Will Netflix shake up the French audiovisual model?

Article  by  Marc LE ROY  •  Published 10.06.2014  •  Updated 09.06.2014
The arrival of Netflix in France is said to be imminent – a possibility drawing much attention because it would profoundly shake up the French audiovisual system. In this game, there would be winners…and losers.

Summary

Rarely has a company that does not yet offer its services in France been the topic of so much conversation here. Not a day goes by without newspapers, blogs and other news sites reporting on Netflix’s performance in the United States, and spreading rumors on its imminent arrival in France.
 
Enveloppe Netflix
Netflix is a Californian company founded in 1997, which made a name for itself offering DVD rental services by mail. Starting in 2007, Netflix offered a subscription video on demand (SVOD) streaming service for computers and subsequently, other devices (Blu-ray discs, PS3, Xbox, connected TV, telephones, tablets and internet box, but not on cable). In 2010, Netflix began offering SVOD abroad, starting with Canada, Latin America, and Europe in 2012 (Great Britain, Ireland, Scandinavia). Today, Netflix counts 44 million subscribers in 42 countries, generating turnover of 4.37 USD (an increase of 22%) in 2013. In early 2013, Netflix delved into new territory: financing audiovisual works. The series House of Cards is offered on the network and sold worldwide, where it has met with well-deserved critical success. Netflix has thus turned into a major audiovisual player worldwide by distributing as well as producing films and series.
 
 
The arrival of Netflix in France appears imminent (September 2014 is said to be the date). Contact with French authorities has increased and the California company has recently expanded efforts to recruit French-speaking managers. Other American SVOD operators could follow (Amazon, Hulu, etc.). The fact that these companies don’t yet offer their SVOD services in France is for a reason. France is one of the most populated countries in Europe, and above all, a country of film buffs; in this respect, it could appear as an El Dorado for a company offering SVOD services. And yet, France has a unique relationship with cinema, considered here as both art and industry.  France has a unique relationship with cinema, considered here as both art and industry.  In this respect, the screening of movies (that is, works initially released in movie theatres) is structured by release rules laid out by public authorities, which may present obstacles to the ambitions of U.S. companies, unaccustomed to such limits. SVOD operators are thus only able to offer films that were released in theatres at least 36 months ago. Moreover, these operators are subject to rules forcing them to finance French film. It is unlikely that Netflix will accept these rules as they stand. A number of transformations may be undertaken in order for this operator (and others) to come to France, in order to avoid the worst-case scenario: Netflix making its services available in France from another country. The financial consequences of this solution would be particularly harmful.
 
Given these issues, it thus appears necessary to find solutions to allow Netflix to operate from within France. However, the arrival of the Californian company may prove problematic for a number of French companies, whose business model could be shaken up by the imminent arrival of Netflix. Canal+, transactional VOD operators (allowing individual films to be purchased, with no subscription system) as well as distributors (cable, ADSL, satellite) and subscription television players may have a great deal to lose faced with an operator such as Netflix. Beyond these companies’ finances and markets lies another, equally delicate problem: the financing of French cinema. In other terms, the arrival of Netflix on the French market could lead to a substantial shakeup of the French audiovisual model.  The arrival of Netflix on the French market could lead to a substantial shakeup of the French audiovisual model.  The specificity of this model calls for extreme vigilance in terms of the structure of the market for releases. Nevertheless, the multiplication and liberalization of the modes of releasing movies and TV programs seems to make control by public authorities less and less realistic. It is thus legitimate to think that the arrival of Netflix on the French market could threaten the French audiovisual model. This is why it is necessary to lay out the legal transformations determining the arrival of Netflix in France, before moving on to study the transformations in audiovisual consumption practices as well as the financial transformations that may be brought about by its arrival.  

The coming of Netflix implies drastic legal transformation

In order for the services offered by Netflix to prosper in France, a number of major legal transformations must occur. The first one is fundamental, concerning the current media timescale. The media timescale is established by French public authorities in agreement with various film industry players. This timescale establishes “release windows” for films. Theatres have fours months of exclusive rights to screen movies before they are released on DVD, Blu-ray and transactional VOD. Television channels may then broadcast the movies between 10 and 30 months following their release in theatres, at the earliest. The channels that are the biggest backers of French and European film, such as Canal+, have to shortest limits (10 months). At the end of the release chain, subscription VOD (SVOD) operators must wait 36 months after movie theatre release to include a title in their catalogue. It must be specified that the starting point of the media timescale is determined by movie theatre release: movies that are not released in theatres and series are thus not concerned by these limits. It is apparent that this time limit compromises the development of SVOD in France. Netflix would only be left with series and transactional DVD in creating an attractive offer – a far cry from the model behind its success elsewhere in the world.
 
