Is Piracy A Serious Threat To Netflix?

Netflix‘s (NASDAQ:NFLX) popular show House of Cards debuted its third season recently and was met with critical as well as commercial success. The political drama featuring Kevin Spacey was a top draw for Netflix in its first two season as well, and looks good for many more seasons on current form. However, the spike in excitement for the show has also resulted in a spike in the show’s piracy levels. Piracy has not materially impacted Netflix’s growth till now but could potentially be a bugbear to the company’s ambitions.

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Piracy Rears Its Ugly Head

House of Cards is one of the first forays into original programming by Netflix and its success, along with that of Netflix’s other hit show Orange is the New Black, has changed the company’s perception in the mind of the consumer. Netflix is no longer considered just an aggregator of popular content from other networks and has come of age as a provider of engaging and interesting content on its own. However, House of Cards’ growing popularity has also led to unwanted attention in the form of piracy. Piracy-tracking firm Excipio reported that the show’s season three was downloaded illegally around 682,000 times within the first 24 hours of being available on torrent services. ^[1] This is a more than 100% increase as compared to season two, which was downloaded close to 321,000 times on the first day. The show was pirated the most in China with more than 60,000 downloads, followed by the United States (50,008), India (47,106) and Australia (40,557). Other countries where the show was heavily pirated were Poland (37,552), the United Kingdom (32,703), Canada (27,584), France (27,151), Greece (20,551) and the Netherlands (20,402). Downloading from torrents is not the only method to illegally view House of Cards and other Netflix shows. Netflix is accessed by millions around the world using virtual private network (VPN) services. GlobalWebIndex estimates that 20 million viewers watch Netflix through VPN services in China alone. Piracy is not only Netflix’s headache but impacts the pay-TV industry as a whole. Despite its ever growing popularity, House of Cards does not feature among the top 10 pirated shows for last year. HBO’s fantasy drama Game of Thrones tops that list compiled by Excipio. ^[2]

How Piracy Affects Netflix

Buoyed by the success of its shows such as House of Cards and Orange is the New Black, Netflix is betting big on its original and exclusive programming. The company plans to launch 320 hours of original content in 2015, triple the amount of original programming it released in 2014. These hours will be part of a roster of 30+ upcoming original series that Netflix plans to broadcast by the end of 2016. The company hopes that the focus on original programs and movies gives it an air of exclusivity in comparison to its rivals. However, Piracy has a direct effect on the attractiveness of Netflix’s exclusive programming. Subscribers may not be interested in viewing these shows at Netflix’s paid platform when they can get the same shows for free. The company even addressed this issue in its last quarterly letter to its shareholders by acknowledging piracy as one of its biggest competitors. ^[3] The company displayed a graph depicting Popcorn Time’s sharp rise relative to Netflix and HBO in the Netherlands as an example of the growing menace of piracy.

Netflix is currently available in around 50 countries and plans to launch into 200 countries over the next two years. ^[3] However, the loss of exclusivity of original programming could potentially impact the growth of Netflix’s subscriber base, especially in international markets. Netflix is available in six of the earlier mentioned ten countries accounting for the most illegal downloads of House of Cards. This shows a propensity for potential subscribers to reject Netflix’s services in favor of illegal means such as torrent downloading. This potential loss of subscribers has not been telling for Netflix as of yet and its international subscriber base has increased from 1.9 million customers in 2011 to 18.3 million by the end of 2014. However, subscriber losses due to piracy could gain prominence as the company launches into countries prone to piracy such as China, Russia, India and Australia. The growth in U.S. subscribers has shown signs of tapering out and a potential slowdown in international growth could be harmful for the company’s business.

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1. ‘House of Cards’ Season 3 Pirated, With China Top Country for Downloaders, March 1, 2015, Variety [↩]
2. Top 10 Pirated TV Shows of 2014: ‘Game of Thrones,’ ‘Walking Dead’ Lead List, January 2, 2015, Variety [↩]
3. Q4 14 Letter to shareholders, Netflix Investor Relations [↩] [↩]