From October 2016 to March 2017 the team is joined by Guest Kats Rosie Burbidge and Eibhlin Vardy, and by InternKats Verónica Rodríguez Arguijo, Tian Lu and Hayleigh Bosher.

Friday, 12 August 2016

Uber and Netflix: The challenge of becoming a global brand


There can be no greater allure for the owner of a successful service name and mark than the possibility of becoming a global brand. No
need to maintain hundreds of manufacturing sites around the world and to manage supply chains and inventory, not speak of having to secure manpower spanning a wide range of skills. This attraction is especially so when your service is provided on-line, which in principle enables you to reach billions of customers, the only requirement being that they are on-line. Throw in the potential for customer scaling based on network effects (think about Google or Facebook), and it is a wonder why anyone would want to actually make and sell something, when the potential for hitting the jackpot with a service-branded product seems so much greater.

Against the rosy view of the potential international reach of service brands, the recent decision by Uber to throw in the towel in China and to allow it to be acquired by a local competitor, Didi Chuxing, brought home the more measured reality that territorial expansion of a successful service brand is a daunting challenge. Under the deal, as reported, Uber announced that it would sell its Chinese business to Didi in exchange for an 18%-20% ownership stake in the newly combined company (valued at $35 billion dollars), with Didi also buying a $1 billion stake in Uber.

As Tech Crunch observed—
"While some may focus on the terms of the deal, the crux is that Uber was in a no-win situation in probably the largest ride-sharing market in the world, and now it can maintain a stake in that market without the continued financial bleeding it was experiencing ($1 billion in losses per year is nothing to sneeze at when you’re prepping for an initial public offering). Factor in the new regulations Uber was facing coming from the Chinese government that would tilt the scales even further into Didi’s favor, and Uber and its investors are probably more than a little relieved to become passive participants in China—even if it does bruise the ego a bit."
This Kat suspects that most Kat readers, unless they have been to China, had never heard of Didi. Indeed, to read the business press in English, one often got the impression that the market for dominance in the so-called gig economy for the provision of ride-hailing services was between Uber and Lyft, with a secondary narrative being regulatory and legal challenges in the various companies with respect to the entire business model. Hold these regulatory and legal challenges constant, it was presumed, and Uber (and perhaps Lyft) would simply expand their service brand across the world, with the cachet of the name and brand serving as the marketing vanguard to capture more and more national markets. But the China market is not the US (or even a European market), and the Uber name and brand was not enough to overcome the challenges of establishing their ride-hailing service, far from their home turf, both geographically and operationally.

Uber is not the only example. Consider the state of Netflix. In a few short years, the company has remade itself into the world’s leading video streaming company. Seeking to build on its success in the U.S. market and the strength of its brand, in January 2016, the company launched its services in 130 countries. What brand, it would seem, was better placed to become the world leader in its on-line industry. Against this background, the recent statement issued by the company further served to underscore the challenge of rolling out a service brand at an international level. The company announced that its growth in international subscribers had grown at the slowest rate since 2014, a year in which the company had made the service available to a small number of countries.

As Adam Minter of Bloomberg.com has observed
"In an earnings call, Netflix managers downplayed the downturn and the role that local competition might've played in it. But that's a mistake. Netflix may be the world's biggest streaming video company, but its subscription-based product has little appeal in the emerging markets that will constitute the bulk of internet access growth in coming years. Unless Netflix can reach those viewers, it can't really claim to be a global channel."
Minter went to describe the following missteps by Netflix in seeking to roll-out its branded services, in particular in the Asia-Pacific, the
largest potential market:
1. Maintaining a price of $7.99 per month for a subscription in Cambodia, where the average income is about $1,000 per year and only 2.3% of the population has a credit card.

2. More generally, fewer than 50% of the 600 million residents living in Southeast Asia have a credit card.

3. Most of the countries in the region have below average internet speeds.

4. The preferred viewing device is a smartphone.

5. Three-quarters of the “customers” view pirated copies, the challenge being how to bring at least some of them into the fold as paying customers.
The piece then describes how one company, iFlix, headquartered in Malaysia, is trying to find a business model suitable for its region. One observation immediately stands out. When companies such as Uber and Netflix do not have the benefits of network effects (as compared with the likes of Facebook and Google), the task of attempting to build an international service brand is much more difficult. Geography and local custom and practice still matter, even for strong service brands.

1 comment:

Joe said...

We have to work with government to make them pay taxes or kick them out.

Subscribe to the IPKat's posts by email here

Just pop your email address into the box and click 'Subscribe':