Netflix in Mexico: An Example of the Tech Giant’s Transnational Business Strategies

Literature Review and Theoretical Considerations

The Political Economy of Communication (PEC) is an appropriate approach to study Netflix’s business strategies as they occur along all phases of the audiovisual value chain from production to distribution and commercialization (Mosco 2009). As part of the value chain analysis, Garnham (1990) found that, “it is cultural distribution, not cultural production that is the key locus of power and profit. It is access to distribution which is the key to cultural plurality. The cultural process is as much, if not more, about creating audiences or publics as it is about producing cultural artefacts and performances” (p. 162). Similarly, Hesmondhalgh (2008) considered that, “the cultural industries approach (has) emphasized the importance of control of circulation – the distribution and marketing of products as opposed to their creation. This was the crucial nexus of power in the cultural industries” (p. 554). The study of power relations in the global audiovisual industry led Wasko (2003) to point out the business domination of Hollywood major distributors (p. 59). In that line, Miller et al. (2012) underline: Hollywood studios “dominate where the real money is made and the key decisions taken: distribution and its revenue sources and outlets, be they theatrical exhibition, television, DVD’s or the internet” (p. 198).

PEC has asked important questions around how new tech companies’ ownership, interests and context, shape their corporate and institutional strategies which in turn shape the markets vis à vis traditional media conglomerates, such as Hollywood’s (Wasko 2019). Previous academic studies on business strategies of VoD platforms, in general, and Netflix, in particular, have built on different areas to understand their transnational expansion.

A first set of scholarly work has dealt with platforms’ internationalization strategies on infrastructure. As Chalaby and Plunkett (2021) explain, Netflix, like other entertainment platforms, were not born global. To allow the current level of demand for video distribution they require content delivery networks (CDNs), a worldwide network of servers, “to improve the speed and reliability of content delivery by storing content as close as possible to end users” (Chalaby and Plunkett 2021, 11). In order to gain direct control, Netflix built its own CDN, Open Connect, in 2011, however, it still uses services from the global value chain to reach its customers (Chalaby and Plunkett 2021; Lobato 2019). “Netflix provides participating [Internet Service Providers] ISPs with these Open Connect server boxes, [. . .] so that users streaming Netflix can connect directly to the box rather than to faraway servers over the public internet” (Lobato 2019, 78). As Chalaby and Plunkett remark, the CDN industry for the media entertainment sector is highly concentrated with high barriers to entry: six providers control between half and three quarters of the market. Moreover, cloud computing services (CCS) that became key to process and analyze large quantities of data required by media delivery (to store, transfer, encrypt, distribute, manage, edit, and share files) is also dominated by the same companies controlling CDNs. In the past, explains Lobato (2019), Netflix used its own data center in the United States but after a major crash in 2008, it moved to other CCS closing its own in 2016. Nowadays, Netflix uses CloudFront AWS owned by Amazon (Chalaby and Plunkett 2021) to serve Latin America from Northern Virginia where it also serves the US market along with the Oregon center; it serves Europe, the Middle East and Africa from Ireland; and, Asia-Pacific from Oregon (Lobato 2019). Even though the use of global supply and value chains occur in other industrial sectors too, through PEC’s perspective and in the context of network economies, it is important to identify how tech giants within the audiovisual sector ally with each other (Fagerjord and Kueng 2019) in a concentrated structure. In this way, we can better understand the power relations they are building (Birkinbine and Gómez 2020).

A second set of work relevant to this article focuses on Netflix’s transnational strategies to deliver content as part of its alliances with local multiplatforms. Wayne and Castro (2021) have studied Netflix’s alliance with local multichannel video programing distributors (MVPD), such as pay-TV providers and other telecommunication services that “occupy an important space between national regulation and local audiences” (Wayne and Castro 2021). Such partnerships have helped the company to simplify new subscriber acquisition within national boundaries and have played an important role in SVoD global expansion. Another interesting strategy is Netflix’s partnership with iQiyi—Baidu video platform—in China to distribute Netflix content in that country. This alliance also promotes US venture capitalists in the Chinese platform “whose operations are privileged in the Chinese market by that country’s government” (Kokas 2020, 8). These alliances are in fact an international phenomenon in which, Ranaivoson (2019) explains, companies in the same communication system balance competition with cooperation, an inter-firm dynamic also referred to as “co-opetition.” Such multiplatform strategies are envelopment strategies that work by “extending another platform’s value proposition and offering it in a multiplatform bundle, by overlapping user bases and harnessing cross-sided network effects to swallow the other platform” (p. 104). As Wasko (2019) argues companies with large capital reserves have a greater ability to make alliances with “those that may constitute a competitive threat” (p. 74).

