Netflix recently announced that it is launching in India as part of its global expansion. But will a one-size-fits-all strategy work?
On January 6, Netflix Co-Founder and CEO Reed Hastings unveiled his campaign to conquer the world. At the 2016 Consumer Electronics Show in Las Vegas, the on-demand Internet streaming media provider added 130 countries to the list of 60 where its services are already available. âToday, you are witnessing the birth of a new global Internet TV network,â said Hastings.
There were no cheers from China, which has been left out of the Netflix plan (along with North Korea, Syria and Crimea). There was some dismay in India, where Netflix is initially offering only around 7% of its US library and limited local content. China and India are potentially two of the largest markets for Netflix. Indiaâs mobile subscriber base crossed 1 billion in October, making it the second country after China to reach that landmark. The younger generation is comfortable watching movies and TV shows on smartphones. India is expected to record 500 million Internet users by the end of 2016, 60% of them accessing the web on mobile phones. China is the clear leader here with 668 million Internet users.
So is Netflix wrong in treating India on a par with Anguilla and Aruba? Kartik Hosanagar, Wharton professor of operations, information and decisions, says there is something to be said for a slow-and-steady approach in a market like India. âNetflix probably acknowledges that the Indian market has to be built up slowly rather than in a big-bang fashion,â he notes.
âWe have launched in new countries by region or individually in the past,â says US-based Anne Marie Squeo, director of corporate communications at Netflix. âWeâve learned a lot from those launches and will learn a lot from this one as well. Given the consumer demand for great content delivered over the Internet, we wanted to start meeting that need now rather than waiting.â
Not a Game-changer
Hosanagar doesnât think Netflix will be a game-changer in India anytime soon. âIn the short-term,Â it wonât disrupt the market,â he says. âNetflix has to solve a number of issues tied to infrastructure. That said, the long-term indicators are that it will have a huge impact on the market. YouTube is already big in India, albeit for short-form content. Netflix will need to adapt. A technology solution made for the USÂ wonât work in India. But once it is adapted,Â IÂ think it can have a great impact on content production and consumption patterns.â
âI think India is a large and important market for most content and distribution platforms, including Netflix,â adds Jehil Thakkar, head of media practice at KPMG India. âGiven the nuances of the market, a softer launch will help in terms of learning lessons, evolving practices, building relationships and understanding consumer behavior before a larger and higher profile rollout is made. China continues to be a controlled Internet and content market that does not allow free competition or entry in the media space and this, in fact, heightens Indiaâs importance in the media and entertainment space for the long-term âŚ [Today] Netflix is not necessarily a strong brand in India. Its entry will not have a significant effectâat least in the short-term.â
âIt is too early to even think of disruption,â says Smita Jha, leader-entertainment and media practice, PwC India. âThe Indian consumer base is very diverse.â But, she notes, âthe launch of Netflix in India has opened up the debate on OTT [over-the-top content, which refers to audio, video or other media delivered over the Internet without users needing a cable or satellite subscription] in a more serious manner in India. Prior launches by some local players did not create such an impact.â Gurpreet Singh Bhasin,Â co-founder and COO at One Digital Entertainment, expects that Netflixâs entry will âensure that domestic players and media giants get more serious about the business and invest for a long-term play.â However, Rajiv Vaidya, CEO of local player Spuul says: âWe donât think Netflix will disrupt the space; it is still a US product, which doesnât take into account the complexities of India.â
The likes of Spuul, BigFlix and Hooq were expecting Netflix to enter the market later this year, says Gaurav Gandhi, COO of the newly-formed Viacom18 Digital Ventures, another Netflix competitor. âNaturally, everyone is evaluating the entry strategy.â
A Costly Proposition
According to Gandhi and other experts, some key factors need to be considered when examining Netflixâs strategy for India:
Price:Â The US cable TV average revenue per user (ARPU) is around $80-$100, while Netflixâs subscription rates are $8-$10. But the Indian cable TV market has one of the lowest ARPUs in the world at $4-$5. At current pricing, Netflixâs basic subscription plan is virtually double.
Data costs:Â Telecom data costs are very high. In fact, some telecom firms are mulling a model in which voice calls are free. Data is used to balance the books. Prices for voice calls are very low: Tata Docomo, for instance, has unlimited voice plans (free calls during the period of the scheme) that start at less than $3.
The delivery mechanism:Â âGlobally, Netflix consumption is higher via fixed broadband lines [and larger screen viewing at home]. In India, it is primarily on the mobile. In fact, the entire digital boom is mobile-driven,â says Gandhi. This means even higher data costs.
Content:Â âNetflix will need to grapple with its strategyâwhether to be a mass or niche player,â says Jha. âIf it is the former, the challenge will be to include [a large amount of] local content so as to effectively compete with the Indian TV broadcast and film fraternity; if the strategy is to go mass, pricing plans may also need to be reviewed as they are currently higher when compared to the average television subscription or film ticket.â Currently, Netflix is offering three plans for India. The basic plan allows users to watch on one screen and costs Rs. 500 ($7.40 at the current exchange rate of $1 = Rs. 67.59) per month. The standard plan (two screens at the same time) is Rs. 650, and the premium plan (four screens) is Rs. 800.
