Nigeria’s iROKOtv, often hailed as the ‘‘Netflix of Africa’’ is not interested in Africa again! Not in the sense that it has added to the list of failed startups, but in the sense that it no longer finds it comfortable running its African operations, and so wants to scale them down. With more than $30 million in investors’ funding, founder Jason Njoku has written a very long essay starting this process, of wishing the 9-year-old company good riddance from the continent.
“Over the next week, iROKOtv will be defocusing our Africa growth efforts,” he says, “and we will revert to focusing on higher ARPU (average revenue per user) customers in North America and Western Europe.”
Going down with the company are about 150 jobs — Not the first time it is hacking off those jobs though. It did so between 2010 and 2015 when it asked over 130 workers in Lagos to go.
And although Mr. Njoku had given a list of the reasons why the company is scaling down now, the signs had always being on the wall. In 2015, he lamented that iROKOtv was super early in Africa.
“I feel even in 2016 and 2017, we will still be too early for widespread data-driven long form video adoption and consumption,” he had said. “As everyone who isn’t a betting company has realised, Nigeria is immature for most internet startups,”
But intelligent people in the ecosystem knew that a day like this in iROKOtv’s life was going to come, unless it was an outlier. The company is not the first video-on-demand service in Africa and would, probably, never be the last. Barely a year ago, one of Africa’s leading pay TV services, Kwese TV, owned by telecoms giant Econet, shut down its operations in all African countries it was in operations, including its video-on-demand service, Iflix and Kwese Play. Since then, Kwese TV has been up for sale, and there is no further information about who is willing to stake new odds with the company. A long list of stone-dead VoD startups follows before Kwese, from Afrostreams to MTN VU to Buni.tv to Cell C’s Black. All stone-dead!
Even after pushing incredibly hard in Africa for the last 5 years, our international business represents 80% of our revenue today,” Mr. Njoku says, “so by taking out Africa growth-related costs, we cut our $300k/month burn to [less than] $50k/month.”
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It is understandable why Mr. Njoku hurled words at Nigeria in the farewell letter. iROKOtv’s woes in Africa appear to have been spearheaded by the country— which makes up the remaining 20% of his company’s revenue share.
For record purposes (added to the fate of recently dead startups in Nigeria), the company would also go down as the first ever African video-on-demand service to be killed by excessive regulations.
In June this year, Nigeria approved the 6th amendment to the country’s broadcasting code, which took away the right to exclusivity for all content broadcast in Nigeria, prescribing the maximum fees at which such exclusive content could be purchased.
“ [As] If dealing with COVID-19, consumer confidence collapse and devaluation wasn’t enough, our great national comrades in Abuja thought it was a solid piece of regulation to quietly introduce the 6th Amendment to the NBC code,” Njoku further notes. “This singular, inexplicable act destroys PayTV in Nigeria. Let me be clear, this had a massive impact on the decision to discontinue investing (and losing money in Nigeria).”
The regulations, among other things, also proceeded to give the Nigerian Broadcasting Commission (NBC), in charge of regulating and controlling Nigeria’s broadcast industry, large discretionary powers to determine whether an agreement restrains competition and creates monopoly, including but not limited to deciding whether the broadcaster has a large market share.
iROKOtv ‘s subscription growth over the last 18 months, Source: jason.com. Image for: Why Is iROKOtv Leaving Africa’s Billion Dollar Industry So Early, And What Does The Future Hold For Other Video-on-Demand Startups? iROKOtv. iROKOtv. iROKOtv. iROKOtv. iROKOtv. iROKOtv
|S/N||African VoD Plaforms That Have Shut Down||Year Founded||Year of Shutdown||Country||Reasons For Shutdown|
|1||Kwese Play, Iflix||2014||2018||Zimbabwe.||*Multiple currency system. *Inflation. Third party content providers on whose content Kwese relied required payment in foreign currency.|
|2||Buni.tv||2012||2016||Kenya||Acquisition by TRACE TV|
|3||Black (Owned by Cell C)||2017||2019||South Africa||*CEO Craigie Stevenson noted that the company did not have the resources to compete in that environment. *Not generating revenue; debts; low subscriber rate. *Built on risky models, including grant of free streaming data to subscribers.|
|4||MTN VU||2014||2017||South Africa||*Built on risky business model, including grant of zero-rated data for streaming on VU.|
*MTN said service cost became prohibitive.