A third strategy examined by academic literature has been Netflix’s acquisition of foreign content and production investment in original content abroad. As Lobato (2019) reports, Netflix became aware of audiences preference for local content and, thus, tailored strategies—such as local acquisitions, subtitling and dubbing—to target local markets similar to how transnational television channels in the 1990′s had understood that “international markets do not simply exist, waiting mutely for great content, but must be made—[. . .] they must be primed, cultivated, and maintained” (Lobato 2019, 111). Moreover, Napoli (2019) attributes tech giant platforms’ shift to producing original content as a strategy to compete with legacy studios in the US and abroad. As Netflix faced the challenge of high and rising licensing costs—let alone denial to license content—, it saw the path to vertical integration to own the IP of its content library because of the underlying profit maximization it could provide. The imperative to not rely solely on pushing American content nor to depend on local legacy studios and, at the same time, the need to negotiate with cultural differences led to what Halprin (2018) observes: “Netflix used original programing [produced abroad] as a way to position itself glocally as the company continued its international expansion efforts” (p. v), which is in line with Lotz (2017) characterization of Netflix as a Studio Portal.

Finally, we underline that Netflix organizational culture and functioning as a tech giant differs from traditional media giants’—such as Hollywood entertainment companies (Hesmondhalgh 2019). However, despite their clash of cultures, there is also an interpenetration between both models. For instance, Hollywood’s know-how intermediaries are now supporting the internet companies’ need to develop entertainment, content and talent. In sum, Silicon Valley poses “continuities and contestations with traditional media models” (Cunningham et al. 2016, 376). In this context, this article identifies another aspect of the transition from competition to rivalry between both models by examining Netflix’s comparative strategies, especially the use of foreign talent and production infrastructures to: (i) gain not only national but geolinguistic regional markets and (ii) to infiltrate the power hub of Hollywood, in which the movie, Roma, served as a hinge to compete within Hollywood’s “Academy,” enter them (MPAA) and rival Hollywood’s oligopoly.

Methodology

Following a critical realist methodology approach (see Deacon et al. 2021) the research involved a qualitative document-based, thematic analysis complemented by a quantitative study of the content in Netflix Mexico’s catalog. We looked for factual information from a variety of sources such as news and business reports, official statistics, previous academic research, and online websites. The triangulation of different sources and data allowed to confirm the information and to infer underlying structures of the topic of study. For instance, in order to examine Netflix’s transnational strategies using the Mexican case, this article, resorted to the holistic scope of PEC, connecting business and media studies traditions to provide: (i) An industrial analysis of the local context: the audiovisual/telecommunications market, its organization, regulation and the way Netflix relates with it. (ii) An analysis of Netflix Mexico’s multiplatform and glocal transnational strategies—including the glocal content available and displayed on its catalog and interface. The catalog analysis entailed an empirical study of information extracted manually from Justwatch Mexico, an online VoD content search engine, during the first quarters of 2018 and 2019. And, (iii) a case study of Netflix’s glocal original production made in Mexico.

Netflix in the Mexican Audiovisual System

In terms of the telecommunications infrastructure, when Netflix began operating in the Mexican SVoD market, fixed and mobile broadband penetration had been steadily growing. For instance, in 2011 there were 11.7 million fixed broadband internet lines—which served 10.8 percent of the population—, whereas there were 8.3 million mobile broadband lines (Sígler 2012). According to the Instituto Federal de Telecomunicaciones (IFT), on the one hand, from June 2013 to June 2020, fixed broadband grew 55 percent as it went from 12.2 million to 20.3 million lines; on the other hand, mobile broadband grew spectacularly 221 percent in the same period, going from 27.4 to 96.5 million lines (IFT 2021). These data reflect a clear potential market becoming more and more suitable for SVoD services. However, there is still a wide segment of the population in poverty and extreme poverty ¹ conditions that do not have access to internet services, which exacerbates inequality in the access to culture and education.

