Categories AlphaGraphs, Analysis, Technology

Netflix’s road to profitability runs through India. Here’s why.

Guggenheim Securities on Wednesday raised Netflix’s (NFLX) price target from $360 to $420, expressing optimism over the streaming giant’s growth potential in the international markets, especially in India. Anybody who has carefully analyzed the South Asian country’s streaming history (a short one though), would without second thoughts, agree that this country holds the key to Netflix’s profitability.

Netflix India how it works

“We believe that India represents an under-appreciated long-term opportunity.  We see improving broadband infrastructure, and a growing population of upper-middle-class smartphone users as an attractive addressable market,” Guggenheim analyst Michael Morris had stated in his note to analysts.

And of course, it is. The country underwent a digital revolution in 2016, when India’s richest man Mukesh Ambani launched Jio, a broadband service that decimated tariffs across the telecom industry. What emerged out of this internet revolution was a confused horde with large amounts of data.

Incidentally, Netflix’s silk route journey ended in India around the same time. And it did struggle for a while with the country that was reluctant to part ways with the traditional cable TV. Netflix was faced with more challenges when a year later, Amazon (AMZN) Prime Video made its foothold in the sub-continent. Amazon’s annual subscription was a rupee less than Netflix’s monthly subscription.

Countries-with-high-Netflix-user-penetration-in-2018

Netflix wasn’t the first to introduce a streaming service in India. It had a regional rival Hotstar, which is backed by 21st Century Fox (FOXA), already operating under a hybrid subscription model. Users could watch some of its content for free, while for the others, they had to pay a monthly subscription.

Today, Hotstar is India’s biggest streaming platform with around 75 million users, and accounting for around 70% of all steaming app downloads, primarily due to its wide collection of regional TV content. Hotstar managing to secure streaming rights for Game of Thrones, which is also the most pirated show in India, certainly helped to some extent as well.

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Meanwhile, Amazon Prime Video accounts for only a meek 5% of the overall streaming app downloads, and Netflix even lower at less than 2%. Apart from these, there are also a few other streaming apps that are trying to bite off a bigger pie of the streaming market.

However, last year Netflix came out with three original shows – Sacred Games, Lust Stories and Ghoul – all of which garnered rave reviews, not just from the regional audience, but from international publishers as well. Though the exact numbers are not yet available, it is estimated that the shows have considerably lifted Netflix’s subscriber base. The same strategy had earlier proved successful in Germany, when original German content paved way for a higher number of subscribers.

The South Asian country gradually opening up to more Western content, and higher disposable incomes in metro-cities should also work in favor of Netflix in the coming years. Besides the increase in subscriber base, it may be noted that lower production costs in India will help improve margins for the company in the long term.

According to a recent report by PwC, among the list of countries with highest CAGR in Subscription Video on Demand, India features third, after Indonesia and the Philippines. The country’s overall over-the-top (OTT) revenue is expected to surge from the current $20.2 billion to around $56 billion by 2022. It is also predicted that India would become one of the top 10 OTT markets in the world by 2020.

 

Hence, Guggenheim analyst Michael Morris’s prediction that Netflix may have a user base of 5.5 million in India by 2020 is rightly backed by numbers.

At the end of the second quarter, Netflix’s international subscriber base was 72.76 million. Hence the fact that there is an untapped user base of 5.5 million in India alone poses substantial growth possibilities for Netflix. With effective pricing and more engaging content, Netflix sure has a good chance of sweeping this mass.

Netflix shares have rallied 87% so far this year, while S&P 500 index has gained 8.4%.

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