How Significant Is India For Netflix’s Growth?

Netflix (NASDAQ:NFLX)  increasingly seeks growth abroad.  According to our estimates, the International segment accounts for 30% of the valuation of the company.  Moreover, we expect rapid growth in subscribers of this segment over our forecast period. In January last year, Netflix became global by expanding into 190 countries. While it has still not been able establish a presence in China, India has the potential to become one of its largest markets in terms of number of subscribers. India’s OTT (over the top) streaming market is set for exponential growth over the next few years.  However, this growth will be driven by tier 2 and tier 3 cities and rural areas, which are currently not Netflix’s target customers in the region.

Smartphone Usage, Internet Penetration, Need For Personal Entertainment Growing Rapidly

India is a “mobile-first” economy and a majority of its population uses the internet on their smartphones. It is estimated that the country will have nearly 500 million smartphones by 2020, double from the current estimate of 200-250 million smartphones.  As telecom operators roll out 4G services and reduce data tariffs in a competitive environment, consumption of videos on smartphones is likely to increase significantly. India’s young population (50% of the country’s population is under 25) favours watching content on the go, leading to an increase in video consumption on mobile devices. Further, 90% of households in the country have a single television set, making a mobile device the default personal entertainment tool for individual consumption. The country is expected to have 650 million internet users by 2020, making it a huge market for video on demand consumption.

Targeting The Right Segment

While India is likely to see tremendous growth in internet penetration and smartphone usage, the majority of this growth is likely to come from tier II and tier III cities and rural areas. These regions do not have a very high disposable income and are less likely to pay a high monthly subscription for services such as Netflix. However, Netflix’s strategy in the country has been to target the higher income segment with premium shows, better quality of videos, coming at a higher subscription rate. We believe that, with this strategy, the company might not be able to capture the growth in the Indian market, since it is restricting itself to a small sub-segment of consumers. Amazon Prime video, on the other hand, appears to have a more “mass appeal” strategy.  Currently a Netflix subscription in India comes at Rs. 650 a month, while viewers can watch Amazon Prime Video at an introductory price of Rs. 499 for a year.  While the price difference is substantial, Amazon is also focusing on more local content to target audiences in tier II and tier III cities of the country.

Economies Of Scale

Netflix’s high subscription rate and foreign shows model might lead to higher margins in the long term.  But it is likely to limit its growth in the India. In a country where consumers are historically not used to paying for video content and piracy is rampant, a high subscription charge will appeal only to the elite segment in the country. Further 4K quality videos (which Netflix boasts of offering) are also preferred by users watching content on their smart televisions – again not a very significant number.  By targeting this audience, Netflix will not be able to achieve economies of scale in the region and might become a niche player.

We believe the Indian market holds strong potential for streaming media players and they can build a substantial subscriber base in the region. However, with its local content strategy and lower subscription rates, Amazon is more likely to capture this growth.  Netflix‘s current model is limiting, making India a smaller market for it over the long term.

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