With regard to the audiovisual landscape, the distribution and consumption markets were dominated mainly by traditional windows such as television, theatrical cinema and DVD video shops—in fact, Blockbuster chain was still operating in México until September 2015. In the case of Free-To-Air television (FTA-TV), two private companies, Televisa and TV Azteca concentrated advertising revenue and audience share at the national level (Gómez 2016). Local and national public TV channels have been marginal, have had small audience shares and small production levels. In fact, audiovisual production was also concentrated by Televisa and TV Azteca, mainly through telenovelas (soap operas) for national consumption as well as global exports. Their main markets were Ibero-american countries and the US. In that context, Mexico City along with Miami and Bogotá had consolidated their role as hubs of Hispanic/Latino audiovisual production with a global reach (see Piñón 2014). Similarly, Pay television (Pay-TV) had been continuously growing, subscribers kept rising across the country. This situation fostered national audiovisual production and co-productions with Pay-TV channels based in the US such as Japanese Sony, HBO Olé, and TNT (Gómez 2016). In sum, when Netflix launched, audiovisual production in Mexico was going through an unusual effervescence and was starting to show competition between FTA-TV and Pay-TV channels for audience shares—mainly through series, telenovelas, news and sports programs.

Additionally, Mexican film production was showing signs of recovery in terms of the number of productions and cinema releases. Nonetheless, it was still stagnated, enjoying only 10 percent of the screen market share (i.e., sold tickets) and 8 percent of the box office revenue; both indicators controlled by the Hollywood majors which accounted for around 85 percent of the market (Gómez 2019).

After ten years of Netflix’s presence in Mexico, there have been significant changes such as the irruption of SVoD companies, the addition of a third national chain of FTA TV and other regional signals of digital terrestrial TV (IFT 2021). The country went through a digital switchover in 2015. Furthermore, from 2011 to 2020, the Pay-TV market had had an accelerated process of concentration as Grupo Televisa acquired four cable TV operators in different parts of the country. Moreover, in terms of satellite TV, Televisa shared the ownership of Sky, the leading Direct-To-Home television (DTH TV) company, with DirecTV Latin America. In sum, Televisa controlled 64.9 percent of Pay-TV subscriptions (IFT 2021). In addition, during those years Televisa became the second largest fixed broadband internet provider through its subsidiary Izzi Telecom—with 24.8 percent of the market. The major telecommunications player was America Móvil which enjoyed 52.2 percent of the market (Sosa 2017). Internet providers were key to online VoD companies which depended on such “pipelines” to provide their services. Both Televisa and América Móvil, launched their own SVoD services: Claro Video from America Móvil began operations in 2012 and Blim from Televisa in 2016.

Currently, the SVoD market is dominated by Netflix which, by the end of 2018, concentrated 80.8 percent of subscribers. Other competitors were Claro Video (14.6%), Blim (2.7%), HBO Go (1.5%), Fox Premium (0.2%), Click (N/D), and Amazon Prime Video (N/D) (Cahun; Expansión 2018). During 2019 and 2020, new SVoD platforms were launched such as Starz Play, Movistar Play, Paramount +, Disney +, Star +, Apple TV+, and HBO Max. This was expected to open a battle to capture subscribers and, therefore, to reduce Netflix’s market share. There were also local platforms specialized in Mexican and independent international cinema, such as FilmIn Latino, and Retina Latina (IMCINE 2021).

Netflix’s closest local competitors such as Claro Video and Amazon Prime Video (launched in 2017) have followed Netflix’s strategy of producing original content (IMCINE 2021). Therefore, it can be underlined that the audiovisual sector as a whole is growing in a significant way. The industrial statistics of the Sistema de Cuentas Nacionales de México, show that the “audiovisual media” sector has been constantly growing since 2015. For instance, in 2019, it grew 4 percent. The figure is important if we compare it with the cultural sector as a whole that grew only 1.5 percent that year (IMCINE 2021, 14). All up, the SVoD market revenues for 2017, 2018, and 2019 were US$441, US$561, and US$698 million dollars, respectively (PwC 2020). From 2018 to 2019, SVoD grew 25.1 percent.