Faced with these issues, it seems somewhat unlikely that Netflix would decide to come to France.  The media timescale must evolve.  A solution would be to considerably reduce the SVOD release window in order to allow Netflix as well as all SVOD operators (French included) to have competitive offers in this arena. Ideally, limits would be gradually modified, decreasing to a range of six to ten months following movie theatre release. This transformation is preferable, given that SVOD appears (at least partially) to represent the future of audiovisual release. If no major change is made in the SVOD timescale, a further consequence will be the substantial limitation of the development of French groups in this arena. For example, maintaining the current media timescale would allow Canal+ to maintain an advantage in terms of its pay channel offer, but prevent it from having an attractive offer for its SVOD service. Wouldn’t it be wise for the Canal+ group (and other French SVOD players) to develop in a field as flourishing as SVOD? To do so, attractive offers must be made available, and thus, the media timescale rules for SVOD must be modified. Unfortunately, no signs point to a reduction in the SVOD release window for now. Several proposals have been made, none of which provide for a sufficient reduction. The Lescure report from spring 2013 proposes a reduction to 18 months for SVOD. In a report from December 2013, the CSA (French audiovisual regulatory body) proposed reducing the SVOD window to 24 months. None of these proposals seem to adequately take into account the commercial stakes of SVOD. The Minister of Culture furthermore recently recalled that Netflix must conform to French law". The various meetings organized between Netflix and French authorities are the proof that negotiations are underway, and a transformation in the media timescale would be the fruit of these discussions. Let us recall that a few months ago, the Minister declared that she was expecting progress in terms of the media timescale. As regards VOD and SVOD, professional film organizations are presumably the competent bodies to change the rules. In the absence of an agreement, the Minister emphasized that she will assume her responsibilities and make a unilateral decision (using regulatory or even legislative measures). Article 17 of the law of June 12, 2009 indeed states that in the absence of an agreement, a decree may be made to unilaterally establish availability limits for SVOD.
 
If Netflix dug in its heels faced with French opposition to change, the solution would be for it to operate from a foreign country in order to bypass French law. Could operating from abroad be a solution for Netflix?  In that case, nothing would limit Netflix (or other SVOD players) from creating an offer that doesn’t respect the media timescale. The sole limit would be in terms of the French film offer, which would be difficult to include, as French rights holders are bound by the decree of July 9, 2009, notably concerning the SVOD media timescale and applying to “all companies in the film sector” based in France, according to its first article. Let us note that not all French films are necessarily held by companies based in France, which leaves Netflix with a certain number of openings. In this situation, a veritable war would break out between Netflix on the one hand, and the French state and Canal+ on the other. This undesirable possibility must not be overlooked. Ultimately, the worst-case scenario would be that Netflix, and other foreign SVOD operators in its wake, abandon the French market once and for all.  It is never good to refuse technological evolutions by claiming that they threaten an established order.  It is never good to refuse technological evolutions by claiming that they threaten an established order. The recent example of the shakeup in music distribution clearly illustrates this.
 
In the context of the arrival of Netflix in France, it would also be desirable to free television channels from certain obligations that could stall them in terms of SVOD services. Television channels are limited by a 1990 decree banning them from broadcasting films certain days of the week, such as Saturday and Wednesday. This text doesn’t concern VOD, SVOD or catch-up television. This breach in equality deserves to be changed less to provide an advantage for SVOD operators than conversely, to place channels on equal footing with these services.
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Toward new modes of audiovisual consumption

The arrival of Netflix in France could consequently deeply transform the audiovisual practices of the French. For this to happen, Netflix will have to free itself from the current media timescale.
 
Let us imagine that Netflix is able to offer a catalogue in France containing films that it has the right to release six to ten months after their release in theatres. Netflix has an enormous budget devoted to the acquisition of release rights for films and series, estimated at two billion dollars, and which is set to double over the next two years. Suffice to say that Netflix has the means to match its ambitions. What remains to be seen is whether the richness of its catalogue will meet consumer expectations (on this subject, see the excellent analysis by Pascal Lechevallier).
 
