A year ago this month, Netflix launched in India with much fanfare. The company made a conscious decision to target the rich elite of India and then to broaden from there. As a Netflix spokesperson said at the launch, “Our early adopters are usually consumers who are tech-savvy, who have smartphones and own Apple accounts,” but that the company will later expand “through deeper local insights.” On the surface, Netflix’s plan made perfect sense. The growth of smartphone, e-commerce and online streaming in the US has slowed, so global internet companies are on the hunt for their next big market. China’s protective policies and regulatory hurdles make it off-limits for most such behemoths. So India it is.
But a year after its launch, Netflix has failed to take over India. As it turned out, home-grown and international competitors alike fought back. The strategies they used revealed the short-sightedness of Netflix’s early-adopter approach.
The battle for Indians’ eyes and screens is not just about streaming video. Netflix may be facing off against Amazon Prime Video and India’s own Hotstar, but Amazon is simultaneously taking on Flipkart, India’s multi-billion-dollar e-commerce company. From Amazon’s perspective, video is just a perk to lock in consumers, a fact that deeply shapes its strategy.
Given that the number of heavy internet users in India will likely overshadow that of the US in the not-too-distant future, India may well become the ultimate proving ground for global tech companies. If you can’t make it in India, you’ll always be second-rate.
When Netflix launched in 1998, it began by circulating DVDs. Later, it pivoted to streaming. For the first time, streaming freed viewers from the tyranny of TV networks and whatever they decided to run during prime time hours.
At the same time, people began spending vastly more time online, which rapidly expanded Netflix’s user base and gave it the cash flow it needed to continue building out its catalogue of content, attracting yet more users and more money. Netflix came to enjoy a sky-high valuation of $54 billion, implying an insane price-to-earnings ratio of 340.
But to keep growing, Netflix needed to keep bringing in more internet users. With growth slowing in the US — this quarter, Netflix added less than half the subscribers it added the same quarter last year — the next key market for Netflix was then quite obviously India, considering that one out of six people in the world is an Indian.
India is also at the beginning of a 4G-fueled data revolution, hastened by India’s richest man, Mukesh Ambani. His company Reliance recently invested close to $22 billion in what Ambani called the world’s biggest startup, Jio.
Reliance Jio entered the Indian telecom market in late 2016 with a bang, offering rock-bottom pricing for its data services to all users. Jio gained more than 50 million subscribers across India in little less than 3 months, a feat unprecedented anywhere in the world. To put this in context, India’s biggest telecom player Airtel took 12 years to reach the same number of subscribers. As a result, Jio users have become regular consumers of data-heavy services such as audio or video streaming that previously were out of reach.
The government of India is also pushing a host of new initiatives under its Digital India program to help get the entire country online. It is currently home to 460 million internet users, but India’s IT industry body Nasscom and Akamai Technologies estimate that by 2020, the number of internet users in India will exceed 730 million. That will make India’s internet user base more than double the US’s entire population.
What India doesn’t have, however, is a culture of spending on video. Netflix’s average revenue per user (ARPU) in the third quarter was $25.29 in the United States and $21.59 abroad. In India, where a movie can cost as little as 29 rupees (44 cents) and monthly subscriptions are as little as 200 rupees ($3), analysts expect ARPUs to be a fraction of what they are elsewhere. The World Bank put India’s per capita income at $1,581, and Indians are known to be price-sensitive.
Until a couple years ago, video piracy was rampant and the urban Indian could easily download pretty much any content off easily accessible torrents on the web. But that has changed. The Indian government adopted a stricter digital policy that banned many such sites, providing a welcome boost to streaming services. In many ways, the ground was set for a company like Netflix to step in and hit it big.
But to win India, you first need to understand that it is not one unified market. It’s an amalgamation of many different markets divided by language (India has 22 official spoken languages), religion and class. But for our purposes here, looking at two key kinds of India should suffice.
One India is young, urban and relatively better off. This India is similar to its corresponding demographic in the US. Its members drink the same $3 Starbucks coffee, watch the latest Game of Thrones episode as soon as it’s out, use a credit card, and carry the latest iPhone. This is the new and emerging India. This 18-to-35 demographic is relatively small, but its greater disposable income, eager adoption of Western brands, and rapid growth puts it on track to becoming the largest such group of its kind anywhere in the world by 2020.