|5||ONTAPTv (Owned by Hong Kong’s PCCW||2015||2018||South Africa||*No official reasons given, but the company seemed not to have the resources to compete in that environment.|
|6||Vidi (Owned by Times Media Group)||2014||2016||South Africa||Over-competition and poor resources|
|7||Altech Node||2014||2015||South Africa||Owner Altech Node exited its South African business|
|8||Wabona||2012||2015||Kenya||No official reasons; but competition and inadequate resources are most likely.|
|9||Afrostream (backed by Y Combinator)||2015||2017||24 African countries, mostly French-speaking.||*More than $4million in funding.|
No new funding.
*From the figures above, it takes approximately two and a half years for the next video-on-demand startup in Africa to die.
Is It That Hard To Run A Video-on-Demand Service In Africa Then?
Below are a few considerations to think over before proceeding on the next video-on-demand adventure in Africa.
VoD Startups Burn Funds Faster Than They Make
When Afrostreams hit rock bottom and shuttered down in 2017 barely 2 years after spending investments in excess of $4 million, critics questioned them for not being profitable before soliciting funding. But then there is more to running a video-on-demand service in Africa than meets the eyes. One of the most prominent ones was pointed out by Afrostream founder Tonje Bakang, who was not ready to go the piracy ways.
“For a LEGAL VoD startup like ours,” Bakang says, “we had to be able to pay between €1,000 and €15,000 per episode for a series; and between €2,000 and €50,000 for a film; just for one year of exploitation and on a list of well-defined territory.”
According to Bakang, the total amount of fees to be paid by a VoD platform like his, actually depends, apart from the ones above, on several factors, including but not limited to the popularity of the programme; the popularity of the casting; the quality of the production; the availability of a foreign language version; the exclusivity; and of course, the piracy of the programme.
“Take the example of a 2-season series of 10 episodes per season, at €1,000 per episode per year,” he says, “2 seasons x 10 episodes x €1,000 per episode = €20,000.”
However, to create the French subtitles of an episode in English, according to Bakang, it is necessary to add an extra €500 per episode or €10,000 per year.
“We arrive thus at €30,000 for 1 independent series,” he says.
“To promote this program, we have to create new trailers with the Afrostream graphic charter, create visuals, and invest in online advertising (Facebook Ads, Mailchimp, media partners etc.) and create events. The marketing budget for an independent series like this one is at least €10,000. We are therefore looking at €40,000 for the one year of operation of an independent series of 2 seasons,” he adds.
But all these do not mean the company would break even, once accomplished.
“Just a series will not be enough to create a sufficient supply for a subscriber,” he says.
By standards, it takes about 10 sets to form a series; and therefore, going by Bakang’s calculations, this represents a budget of €400,000 for one year. And using the same calculations, it would cost exactly €1,200,000 for one year of operation to produce 30 sets of series. (This is also bearing in mind the time of his writing, in 2017; and the attendant currency fluctuations that might have affected the value of the outcomes of his calculations.)
Similar process would also happen with films.
“Let us take the example of an African-American independent or Nigerian film (Nollywood) at €3,000 per year of operation,” he says, “to promote this film, we must add a minimum marketing budget of €10,000. This puts us at €14,000 for a year of exploitation of an African-American independent or Nigerian film released two years ago.”
“How many films does it take to make up an interesting catalogue? 50 films? Based on my example, this represents a budget of €700,000 for one year. 100 films? €1,400,000 for one year of operation. Here too, I used the cheapest film price,” he further adds.
Therefore, for Bakang, at the time of his writing, to have 30 independent series of 2 seasons and 100 independent African or Nigerian films with subtitles in French, a budget of €2,100,000 for one year of operation is required.
This budget, however, excludes the company’s plan to develop a streaming platform; server costs; application development for smartphones; tablets; telephone operators’ boxes; operating costs; team salaries; consultant invoices; lawyers; offices; travel abroad; and marketing of the offer.
“In total, this amounts to approximately €1,000,000 per year,” Bakang says.