Pay movie channels like Ciné+ and OCS are bound to face the consequences of the development of SVOD. Why pay for movie channels when a Netflix subscription allows you unlimited access to quality films for less than ten euros? Cable and Canalsat subscriptions are also bound to face the consequences of Netflix’s arrival in France. The phenomenon known as “cord cutting” has long been studied in the U.S. Every year, the number of households that stop subscribing to cable (the main source of subscription television in the U.S.) rises. Beyond the crisis, many see a correlation between these figures and the rise in Netflix subscriptions. Canada has seen a similar phenomenon. Following this logic, subscription movie channels would be the first to suffer upon the arrival of Netflix in France. The phenomenon could even affect Canal+, which would have a fierce competitor in Netflix, offering much less costly services. In the U.S., HBO is said to have lost a substantial portion of its subscribers. Canal+, which is already struggling against Qatari channel Bein Sports in the area of sports broadcasts, would be in a delicate situation. Its future would notably depend on its ability to broadcast films released in theatres before Netflix. Another victim in the making: transactional VOD. Current prices to watch a single film are nearly equal to what Netflix asks for unlimited access to a whole catalogue of films and series. The only survival solution for these operators would be the ability to release movie theatre releases prior to SVOD operators.
 
France is not currently devoid of SVOD operators (FilmoTV, Universciné, etc.), and Canal+ also offers one such service, known as CanalPlay. These operators are often available on PC, tablet, cable TV or ADSL. However, none of them seem capable of taking on the colossal Netflix. The company’s budget of two billion dollars for acquiring release rights for films and series has already been mentioned. The quality of Netflix marketing also warrants mention: 800 engineers currently work on the algorithm allowing the operator to make recommendations to customers. The results are impressive: according to Netflix, 75% of programs viewed are selected thanks to this algorithm.
 
It is clear that no French operator can possibly beat the veritable war machine that is Netflix. It must be noted that  French operators were late to realize that SVOD represented the future of the market.  French operators were late to realize that SVOD represented the future of the market.  Television channels preferred to cling to their rights stemming from the media timescale without worrying about the market’s transformation. It is uncertain that the future will prove them right. More broadly, unspecialized national television channels will also have to deal with the arrival of Netflix in France. A portion of the advertising market should be redirected toward Netflix and SVOD operators as the favored release channel for movies and series in the future. The development of strong and attractive SVOD operators in France could also lead to a drop in piracy. The price of Netflix subscriptions indeed seems low enough (less than ten euros) to dissuade a large portion of the population from downloading works protected by copyright. If this phenomenon becomes established, it could be an extremely good piece of news for rights holders, who will see their earnings increase.
 
However, the French competitors of Netflix are not empty-handed in the face of the California operator. In reality, the arrival of Netflix may very well strongly energize the competition in terms of the audiovisual offer in France, for the benefit of consumers. As has already been stated, a price war is set to be waged against Netflix. In other words, the services offered to customers will get cheaper, similar to what happened when Free hit the mobile phone market. Not everyone is sure to survive, and the playing field may very well be transformed, as it is far from certain that there are enough earnings to go around. Beyond price conditions, longstanding television channels need to pay attention to their programming. Two phenomena may emerge: a sharp rise in channel-exclusive programs, and a war to acquire rights to movies and series.
 
To be sure to have exclusive broadcasting rights for movies or series, it’s a wise idea for companies to produce the content themselves! Canal+ has been doing so for several years, and Netflix began more recently. By producing their own series or telefilms, these companies are sure to keep control over broadcasting rights, and thus, offer exclusive first looks at these products on their own distribution channels while – in the case of Canal+ – ensuring subsequent broadcasts on the group’s channels. The situation is simple: if you wish to watch a given series, you are forced to use their services. Thus, in France, it is unlikely that Canal+ would sell screening rights for its own series to Netflix, just as HBO doesn’t sell its series to Netflix. While Netflix sold the rights for the first and second season of House of Cards to Canal+, it is not a given that the company would continue to do the same upon arrival in France. This phenomenon of exclusiveness runs the risk of promoting illegal downloading. Exclusiveness may also result from the negotiation for screening rights for movies or series that aren’t self-produced. In any case, the arrival of Netflix should energize the rights buying market, benefitting rights holders. Down the line, Netflix and the major French channels may very well battle to acquire the rights to such and such movie or series.  The rights acquisition war may very well have already been kicked off.  Today, the existence of the media timescale has led to a lack of dynamism on the market, notably in terms of the issue of the first television broadcast of movies released in theatres. A transformation in this timescale, hand in hand with the arrival of new American SVOD operators, would thus necessarily lead to a rights war, somewhat mirroring what has happened in terms of sports TV since the arrival of Bein in France. Netflix made it clear that it had acquired exclusive international broadcast rights to the highly anticipated Breaking Bad spinoff, Better Call Saul. The rights acquisition war may very well have already been kicked off.
 
