Netflix comes to Nigeria: What's all the fuss about?

At the prestigious Consumer Electronic Show (CES) 2016, Netflix CEO and co-founder, Reed Hastings, made the much anticipated and yet surprising announcement: Netflix was going live in 130 countries instantaneously. An elated Hastings reeled out a list of countries, including Nigeria, in which Netflix was being switch on. Hastings chronicled the goal of Netflix in this excerpt carried on Netflix’s website: “Today you are witnessing the birth of a new global Internet TV network. With this launch, consumers around the world -- from Singapore to St. Petersburg, from San Francisco to Sao Paulo -- will be able to enjoy TV shows and movies simultaneously -- no more waiting. With the help of the Internet, we are putting power in consumers’ hands to watch whenever, wherever and on whatever device.”

Netflix, established in 1997, is an American company that delivers media (TV shows, movies) on demand to subscribers via internet. Netflix also rents out DVDs and Blu-ray disks via mail. As of October 2015, Netflix reported 69.17 million subscribers worldwide, including more than 43 million in the US. Netflix reported revenues of US$ 5.50 billion for 2014 financial year.

The current landscape

Nigeria’s movie industry, Nollywood, is a multimillion dollar industry. Primarily, Nigerian movies are consumed by purchase or rent of DVD; the cinema culture has just began to make a comeback in recent years. However, piracy has been the bane of Nollywood. The World Bank estimates that for every copy of movie sold, nine other are pirated. The same story is applicable to the vibrant music industry. Netflix is certainly not the first Video-on-Demand (VOD) service in Nigeria; iROKOtv, AfriNolly, DStv BoxOffice,and Dobox are quite similar offerings already active in the Nigeria market space. iROKOtv, which currently has a partnership with Netflix, is estimated to have monthly revenues of about $350,000, although most of the active users are overseas.

Technology has proven to be a double-edged sword for the Nigerian entertainment industry. For example, although development from the VHS technology to CD technology gave better view quality to consumers, CDs are notoriously easy to duplicate. Pirates just need to lay their hands on a copy of CD to duplicate it into thousands. Even worse, the advent of DVD technologies meant that pirates could put multiple films on DVD and sell them for the price of a one. Many film producers had to resort to selling to the pirates both the content and the rights to reproduce them.

A war?

Some may think, with good reasons, that the rise of VOD signals the gradual decline of the Nollywood industry as we know it. Global VOD service providers such as Netflix, give access to premium worldwide content at a flat monthly subscription rate. This school of thought are of the opinion that a deluge of easily accessible content from the latest Hollywood blockbusters, to captivating Spanish and Indian telenovela/soap opera may reduce demand for Nollywood content.

On-demand media services are also disrupting the tradition content distribution route. The music industry is probably the best example of this. Nowadays, it is quite commonplace for artists and record labels to release their content via music streaming services such as Spinlet, Spotify and iTunes store, sometimes choosing to sell their content directly. We are already seeing this in the movie industry. October 1, the movie by the celebrated producer/director Kunle Afolayan, is already showing on Netflix. A host of other African titles (around 5000) are also carried on iROKOtv. Should this trend gain foothold, it is opined that the traditional “Alaba marketers” and DVD marketers may gradually be eased out of business.

Or a partnership?

However, VOD should not be seen as the enemy of Nollywood but rather an ally. One thing we know for certain is that Nollywood is a very resilient and creative industry. Global VOD services actually showcase Nollywood internationally and expands its reach. As the founder of iROKOtv noted, approximately 6% of the 313 million streaming video views on iROKOtv were from Nigeria; the remaining 94% were from outside the shores of the country. 55% of iROKOtv’s subscriber base are in the US and UK. This can only mean more international exposure for the Nollywood industry.   

It is hoped that technology will play a leading role in curbing the scourge of piracy. New technologies such as smart internet-enabled TVs, and new ways of consuming media such as via internet and console based VOD e.g. DStv BoxOffice, Xbox Video, are increasingly gaining acceptance. Industry watchers are of the opinion that these technologies offer a variety of tools that can be used against piracy.

As noted earlier, on-demand media streaming services give content creators the ability to directly monetize their content with reduced risk of piracy (at least for now). Also, consumers can be sure that subscription or rent paid will actually end up in the hands of intellectual property owners and not pirates.