And to be able scale and possibly make profit, the budget must be amortised; and this usually means that a higher number of subscribers would be required, and at a very high cost. In 2015, Netflix France, excluding the cost of content and technical cost, spent €66 to acquire each subscriber. Put more precisely then, Bakang’s Afrostream needed just about 70,000 subscribers, each paying a subscription of €7 per month for 12 months without interruption to be able to amortise the cost of 30 series and 100 films, including the content, technology and the operating costs (€,5,880,000 per year).
Unfortunately, over 10,000 subscribers, which Afrostreams was able to then acquire, were not enough to strongly convince investors that Afrostreams would make profitable returns on their investments, in an industry notorious for being unprofitable for its early-stage players. Consequently, the company proceeded to die.
Afrostreams’ fate closely explains why iROKOtv is smartly shuttering down its Africa operations in time, before its completely meets the same fate.
According to iROKOtv, approximately USD 25 Mn in content was acquired in the past five years in Nigeria. Therefore, it is arguable that with less than five hundred thousand subscribers after over 9 years in Africa, coupled with the recent sale of its film studio, ROK (which generated more than 75 per cent of iROKO’s 2018 revenue), to CANAL + Group, it would take the company many more years, in the face of Nigeria’s swinging currency stability and the newly introduced 6th Amendment to the NBC Code, to reach profitability, given the burn rate of $300k per month it has incurred in Nigeria before now.
“In 2015, we introduced the N3,000 annual plan,” Mr. Njoku notes. “It was affordable and an instant hit. It supported our invest(ments) in (our) Africa(n) growth ambitions and was priced close to perfection for our user base. It was readily taken up by hundreds of thousands of people across West Africa.
“Back then N3,000 = $18 (166/$). We went through the brutal 2016–17 devaluations and ended up N3,000 = $8.33 (360/$). A nightmare by all means…Today N3,000 = $6.3 (477/$). All indications are that the Naira devaluation hasn’t really finished. Some are saying it’s just starting and will end up at 550–600/$ before year’s end. What we are seeing now is distorted as…access to FX has been cut off for almost 6 months. A lot of our costs are in dollars — AWS, tech tools,” he adds.
Consequently, presented with the opportunity to either choose to focus on its international market, where the company charges users an annual fee within the range of US$50, or its Nigerian market, where it charges users around US$6 for similar services, iROKOtv would readily jump ship in favour of the former. The former choice would even be more quickly made if iROKOtv makes most of its African revenue from grants of rights to its exclusive content, a practice which has been brought to an abrupt end by the Nigerian Broadcasting Commission through its 6th Amendment to the NBC Code.
iROKO’s fate in Nigeria also met Zimbabwe’s Kwese TV. Explaining why the company had to shut down its African operations, Group CEO Econet Media, Douglas Mboweni, blamed the country’s economic downturn along with problems caused by the country’s decision to switch from a multi-currency system to a local currency that led to soaring inflation.
“The third-party content providers, on whose content we rely, require payment in foreign currency,” he said. “With the prevailing economic conditions in Zimbabwe, and the current business operating environment — characterised by an acute shortage of foreign currency — sustaining Kwesé and Kwesé Satellite Service was no longer viable.”
In essence, there is no gain saying the fact that to compete in the African video-on-demand industry, players must be heavily funded and must be prepared to burn funds without profits in their first few years. This perhaps explains the runs of well-funded VoD companies like Netflix, Amazon Prime Video and MultiChoice’s Showmax on the continent.
Netflix and Amazon Prime Video are leveraging their large catalogues and strategic partnerships (including partnerships with the continent’s leading movie sphere, Nollywood). In 2019 alone, Netflix spent almost $14 billion on “additions to streaming content assets”. Showmax, founded in 2015, is also pulling weight with minimum subscription fees as low as $4, as well as its increasing catalogues, estimated to be around 800 movies and 414 series. MultiChoice’s most recent partnership with Netflix and Amazon would also help to cement the trio’s market shares in Africa and kill early stage VoD startups, unless they are niche-focused (like South Africa’s PrideTv.co.za which focuses on the country’s LGBT community or Digital Entertainment on Demand which offers movie rental services and live streaming of sports alongside traditional on-demand videos; same as Vodacom’s Vodacom Play which is banking on its high customer base to scale)
High Cost Of Internet vs. Low Internet Connectivity Across Africa
Access to low-cost internet connection in Africa is still a tall task, even though over 526 million people on the continent (representing about 11.5% of global internet share) use the internet .