The arrival of Netflix and other American SVOD operators in France could also pose interesting technical question in terms of the distribution of internet bandwidth, which cannot be extended at will. According to newspaper Le Monde (December 8-9 edition), the Netflix SVOD service represents one-third of U.S. internet traffic at peak hours. In these conditions, a recurring question arises:  Should services that use more bandwidth than others come be charged accordingly?  Should services that use more bandwidth than others come be charged accordingly? This is what the new president of the Federal Communications Commission, the U.S. telecommunications regulatory body, thinks. In the U.S., websites and services may thus have to pay to benefit from quality bandwidth. The question is more pressing than ever following the decision made by the District of Columbia Court of Appeals on January 14, 2014, declaring unconstitutional a law relating to net neutrality, which obliges internet providers to treat all websites equally, regardless of their traffic. However, Netflix seems unperturbed by this decision, considering that neutrality will continue to work in one way or another, given that it is not lucrative for internet service providers to limit a popular site for users. The same questions may arise in France faced with the growing success of SVOD operators. While no law exists for the time being, the ARCEP (French telecommunications regulatory authority) is nevertheless focusing its attentions on this neutrality. The question is also provoking debate at the European Union level, where a text on the subject is said to be in the works.
 
All of these transformations in audiovisual consumption remain hypothetical for the moment, so long as the arrival of Netflix in France is uncertain. The American operator is currently coming up against French regulations, notably in terms of the draconian media timescale that limits the catalogue of films to which the operator would have access. In contrast, there is no fixed rule for the release of series, strictly subject to the laws of the market. In any case, the success of new SVOD operators will be determined by the extent of their offers. Furthermore, the arrival of Netflix in France will go hand in hand with substantial financial compensation. Here, again, regulations force broadcasters (and Netflix could be an extremely large broadcaster) to participate in the financing of French cinema. Here, as well, the transformations could be major.
 
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Financial transformations to be organized

The financing of French cinema in large part derives from the current organization of the media timescale. For television channels, the shorter the release window, the higher the cost for the channel. Canal+ is thus rightly considered to be the biggest moneymaker for French cinema. A number of other French national channels also participate in this financing scheme, without which French cinema would be bound to disappear. In this situation, the timescale must also be viewed as a house of cards.  In this situation, the timescale must also be viewed as a house of cards.  One small movement would inevitably lead to the collapse of the whole structure. The lessening of the media timescale for SVOD services, by however much, would necessarily prove harmful for one or more channels, which would see their release windows challenged or entirely supplanted by new players. In these conditions, channels will demand that the financing system be thoroughly overhauled to strongly take SVOD into account. It will then be necessary to rebuild the financing of French cinema.
 
For now, on-demand media services contribute to the financing of French and European cinema when they reach annual net turnover of more than ten million euros. The essential issue is determining whether dynamic SVOD operators evolving within a normative, favorable environment (lessening of the media timescale) could compensate for a drop in funding from traditional channels. Here, again, negotiations with powerful new players such as Netflix may very well be tense. It is far from certain that Netflix will accept financing French and European cinema to the extent that Canal+ does today. Coexistence with the various other players will certainly be an option. The Minister of Culture has been clear on this point: “Netflix must comply with the regulations behind the success of our industries, notably in terms of financing creative works. This is a sine qua non condition to preserve our ecosystem. Otherwise, we run the risk of destabilizing our players, as well as the financing mechanism, in a market that is already highly competitive. Netflix must be a complementary player in the system, rather than a clandestine passenger that takes advantage of French creativity without fully consenting [to the system]”. Indeed, Netflix defends a system that earns it money, but is this system sustainable in the long run for all players in the film sector, and notably for the rights holders? In other terms, can powerful SVOD operators offering access to a large catalogue of works for less than ten euros a month actually support French production, in the long run? This is the question that rightfully interests the Minister.
 
Let us recall that Netflix has arguments in its favor: its arrival and that of other foreign SVOD operators will create jobs, generate income and energize the audiovisual market in a way that appeals to certain players in the sector (rights holders for the release of films, for example). Furthermore, Netflix and others could provide a dynamic and attractive legal offer, which could truly help diminish piracy. In these conditions, barring their path with overly strict conditions could hurt the French economy. Ultimately, the creation of a favorable operating framework for SVOD operators could result in the renegotiation of contributions all around, without necessarily substantially changing the overall sum devoted to the financing of French cinema every year. Film buffs are well aware that sometimes, everything has to change in order for nothing to change at all...

Translated from the French by Sara HEFT


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Photo credits :
- main visual : brianc  /Flickr
- swanksalot  / Flickr
- stevegarfield / Flickr

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