Is the hurried globalization plan a result of subscriber saturation in its existing markets and shareholder unease as a consequence?
US companies in this space have earlier found they cannot take Western pricing models and extrapolate them to India. Facebookâs second-largest market is India with 125 million users. Out of them, 114 million are mobile users. In the year ended March 31, 2015, the social media giant saw its India revenues jump 27% to $18.26 million and net income rose 33% to $2.4 million. However, revenue per user was 15 cents compared to $10 in the US.
If Netflix decides to cut rates, some local rivals may meet it head on. Viacom18 can pick up the gauntlet if it needs a deep-pocket response; the company is owned by the wealthiest Indian, Mukesh Ambani. Hotstar is part of Rupert Murdochâs far-flung empire. Besides, Hotstar is free. It offers a mix of cricket and local content.
Cricket and Cinema
âIndia loves cricket and cinema,â says S. Sadagopan, founder-director of the International Institute of Information Technology, Bangalore. âNetflix has the potential to disrupt, provided it is able to source Indian content, price it right and manage the speed of delivery. A small number would love the Netflix US content, but the real disruption will need âMade in India, Made for Indiaâ content.â
âWe are producing local TV shows in Italy, Brazil, the UK and a number of other countries, and expect that list to grow globally along with our service,â says Squeo, the Netflix spokesperson. âIn 2016, we plan to spend about $5 billion on programming rights, including many titles that will be exclusive to Netflix around the world. However, content licensing has traditionally been very fragmented and regionalized. It will take some time, several years at least, to get to an offering that is the same everywhere.â
Content matters, experts note. It dictates strategy, pricing and positioning. Local content will have a market in rural areas. But affordability remains an issue and will require out-of-the-box thinking.
In addition, there are other basic hurdles to cope with. One major issue is bandwidth. âThe biggest challenge is bandwidth availability,â says Sadagopan. âHopefully âŚ enough bandwidth will be available soon.â Adds Mohit Jain, research analyst-technology at securities firm Anand Rathi: âExpensive and inconsistent Internet speeds are the biggest challenge for Netflix in India.â
âI suspect the low-key entry reflects the fact that Indiaâs broadband penetration is low,â says Hosanagar. âEven where a household has broadband, speeds are not true broadband. Netflix will need to make the same kinds of investments in infrastructure in India as it has made in the West. This will include investing in content delivery networks so that its content is stored as close to the end-user as possible. It will need to invest in some additional infrastructure in India to adapt to the mobile. It will need to partner heavily with telecom operators in India. With all of that, Netflix will have a fair shot.â Reliance Jio will be launching 4G services in the country soon (it is in beta now). So, the Netflix launch may be anticipating that.
Squeo of Netflix has an answer to the infrastructure issue. âNetflix automatically adapts the data rate of the video stream to meet the bandwidth available to the member at any point in time,â she says. âOur adaptive streaming engine allows us to automatically adjust the bit-rate of the video stream based on a memberâs bandwidth so we can eliminate buffering. We do this by encoding video content for a multitude of devices and formats so we can deliver the one that will provide the best viewing experience.â
There could be other hiccups. Censorship, for one. âThe latest James Bond installment has had its license to thrill revoked after [Indian] certification board orders scenes with kissing to be cut by 50%,â said a recent report in UK newspaperÂ The Guardian.Â House of CardsÂ and other programs available on Netflix may face backlash due to the use of four-letter words and other racier content. Then there is piracy: In India, sharing and downloading of copyrighted material is rampant. And credit card frauds have spread to the extent that people are wary of giving information online. Netflix requires card details for even the one-month free trial period, which may prevent many from trying the service.
Is the hurried globalization plan a result of subscriber saturation in its existing markets and shareholder unease as a consequence? Baird Equity Research downgraded Netflixâs stock from âbuyâ to âneutralâ on January 4. âThe push toward increased original programming and content costs generally could pressure profitability and cash flow more than expected,â wrote Baird in a note. ââŚThe international markets have lower broadband penetration rates, lower credit usage and lower TV ARPU, all of which could hamper Netflixâs growth in those markets.â
Zacks Investment Research put the Nasdaq-listed stock on its âsellâ list. Netflix shares dropped some 7% after the downgrades. However, Netflixâs stock price doubled in 2015 and the fall may be the result of overly high valuations and investors booking profits.
âIt appears Netflix has not done enough homeworkâthe way it is priced initially and the content available at launch time is anything but rich,â says Sadagopan. But NetflixÂ changed the rulesÂ of the game and adapted along with its customer base in the US and elsewhere. It is capable of doing so again.
The views expressed in this article are the authorâs own and do not necessarily reflect Fair Observerâs editorial policy.