The Key to Partnership Success is Android OS Set-Top Box Penetration Rate
Netflix Subscription and Installation Only Available on Android-Type Set-Top Boxes
SKB's Penetration Rate Lower Than Competitors
SK Broadband and Netflix have formed a partnership by withdrawing all lawsuits related to network usage fees that have continued for several years. It appears that both companies agreed that cooperation is more beneficial than litigation. The issue is how much profit SKB can gain through its alliance with Netflix, with skeptical voices questioning whether it can generate enough revenue to justify dropping the lawsuits.
On the 18th, the two companies ended a 3-year and 6-month-long network usage fee lawsuit and signed a strategic partnership to announce their reconciliation. SKB and its parent company SK Telecom will launch Btv (IPTV) plans combined with Netflix services and mobile plans in the first half of next year. SK Telecom will also introduce new Netflix bundle products in its subscription service 'T Woosoo.' They will also pursue cooperation in artificial intelligence (AI) technology development.
The terms of the negotiation between the two companies have not been disclosed, but the industry assumes that the contract was made in a manner similar to those LG Uplus and KT had with Netflix in the past. LG Uplus and KT are known to distribute the revenue generated from their partnerships with Netflix, taking into account network usage fees. Although the contract does not explicitly state network usage fees, a certain portion of the partnership revenue is received as network usage fees under a different name.
Additionally, in non-monetary terms, it is known that they receive compensation such as the expansion of cache servers (Open Connect). Cache servers refer to proxy servers that temporarily store data close to users to provide faster internet service speeds. When servers are located abroad rather than domestically, they are installed to reduce line usage fees required for communication with foreign countries. Netflix is said to be fully responsible for such infrastructure investments.
The industry estimates that the network usage fees Netflix must pay to SK Broadband will exceed 40 billion KRW. At last year's Korean Broadcasting Society Autumn Regular Academic Conference, Professor Byun Sang-gyu of Hoseo University's Department of Culture and Video estimated that the amount Netflix should pay would be about 146.5 billion KRW annually. This estimate was based on the utility Netflix provides to individual consumers.
The key question is whether SKB can generate revenue from Netflix to the extent of these estimates, but the industry views this skeptically. One reason cited is the low penetration rate of new set-top boxes. To have Netflix subscribers through Btv and to enable Netflix viewing on Btv, a new set-top box equipped with the Android OS is required.
LG Uplus, a competitor, boasts the highest penetration rate of Android-based set-top boxes (97%) among domestic IPTV providers. Based on this, it achieved the fastest partnership with Netflix among domestic telecom companies in 2018 and also secured an exclusive IPTV partnership with Disney Plus. KT, the second telecom company to partner with Netflix among the three major carriers, is known to have about a 70% penetration rate of Android-based set-top boxes.
On the other hand, SKB is the latest entrant in the Android-based set-top box market. Therefore, its penetration rate is expected to be lower than that of the other two companies. Some estimate it to be below 50%. The lower the penetration rate, the fewer subscribers flow into Netflix through Btv, resulting in reduced revenue for Btv.
Another issue is that the partnership with Netflix is no longer an attractive product for consumers. An industry insider said, "Until 2018, when LG Uplus first partnered with Netflix, there were almost no global OTT providers in Korea, so it was quite profitable. However, now that there are many competing OTTs such as Disney Plus, Amazon Prime, and Apple TV, partnering with Netflix alone does not have as much merit as before."
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