While Nigeria, Egypt, Kenya and South Africa lead the continent internet subscriber base with over 126 million, 49 million, 46 million, 32 million respectively, same cannot be said of the precise number of people in those countries who can bear the cost of access to the internet.
While 1GB worth of internet, for instance, cost around $2.78 in Nigeria — by the end of 2019 — it cost $1.24 in Egypt; $2.45 in Kenya; and $6.81 in South Africa for the same quantity and around the same time.
In fact, at more than $30 per 1GB in Equatorial Guinea; more than $20 per 1GB in Zimbabwe; more than $16 per 1GB in Guinea Bissau, Namibia, Seychelles; and more than $10 per 1GB in Swaziland, Libya, Chad, Mauritania, Sao Tome & Principle — as at December, 2019 — Africa is the region of the world with the most expensive internet data.
The implications of this is that subscribing to at least 10GB of data will take up, at least, 122.45% of the income of an average income earner in D.R Congo; 8.83% in South Africa; 26.82% in Zimbabwe; 53.75% in Togo; 11.6% in Senegal; 8.50% in Nigeria; $14.63% in Kenya; 3.78% in Egypt; 70.16% in Burundi; 107.04% in Central African Republic, etc.
This perhaps explains why, of all internet traffic in Africa, only about 6% is video-related. This is also glaring in the facts recently released by Netflix about its subscriber base around the world. From the report, it could be gleaned that despite Nigeria’s over 126 million internet subscriber base (the sixth largest in the world), the country is no where around the top 50 in the most subscribing countries in the world, even though Costa Rica, at 24 position, has just about 281,417 subscribers.
This is not surprising though; Nigerians are fighting hard to maintain barely decent livelihoods. About 152 million Nigerians live on less than $2 a day, representing about 80 per cent of the country’s estimated 190 million population.
Thus, since it takes about $2.78 to access 1GB of data in the country and it equally would require, on average, about 1GB of data per hour to stream standard-definition videos on Netflix [and 3GB per hour for high standard definition (HD)], it would take, at least $5.56 (two days meal) to stream 2 hours of video per day, which is Netflix’s average in 2019. Nigeria’s situation is even more disturbing when it is recalled that the country is the continent’s largest economy.
“People were shocked at Netflix (alleged) subscribers numbers for Nigeria? Why? Airtel Nigeria and MTN average revenue per user (ARPU) is $2.8 and $4.5,” Mr. Njoku tweeted. “Nigerians are super price sensitive and pretty poor. In 2018, 57 percent of MTN data users were incidental, 0–5mb per month.”
The Bottom Line
Although it may seem insignificant, on-demand video services in Africa should, in the face of the stiffening competition and a very tiny market, either go niche or strategically innovate. Innovative approaches should include relying on many tech-based strategies, such as the use of capping to divide video qualities in ranges; compression to provide watching or downloading experience that does not waste time in poor networks, among many others.
Netflix, for instance, has spent considerable number of years implementing new and more efficient video-encoding processes which have reduced over 20% of the occupied space and bandwidth on the company’s platform without reducing the quality of streamed videos. This measure is also important knowing that, apart from factors such as high cost of data, the speed of the internet is equally important when running on-demand video services in Africa, and Africa has one of the lowest internet speed in the world.
Nevertheless, with Africa’s average age being 19.7 years, the future is bright. Reports show that 89 percent of Millennials ( currently between 24–39 years old) use on-demand video services, while 59 million people watch live TV.
What African countries need to do therefore, is to empower their young populations to earn more and to encourage these innovative services through better-fashioned legislations.
“We still believe in Nigeria,’’ Mr. Njoku concludes. “We still believe Ghana, We still believe in Africa. It’s a strange thing to realise that even after almost 9 years with IROKOtv, 5 exclusively focused in Africa, we still may be too early for Africa. That, in itself, says so much about the current Internet opportunity in Africa…For now we can only focus on cash flow. We will be waiting patiently, keenly, for the key signals to jump right back in to growth mode. We are still on ground”
Read full article here
In this episode of GFA-Attract, we discuss with Kennedy Mubita, Nairobi based Venture Capital Lead for Africa & Middle east at SC Ventures, the venture capital arm of Standard Chartered Bank. SC Ventures is a $100 million fund focused on FinTech investments.
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