Fight against Netflix: Is further M&A of local OTTs the solution in South Korea?

Further consolidation of local over-the-top platforms remains a possibility in South Korea. A potential merger between two of the largest local players, CJ ENM CO. Ltd.-operated Tving Co.Ltd. and Wavve, is seen as a powerful match to combat Netflix's dominance in the market.

➤ A merger between two of the biggest local players could create a subscriber share similar to that of Netflix Inc., but the gap could still be large in terms of profitability.

➤ Cost synergies could be an important benefit of M&A as a response to rising production and marketing costs.

➤ The new strategic partnership of Netflix and SK Broadband Co. Ltd. that ends the three-year legal dispute between the two companies over the payment of network usage fees could further boost Netflix in the country.

TVING became the biggest local subscription video-on-demand platform in South Korea following its merger with KT Corp.'s KT Seezn Co. Ltd. in December 2022, but there is still a gap of close to 30% between the subscriber bases of Netflix and TVING as of June 2023.

South Korea is estimated to have a total of 21.6 million subscriptions at the end of the second quarter of 2023, and Netflix accounted for the largest subscriber share of 34.6%, followed by TVING and Coupang Play of Coupang Corp. If TVING and Wavve did consolidate, the merged entity could trail Netflix closely as far as total subscribers. However, that would not be the end of the story as the merged entity would still have to generate more profits to be on similar grounds as Netflix.

The global streaming giant is projected to have the highest average revenue per subscription (ARPS) of $8.88 per month in the market in the first half of 2023, generating subscription revenue of $384.53 million. TVING and Wavve are estimated to have earned subscription revenue of $136.71 million and $115.33 million, respectively, during the same period.

With the availability of NAVER Corp.'s membership bundle and regular promotional offers, the monthly ARPS of TVING is estimated to be on the lower end. Wavve has maintained the same subscription fees since its launch but rolled out lower-cost annual subscription plans in August 2022. Local players have adopted lower pricing strategies to maintain subscription growth and have not raised prices for a long time. Rival Netflix introduced the lower-cost ad-supported tier in South Korea in November 2022 and previously raised the prices of its standard and premium tiers in November 2021. Netflix's diversified pricing structure is tailored to suit the needs of different consumers. It could be a matter of time for local players to adjust pricing to cover rising production costs and address profitability.

CJ ENM founded TVING and remains TVING's largest shareholder. Less influential shareholders of TVING include SLL JoongAng Co. Ltd. (the content production and distribution arm of JTBC Co. Ltd.), NAVER Corp. and Vimn Netherlands Holding BV (a subsidiary of Paramount Global). Wavve, on the other hand, is backed by SK Telecom Co. Ltd. and the three major terrestrial broadcasters Korean Broadcasting System, Munhwa Broadcasting Corp. and Seoul Broadcasting System. A merger of TVING and Wavve could bring together the most powerful content production houses in South Korea and mitigate the issue of growing content costs that have been heightened by the expansion of Netflix's content spending in the country.

Netflix's dominance in South Korea seems intact. Ending its lawsuits with SK Broadband, Netflix has now entered into a strategic partnership with SKT and SKB. While the announcement has not gone into too much detail, the partnership would include bundling Netflix's subscription with the telco services of SKT and SKB. The ad-supported tier is expected to be among Netflix's tiers that will be offered through these bundled packages. Netflix's existing telco and cable partners in the country include KT, LG U+ and D'Live. SKT is the only one of the big three incumbent telcos in South Korea that has not had a partnership with Netflix. The addition of SKT and SKB could drive another wave of subscription growth for the global streaming giant.