Most VOD services purchase rights to works carried on their platforms with Netflix going as far as purchasing worldwide exclusive rights and bankrolling production projects. Late 2015, Netflix paid $12million for worldwide rights to the film adaptation of Nigerian novel of same title, “Beasts of No Nation” starring Idris Elba. This kind of deal provides immediate cash for the movie producers. Following Netflix’s lead, we may also see local VOD service providers invest in original content. This will certainly be great for Nollywood.

Depending on how content creators and producers structure their deal with on-demand media streaming service providers, the potential for profit for either party is great. VOD services also have the ability to generate revenue from additional sources such as advertisements.

Overall, Nollywood stands to gain by embracing the trend distributing content via VOD services. The opportunities provided by this business model and technology should be harnessed to tackle existing challenges such as funding, piracy etc.

Tax and regulatory considerations

Without a doubt, technology disrupts. As discussed in earlier publications, whilst there are numerous benefits of e-commerce, the paradigm shift from a physical to an 'invisible' business framework comes with its challenges. One of these challenges is tracking transactions especially for the purposes of taxation. Stakeholders in the industry need to worry at their level of compliance with tax obligations in Nigeria. For instance, the following relevant questions must be asked:

·        What issues may arise where technology is used to promote and sell content?

Would VAT apply to sales of content to local electronic distribution companies? Would VAT apply to direct sales of online content to local consumers? What of sales of content to international customers and companies?

 

·        What tax regulations are applicable to the various industry players?

For instance, the Personal Income Tax Act (PITA) applies to individuals, partnerships and sole proprietors whilst the Companies Income Tax Act (CITA) applies to incorporated entities. The Value Added Tax Act (VATA) is applicable to the supply of goods and services.
 

·        Is income earned via electronic transactions subject to tax?

If so, am I registered for tax? With which authority should I be registered? When should I have filed my tax returns? Where my income is earned abroad, is there a tax consequence in Nigeria?

 

·        Is a tax base erosion occurring?

Where foreign on-demand media streaming service companies purchase content from our local content creators, the profits from the worldwide use of the content are taxed in the country of origin of these service companies. Will this not contribute to erosion of the tax base of the government? How can the government mitigate the risks of this?

 

·        Are the existing regulations sufficient to cover the impeding technological change?

·        What is the fate of copyright outside the shores of Nigeria?
Does the regulatory authorities have the capacity to protect copyright outside the shores of the country?

The inability to adequately capture the quantum of attendant direct and indirect taxes payable on ecommerce transaction has left leakages in the tax system. Whilst this is by no means a problem created or condoned by Federal Inland Revenue Service (FIRS), there is little doubt that a strategic partnership with institutions which provide platforms to consummate such transactions would ensure that the objective of minimizing and reducing tax leakages especially from the digital economy is achieved at a faster pace.

Tax authorities must develop efficient strategies to include and appropriately classify industry practitioners in the tax database. There must be collaboration among tax authorities across the multiple jurisdiction in which today’s e-commerce companies operate in order to effectively block loopholes.

Challenges

Perhaps the greatest challenges facing VOD service providers in Nigeria is the cost of bandwidth. Netflix estimates that each stream of standard definition video can consume about 1GB of data per hour. However, we may likely see telecommunications service providers seize this opportunity to woo customers with affordable VOD data plans. Partnerships between VOD service providers and telcos may also become commonplace.

Another challenge is that of piracy. We certainly do not expect pirates to give up without a fight. They will also seek out novel ways of plying their abominable trade. It should be noted that digital piracy is much harder to tackle. Even global giants like Microsoft and Sony with the backing of their respective governments still have to contend with software piracy. We hope the authorities will be more proactive and up to the task.

Conclusion

All hands must be on deck to ensure that the country as a whole, and the entertainment industry in particular, benefits from emerging use of technology. The tax and regulatory agencies must be proactive to ensure that existing laws especially those relating to tax and copyright are well communicated and enforced.

Industry players must also seek professional advice as they operate in the industry. They must gain a good understanding of modern business processes via-a-vis applicable local and foreign regulations. This would ensure that income earned is not eroded by taxes.

Originally written by me, Ayinla Olajide for Deloitte. 2016 All rights reserved!