Will India Prove To Be A Key Driver For Netflix, Inc?

  • Netflix has started its operations in India.
  • India offers a massive addressable market and a huge growth potential for the company.
  • But Netflix needs to address a few issues before it can take advantage of the growth potential in the country.

Netflix (NSDQ:NFLX) has lately been busy with its ambitious international expansion plan. The company commenced operations in 130 countries over the past 12 months alone, taking its overall geographical presence to 190 countries as of this January. But out of this huge lot of international markets, investors and speculators are talking about Netflix’ prospects in one particular country – India. It has a huge media market after all. Will Netflix’ operations in the country be a blockbuster success or an outright failure? Let’s analyze its prospects to get a better understanding.

Opportunities

  • Let me start by saying that the Indian cinema industry may not be the leading revenue generator globally, but it’s huge in terms of releases and ticket sales. For instance, the country saw about 1,966 theatrical releases during 2014, and cinema ticket sales there are forecasted to reach 8 billion by 2020. These figures illustrate that there’s a massive potential demand for media programming in India and that Netflix is poised to tap this massive addressable market with the launch of its operations in India. Revenue generation and platform monetization would, of course, depend on other factors such as the extent of local language content or pricing.
  • It’s also worth noting that India’s video-on-demand subscribers stood at just 12 million users back in 2014, but this user base is forecasted to expand to 105 million consumers by 2020. To put things in perspective, there were just 51 million OTT consumers in the U.S by the end of 2015. This pretty much suggests that the above-mentioned ticket sales won’t be limited to just cinemas; there will also be a massive base of paying consumers looking for online video streaming services over the coming years. So Netflix’ commencement of operations in India is a very strategic move that can be extremely rewarding over the coming years.
  • More to the point, Netflix has become a huge brand internationally. I’m of the opinion that Netflix will be able to strike deals with local content creators and movie studios at discounted prices due to its sheers size. After all, these studios will get an instant delivery platform with a user base of potentially several million Indians. So altogether, I believe that local content acquisition should relatively be easy for Netflix India.
  • Netflix has a sizable base of 27 million expatriates living in other countries some of which include Australia, U.S, Canada and England. If this base of non-resident Indians hasn’t subscribed to Netflix’ streaming services already, I believe that having a broader portfolio of local Indian content can encourage them to eventually subscribe. There is a dearth of local content programming for expatriates living in other countries and Netflix might just be the solution for them. This further expands Netflix India’s total addressable market size.

Challenges

Now that we have examined the positives of doing business in India, let’s take a closer look at the challenges that Netflix India could face going forward:

  • A big roadblock for Netflix India is the dearth of internet bandwidth available in the country. A recently published report by Akamai revealed that India’s average bandwidth speed of 2.8 Mbps is amongst the slowest in the world, and is much lower than the global average bandwidth of 5.6 Mbps. If users don’t have decent enough internet speeds, then there is no chance that they will subscribe for Netflix and wait for videos to buffer. They would instead just watch TV and skip the entire internet experience altogether.
  • YouTube introduced the “offline” mode in a bid to address this very issue; its users can download videos within the app, and then watch and re-watch their downloads as many times as they want. But management of Netflix has clearly stated that a similar offline mode isn’t in the works and it won’t be made available on its platform anytime soon. This leaves the problem of limited bandwidth availability wide open; users who do not have access to a decent internet connection will probably either continue Torrent-ing or just stick to TV.
  • Another issue that I see is the steep pricing of Netflix India’s subscription plans. The basic monthly fee of $8 may not look much in isolation, but it is quite sizable when seen in relation to average cable prices prevailing in the country. Users in the U.S cut their cable cords as Netflix subscription there costs only 20-30% of their average monthly cable bill. But in India, where a basic Netflix subscription costs about 50% more than an average cable connection bill, a similar trend may not take place. The expensive pricing structure might also hinder Netflix’ adoption in the country. The streaming company needs to work in this area.
Average Cable Bill (mo.) Basic Netflix plan (mo.) Netflix-to-Cable Ratio
India $5-6 ~$7.7 ~150%
U.S $35-40 $9 ~22.5%

(Source: Author)

  • More to the point, there are already plenty of video streaming platforms available now. Most of these platforms are procuring content from domestic content creators and they already have a wide portfolio of local language media programming available for their users. Netflix, on the other hand, has so far signed only 1 deal to produce domestic content in the country. This essentially suggests that anyone looking for domestic content, online, will not prefer subscribing to Netflix due to the lack of media programming.

Screen Shot 2016-07-08 at 5.28.21 PM

(Source)

  • The previous point maybe easier said than done. Indian cinema industry is fragmented, with a huge number of low-revenue films being released each year. To put things in perspective, over the last year, about 1,966 films were released in India while the U.S saw only 211 releases. It is due to this reason that striking deals with local content creators could be a painstakingly long and expensive process. It may hinder Netflix’ growth.
  • Netflix could also run into trouble with the censor board of India. It’s management recently revealed that the company doesn’t have any censorship mechanism in place and that it’s publishing uncensored media programming for Indian consumers. The censor board of India is known to be very conservative and it might object to some of the content available on the Netflix platform.

Putting It All Together

Netflix has an extensive media library but it will need to have locally produced content to attract Indian viewers in large numbers. Granted that there are a few opportunities available for Netflix India, but overall, I believe that the company will first have to address issues related to constrained bandwidth or pricing structure to reap any kind of significant returns from the country. Until then, I wouldn’t expect any sizable contribution from its Indian operations.

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