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Disney factor prompts Netflix India U-turn to slash sub prices

In just 8 months Netflix has had to change tack in India and admit that being more expensive not only than its competitors but also than established pay TV operators was not going to work. So, it has bowed to the inevitable and halved the price of its monthly basic plan from 500 Rupees a month (about $7) to 250 Rupees. This brings it almost to the level of cable and DTH offerings which tend to run at around $3 a month, but still well above OTT competitors, including the number one Hotstar, which charges 199 Rupees a month and also Amazon Prime, which had conceded earlier it must offer a special price for India, just 129 Rupees a month (about $1.90).

 

However, Hotstar, now owned ultimately by Disney after its takeover of 21st Century Fox, makes most of its money from AVoD, with now about 200 million active users. Even at the lower price Netflix will not suddenly take off as it had hoped when it entered the Indian market full of bull in January 2016 and publicly at least was optimistic well over two years later as recently as July 2018. Yet the reality was that it has gained only about 500,000 subs by then, a figure which remarkably appeared close to saturation at that price point.

Netflix still believed that lift off would be achieved in India once it had amassed a compelling base of locally produced content. Netflix in July 2018 launched its first Indian-produced series, Sacred Games, with 9 further originals in the pipeline, which CEO Reed Hastings predicted would allow it to ride a wave of phenomenal Internet growth and penetration in higher bandwidth broadband access. At a conference in Delhi, Hastings pronounced that having just passed the 125 million subs mark globally, the next 100 million would come from India. That could just be true for Amazon, which is spending heavily there to see off Walmart to become the dominant online retailer there, dragging video consumption along with it. Hotstar though is hot favorite to garner the next 100 million viewers in India if we count AVoD.

Netflix had bet on total SVoD numbers growing faster than they have on the back of a rapidly expanding middle class, which it also reckoned would be willing to fork out comparable monthly subscription rates to elsewhere in the world if the content was sufficiently compelling. But expectations die hard and being able to pay is not the same as being willing to do so, when $7 a month feels to an Indian more like $40 in the US, irrespective of disposable income.

By November 2018, with sub numbers stubbornly refusing to budge, Netflix was facing accusations of obstinacy, but still Hastings insisted that prices would not be reduced. He advanced two arguments in defense of holding prices, firstly the usual one that subscribers were only being charged the price of 2 or 3 movies a month and were getting a lot more content for their money. Secondly, he pointed out that the distribution of subscribers across the basic plans, 500 rupees for the basic, 650 for the standard and 800 for premium, was typical of other countries including the US. But that only suggested price was not a factor for the small percentage of presumably quite wealthy Indians that had already subscribed. In any case the argument was somewhat undermined by Netflix having already introduced low priced packages in a few other significant markets in order to become competitive, including Malaysia.

So now, facing a yawning deficit between subscription revenue and content spending in India, Netflix has turned around and cut prices in the hope that this will take the lid off subscriber growth. We anticipate this will stimulate growth sufficiently that after taking costs into account as well as the halving in ARPU, revenues will still grow significantly.

But the price cut may not be enough to drive subscriber growth as much as Netflix would like, certainly not remotely near that rather hubristic 100 million subs target. That would be about double the total number of SVoD subscribers in the country even by 2024, according to our forecast, with even the most optimistic forecasts below 60 million. At its new prices Netflix would do well to get a quarter of that. We projected Netflix to be on only about 3 million subs in India by 2024, but that was before the price cut, taking Hastings’ word that at face value.

Given the combination of low sub prices and preference to pay nothing at all even among relatively affluent Indians, most money there will be made from AVoD and we wonder how long Netflix can stick to its principles on that one. After all, the only principle in this context is what works and introduction of an AVoD option clearly would in India, although there would be concern this might undermine its strategy elsewhere.

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