It was in this context in which SVoD platforms were generating significant economic value, that some challenges were identified regarding their lack of regulation (OECD 2018). In Mexico, as in many other countries, foreign SVoD platforms were not paying taxes. The main issue to regulate platforms was the extraterritoriality of foreign digital services that had no local residence, and therefore, were out of States’ jurisdictions. Thus, Mexico was losing an important revenue base from digital platforms’ earnings and there were unequal economic competition conditions where local businesses—including local online VoD platforms and traditional media outlets—were obliged to comply with national tax regulations but foreign competitors, such as Netflix, were not. This opened a debate where the local audio-visual community, national audio-visual competitors, and a couple of Congress initiatives demanded changes to update the legislation. Getting ahead of what seemed to be an imminent change, Netflix announced, in February 2019, the establishment of its permanent offices in Mexico (Riquelme 2019). Notwithstanding, at the end of 2019 the Congress approved new decrees to reform the fiscal legislation to include taxation of foreign digital services, which came into place on the 1st of July, 2020 (Ramírez 2019).

Netflix’s Business Strategies in Mexico

This section presents the different transnational strategies that Netflix displayed not only to consolidate its presence in the Mexican audiovisual market but to use its operations there to boost its competitive objectives in other regions. Transnational strategies responded to Netflix’s needs for expanding its export market, integrating production and differentiating regionally (Bartlett and Ghoshal 1998). These entailed: establishing strategic alliances, a new subsidiary (direct investment), as well as, exporting, licensing and producing content abroad (Picard 2002).

“Roma Effect”: A Transnationalization Strategy to Break Majors Dominance

In this section, we highlight how Netflix is utilizing Mexican productions as part of its transnational business strategies. The case of the film Roma illustrates how Netflix consolidated its presence in Hollywood to break the dominance of the major studios.

Roma was produced by Esperanto Filmoj and Participant Media with Alfonso Cuarón, a former Oscar winner, as its director/producer. The black and white, Spanish and Mixtec language Mexican movie, detailed Cuarón’s memories, re-creating his childhood years in the 1970s Mexico City within a middle-class Mexican family. With a budget of US$15 million, the production was shot in 110 days. During the negotiations to sell Roma to major studios, Cuarón said to be fully aware that a foreign-language film shot in black and white was unlikely to find a typical Hollywood home (Tapley 2018). In April 2018, Netflix announced it had the exclusive distribution rights of Cuarón’s most personal movie made so far. This is relevant, as Roma was a pick up title branded as a “Netflix original.” In this case, the tech company played the role of a global Studio Portal. It is worth asking, why did Netflix bet for Roma—a foreign movie—as a flagship to conquer the Academy Awards? And how did Roma work as an industrial strategy to disrupt the movie distribution and consumption dynamics, at global and local levels?

Certainly, Netflix knew that Cuarón’s reputation allowed him to contend for a new nomination in the category of best foreign film—as well as benefiting from the positive context of “the three amigos” ² domination of “best director” Oscar movies from 2014 to 2018. But we think Netflix saw an opportunity to increase its global brand as well (and its Mexican subscribers). In fact, along with these considerations it is possible that Roma was thought as a “strategy bet” for the company (Hastings and Meyer 2020, 165).

Let us consider Cuarón and partner company’s points of view regarding their decision to sign with Netflix for distribution. The decision was somehow surprising due to Cuarón himself considering that the optimum way to experience Roma was in a movie theater. However, Netflix offered a global theatrical release with the movie to be shown in more than 500 locations worldwide, including select 70 mm, prior to its release on Netflix. The Mexican director declared: “The film was made for the big screen. But I’m also a big defender of options” (Faughnder and Rottenberg 2018). As he explained, “I will always defend the movie theatre experience but something we need to defend as strongly as that, is cinema diversity [. . .] unfortunately, [cinemas] are limited to certain types of content” (Netflix Latinoamérica 2018: 50″35′). In the same line, Participant Media’s chief executive, David Linde, declared: “What we’re seeking to accomplish globally is finding the most robust way possible to reach tens of millions of people and also avoid the current marketplace reality that often faces non-English language films” (Faughnder and Rottenberg 2018).