And then there’s the other, older India. It’s only now slowly coming online. Despite being far bigger in volume, it’s too early to say how willing they will be to pay for services they’ve yet to feel the need for. This is the India that Reliance Jio primarily targets. They don’t have reliable broadband connections and have much less discretionary income.
The key to cracking this far bigger and potentially more lucrative market lies in building out a vast catalog of local content, both original or licensed. According to a recent industry report by KPMG India, Western programming only commands a minuscule half a percent share of viewership on Indian television, compared with over 60 percent for domestic entertainment. Similarly, Hollywood and foreign films manage a less than 10 percent share at the box office. You cannot win this market without speaking its language.
But Netflix didn’t offer that. Nor did it offer a sufficiently rich Western catalogue to compensate. Users realized that the Netflix library in India was woefully small compared to what was available in America, and their localized Indian content was rather abysmal.
The streaming company would have done well to take a leaf out of the playbook of the unlikely player who is currently leading India’s video-streaming race: Fox-owned Hotstar, which claims over 130 million downloads.
Hotstar launched Hotstar Premium in the middle of last year with a vast swath of international content and charged 199 rupees a month, or just under $3. It has secured exclusive streaming rights in India to HBO shows like Game of Thrones, Silicon Valley and Westworld as well as to a wide array of local content in the popular local languages of Hindi, Telugu, Marathi, Tamil and Malayalam. Though Hotstar doesn’t reveal its numbers, it claims a subscription base more than 10 times bigger than Netflix in India.
If this wasn’t bad enough for Netflix, a new competitor has recently entered the fray: Amazon. Amazon came to India in mid-2013, and in the past three years has caught up with India’s biggest e-commerce company, Flipkart.
With total investments of Rs 7,000 crore (more than $1 billion) in just over 12 months, the Jeff Bezos-led company has managed to quickly make major inroads into the Indian market. Amazon Seller Services, which runs the India business, grew 120 percent between 2015 and 2016, posting a revenue of Rs 2,217 crore (about $310 million) for financial year 2016, surpassing that of rival Flipkart Internet’s, which stood at Rs 1,952 crore (about $280 million) in the same period.
In December of 2016, Amazon rolled out its Prime video service in India as part of the Prime bundle. Amazon’s goal is to use video to acquire more Prime subscribers, whose number globally currently stands at an estimated 54 million.
The message essentially is: Come for the video, stay for our instant-gratification everything store.
In fact, Bezos wants Prime to be so good a deal that you’d be “irresponsible” not to sign up. Selling Prime memberships would mean locking these new Indian customers into the habit of buying nearly everything from Amazon, as many Americans have found themselves doing. According to a just-released study from Consumer Intelligence Research Partners, Prime members spend $1,500 per year on Amazon, nearly triple the $625 spent by non-members.
Unlike Netflix with its narrow focus on young-and-wealthy Indians, Amazon is targeting pretty much anyone with Internet access. The companies’ pricing strategies reflect their priorities. In India, Prime costs $15 per year — whereas Netflix charges over $7.50 per month.
During the annual Diwali sale, India’s equivalent of Black Friday, Amit Aggarwal of Amazon India claimed that Prime membership was the most bought item ever in Amazon India’s short history. He claimed that 1 out of 3 products sold was a Prime membership during the frenzied 5-day festival period. Aggarwal also says that memberships grew more than 100% after the launch of Prime Video.
Yet the real battle lines are being drawn in content creation, which according to Mumbai-based entertainment industry analyst Jehil Thakkar “is going to be the real differentiator” between such services. India is a market where local content rules.
Netflix is rumored to have an original series based on Vikram Chandra’s best-selling novel Sacred Games, but Amazon has gone much farther: In December it announced 17 shows from Indian creators, with eight of them already in production. Meanwhile, Prime Video already offers a lot more films and TV shows in Hindi, Tamil, Bengali — some of the country’s most spoken languages — than Netflix. Amazon has partnered with some of India’s biggest film studios, and has promised it will bring Bollywood features within “a few weeks of their theatrical release” to Prime Video.
