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Netflix's crown grows heavy in the UK

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Netflix's crown grows heavy in the UK

With U.S. subscriber numbers plateauing, Netflix Inc. is increasingly looking outside its home market for growth.

In the U.K., this search could be complicated by the upcoming launch of rival streaming services from The Walt Disney Co. and Apple Inc., and BBC and ITV joint venture BritBox, analysts said.

The streamer's efforts to prolong its reign as the country's top subscription service have included upping local content spend, most recently by $500 million, and investing in a production hub based just outside of London. These investments led Netflix in May to raise U.K. prices for the first time since 2017.

Balancing its debt-fueled content budget against price increases will be challenging in an increasingly competitive environment, Tom Harrington, industry expert at tech and media analysis firm Enders Analysis, said.

"Netflix has conditioned users to expect an endless amount of content at a relatively low price compared to pay TV," Tony Gunnarsson, a streaming expert at tech analysis firm Ovum said. "As a result, it will struggle to materially raise subscription fees or slow the release schedule of new shows without alienating its customers."

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Without advertising revenue — or additional revenue streams like Disney's theme parks or Apple's hardware — the streamer is reliant on its subscription fees as its main source of revenue. In April, Netflix raised $2 billion in debt for the second time in seven months to fund the production of new content.

"To balance the books, it could hike prices and spend less on content. But I don't see either happening any time soon," Harrington said.

In the meantime, its focus on British content may not be the best approach, analysts said.

When it comes to linear TV, U.K. telecoms regulator Ofcom claims viewers prefer locally produced content. This is not necessarily the case for U.S.-based streamers in the country, analysts said.

Netflix U.K. and Ireland sporadically publishes a list of its 10 most-watched shows. An early-October top 10 for the region featured seven U.S.-produced shows, although the number one spot went to British drama Top Boy.

On the back of this and other U.K.-produced hits including "The Crown" and "Our Planet," Netflix announced it will license and make more than 50 originals in the country this year.

Comparatively, Disney and Apple have spent next to nothing on British programming. The two companies likely expect that their American shows are enough to lure in Brits at launch, Gunnarsson said. "Netflix's argument that U.K. shows 'travel well' can also be applied to U.S. programming," Gunnarsson explained.

Netflix asserts that British shows do well overseas due to the lack of a language barrier. Harrington claims that this is not necessarily the case for all international territories. "The U.K. is a safe bet but it will not substitute Netflix's investments in South Korea or Japan, for example, where local content still packs more appeal for viewers," he said.

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Streaming services can coexist. On average, U.K. households subscribe to 1.5 streaming services. Ovum expects this figure to rise slightly to two services per home in the coming years. U.K. pay TV customers are also likely to have a Netflix subscription, according to Ovum. This overlap means there is room for newcomers to thrive, Harrington said. Some households may sign up to three subscription services in the same way they historically signed up for pay TV bundles, he added.

With these trends in mind, newcomers are looking to break into the market by being complementary to Netflix or cable — a strategy reflected in their price, he added. All three aforementioned services have undercut Netflix's subscription fee in the U.S. Disney also introduced a streaming bundle, compiling Disney+ with ESPN+ and Hulu LLC. Apple is throwing in a year's worth of free streaming with its high-end devices like the iPhone. Ofcom has tipped Apple TV+, Disney+ and BritBox to reach 2 million U.K. subscribers each by 2023.

Analysts say there is a subscription ceiling, however. "Don't expect people to sign up to four or five services at once," Harrington said. With only so many hours to devote to binge-watching, viewers with multiple subscriptions may cut off the service they watch the least, Fred Black, streaming expert at TV and media analysis firm Ampere Analysis, said.