According to the specialized press, Netflix spent between US$30 million to US$50 million on Roma’s Oscar marketing campaign. They even hired the Hollywood spin doctor, Lisa Taback, for that aim. Surely, the budget and promotional campaign were another aspect that made Cuarón and his co-production partner take into account signing with the tech company. The aggressive marketing strategy showed, on the one hand, Netflix’s financial muscle and, on the other, the important bet the company made on Roma. However, the film’s financial results remain unknown, since the company refuses to report theatrical grosses or total streaming figures. The only data reported by the company was that during the first month of Roma’s release in Mexico, the movie was streamed 3.6 million times (Beauregard 2019). This figure is important because at the end of 2018, Netflix was estimated to have around six million Mexican subscribers (Moody 2020). It is also important if we compare it to the Mexican film, Ya veremos, with 4.1 million admissions, the highest in 2018 (IMCINE 2021). Netflix released Roma on its global streaming platform to 190 countries on December 14th, 2018.

Roma’s case has to be set in the context of Netflix overall expenses and strategy during 2018 where licensed content accounted for US$14.8 billion and investment in produced content to US$6 billion (Beers 2020). As we know, these investments are guided by Netflix mining of consumer data to determine which content viewers pay to see and establish the total cost of each licensing agreement. The data is compiled to determine the expected hours of viewing each TV show or movie generated over the course of a licensing agreement—establishing a cost per hour viewed. It compares this metric to similar content arrangements and it bases final pricing on exclusivity, as well as the duration of the contract (Costa 2020). In that respect, the manager of data engineering and analytics, Michelle Ufford, defines Netflix as “a data-driven entertainment company, where analytics are extensively used to make informed decisions on every aspect of the business” (Netflix Data 2017).

Another point that has to be underlined regarding Roma is how Netflix managed its eligibility to enter the annual Academy Awards in the US. This is important because the tech company used Roma as a second experiment ³ to learn from and which will later put into practice—for example, with The Irishman. In order to be considered eligible for the Oscars, a movie must have played in a Los Angeles county cinema for paid admissions during a minimum of seven consecutive days. This requirement could be complicated, because regular cinemas follow the business model known as “release windows” once imposed by the Hollywood majors. ⁴ Thus, the big cinemas demanded Netflix to allow the movie to be in their cinemas for a period of time before it became available on the streaming platform (Hadida et al. 2021). This window confrontation was specially noted in Mexico with the two main theatrical exhibition companies—Cinepolis and Cinemex—refusing to screen Roma, clashing with the high expectations that Mexican audiences had for that particular movie (Battezzati 2020). The movie was released in independent movie theaters and for a small period of time. As Cuarón explained:

We decided to insert the movie in a paradigm that didn’t exist [. . .] Netflix decided to make its rigid and specific model flexible in order to distribute it in cinemas as well as on the platform, showing the latter doesn’t take away revenue from cinemas, as the ones we have are full. [. . .] What matters here is that both models could be providing greater diversity. [. . .] Roma has been part of that turning point in the movie industry which is referred to as the ‘Roma effect’ (Netflix Latinoamérica 2018: 49″30′)

Notwithstanding the restrictions, for a foreign movie, Roma made an important estimated box office in the US: around US$4 million. The same source estimated that if Roma had had a traditional release, it could have grossed up to US$20 million (Brueggemann 2019). Having said that, the three-week, pre-streaming release of Roma was an unprecedented effort for Netflix. This aspect is very important, because it is how Netflix is breaking little by little the rules of how Hollywood works (Miller et al. 2001; Wasko 2003). Another novelty of Roma is that it was the first Netflix movie to get a Blu-Ray and DVD release, thanks to the Criterion Collection launching a special edition in February, 2020.

However, the most significant consequence of Netflix acquisition of Roma was its achievement of ten Oscars nominations for the 2019 Awards of the Academy of Motion Picture Arts and Sciences (AMPAS). This helped Netflix to up “the company’s profile as a legitimate force in the movie business” (McClintock 2019). The same day AMPAS announced such nominations, the Motion Picture Association of America (MPAA) added Netflix as a new member of the global trade association that advocates on behalf of the US film and television industry (McClintock 2019). That day, Netflix became the first tech company to join the Hollywood lobby group which will allow it to have an influence on internal and foreign policies regarding trade, copyright protection, production incentive taxes and rating systems—in exchange for a US$12 million annual fee. Roma is, therefore, a good example of how Netflix uses distinct transnational business strategies to achieve different company goals to break the global dominance of movie distribution by Hollywood studios.