In terms of Western content, Netflix has the upper hand, with critically acclaimed shows such as Black Mirror, Breaking Bad and Dexter. Amazon tries its best to keep up by offering Seinfeld, Mr. Robot, The Night Manager, The Good Wife and even The Grand Tour.
The problem with Netflix India, however, is that the most natural comparison is with Netflix USA, which serves the company poorly. Not even 15 percent of the titles in the US are available to India users. With Prime, the expectations are different. The customer realizes that the real value is in single-day delivery and early access to deals — the benefits for which people were paying for Prime to begin with. Everything else is merely a bonus. The expectations, scope for disappointment and churn is much, much lower.
And India is likely to be an either-or market, unlike the West.
Unlike the US where cable TV costs $99 a month, in India a local cable bundle costs just $5 a month. And when users reassign the same money to subscribe to a streaming service, whoever provides the most value per dollar is likely to be the winner.
And right now, it’s pretty clear who that MVP is.
There’s one more thing. It cuts across every divide in India, be it of class, religion or language. It’s also the same thing that Hotstar leveraged to zoom its way to the top of the Indian streaming market, leaving every other player in the dust.
Cricket.
To say that India as a country is bat-shit crazy about this sport would be putting it mildly. When Uber CEO Travis Kalanick visited India last month, his first order of business was to meet Indian cricketing superstar Sachin Tendulkar at his home in suburban Mumbai.
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Cricket was also key to Hotstar’s successful launch a year ago. When Hotstar first started live-streaming the Indian Premier League (IPL) in cricket-crazed India, it rode a sudden burst of popularity to gain subscribers and reach 25 million downloads within a single month.
The 2016 edition of the IPL reached a massive viewership of 335 million, more than 50 percent of India’s paying television households — reinforcing India’s love affair with the country’s biggest sports tournament. Hotstar claims that in the major Indian cities, more people watched last year’s IPL season on its service than on TV.
All this is especially interesting in light of the fact that the 10-year digital rights to the IPL are up for grabs in 2017. A bid from Amazon could well materialize. As Ben Thompson (of Stratechery) has written: “In recent months, the e-commerce giant has been in talks with heavy hitters like the National Basketball Association, Major League Baseball and the National Football League for the rights to carry live games.” Rumors abound as to how Amazon is planning to acquire rights to the IPL, and at least two people I spoke to whom are knowledgeable on the matter confirmed that Amazon India would be aggressively bidding on it.
Hotstar and Netflix are both pure play video streaming companies — streaming is the only way they make money. This leaves them only a limited budget to play around with. The fact that Prime video is a loss-leader for the bigger e-commerce business leaves it with a much bigger pocket of funds to play with. By monetizing indirectly through Prime member purchases, Amazon has a greater ability to spend on content that will attract a large number of users to its e-commerce platform.
The IPL wouldn’t just help Amazon control India’s streaming market. It might also hold the key to wresting control of India’s much more lucrative, multi-billion dollar e-commerce market from Flipkart.
For Indian internet start-ups, 2016 turned 2015 on its head. Valuation markdowns, executive departures, massive job cuts, market share losses (to American rivals) and a lack of big-ticket fund raises dominated the headlines in 2016.
It was a total departure from the previous year, when start-ups touted high-profile recruits from Silicon Valley, hired thousands of engineers and enjoyed the fruits of a fast-expanding Internet market, attracted massive funding and were assigned jaw-dropping valuations.
India’s posterboy for tech startups, Flipkart, now has the additional challenge of combating value-adds like Amazon Prime Video to entice digital buyers. Customers have shown little platform loyalty, and instead are drawn to the lowest prices. In fact, Flipkart’s valuation has been cut in half by successive mutual funds from the massive $15 billion it once commanded.
Instead of competing head on with Netflix or Flipkart, the launch of Prime Video gives Amazon the option of flanking both, which certainly looks like another masterstroke by the e-commerce giant.
Jeff Bezos has yet to settle for anything less than world domination, and I suspect that any player who comes in the way — be it e-commerce or any other vertical — will be ruthlessly annihilated, as Amazon takes over more and more of the world.
Oh, Netflix sure can’t chill.
