“Introduction and Company Overview
Deepen vertical integration with local content producers
Go downmarket (undercut Hotstar)
Acquire Indian competitors (e.g. Jio TV)
Exit the market
Netflix, a leading American online media streaming and production company, expanded successfully across the globe in the 2010s. However, in India—a very important market for Netflix due to its large population and strong demand for video streaming—Netflix seems to be struggling. Dominant competitors and specific customer requirements have made growth difficult for the firm. The management team faced several strategic issues, all pointing to the key question: How can the company adapt its business model to gain a foothold in the Indian market? Should the company conduct acquisitions to deal with the situations? Or should Netflix exit India and shift focus to other global markets instead?
In this case, both Netflix and the Indian video streaming market are analyzed, with several strategic options are compared. The team of authors recommends purchasing local studios and production houses, so that Netflix can continue to pursue its verticalization strategy and meet local consumer demands. We also suggest Netflix adapt its price to appeal to more users, as Indian users are generally more price-sensitive. While it might dilute Netflix’ premium brand, we believe such risk can be mitigated by adopting a more bare-bones, lower-cost subscription targeting the large number of Indian consumers who use their smartphones to access the internet.
“Introduction and Company Overview
By any standard, Netflix was the heavyweight in the online subscription media platform space in 2018. From its founding in 1997 until then, it had grown to nearly 140 million active users and a market capitalization of almost $117B. But since launching in India in 2015, it has struggled to gain purchase with the country’s viewing audience. Although Netflix is synonymous with streaming media worldwide, it has acquired only 2% of total viewers in the Indian market, far behind the market-leading Hotstar, which owns 40% of the country’s market (2018). At this time, Netflix needed to decide what path to take to achieve higher market capitalization and an increased membership base in India. An analysis of its recent strategic decision-making, together with its options going forward, will determine whether Netflix should throw in the towel and exit the Indian market, or double down and improve its competitive positioning.
Netflix, Inc. is an American media-service streaming company founded in 1997 by Reed Hastings and Marc Randolph in Scotts Valley, California. The history of Netflix’s business model may be divided into two phases: DVD rental-by-mail and digital streaming. The company began with the DVD rental business, using the Internet as its distribution channel. This iteration of the company competed with local rental businesses, Blockbuster, and Redbox. After Netflix changed its billing system to a subscription-based model, it tripled its rentals to more than 100,000 per week. In 2002, the company became profitable and subsequently went public on NASDAQ. In 2007, Netflix initiated the service with which it has become synonymous: on-demand streaming content. In 2012, Netflix infiltrated the production game and released its first self-produced content, the political drama House of Cards. Netflix’s current business segments are split into three sections: domestic streaming, international streaming, and domestic DVD. Netflix generated about $20.1 billion in revenue in 2019, which is a 27.62% increase from the annual revenue of 2018. Financial analysts estimate that Netflix’s revenue is expected to grow 26.8% in the first quarter of 2020 to $5.73 billion.
Netflix enjoys significant product advantages that have fueled its revenue growth and brand equity: a simple user interface, absence of commercials, heavy investment in original programming, download offline feature, different tiers of membership plans, personalized recommendation algorithm, global customer base, thumbnail previews of content, a seamless user experience in HD or ultra HD, binge-watching mechanism, competitive pricing in North America and Europe, and its first-to-market capabilities with large streaming content portfolio. While these have given it leverage over its competitors, some weaknesses the firm needed to address and improve were inadequate locally pertinent content, an increasing debt burden, location-reliable selection, increasing operational costs, limited copyrights, and a pricing strategy that is not proportional to local markets, like India.
Entangling the situation for Netflix is the fact that the competition is booming. There has been an unprecedented explosion of SVOD firms, with many of the large consumer technology companies making significant investments in the media and production space. In 2018, Netflix competed across the globe with competitors like Hulu, HBO NOW, Apple TV Plus, and Amazon Prime. As a result of this fragmentation, consumers are compelled to reevaluate their subscriptions and memberships. As of 2018, there were “more than 300 OTT video services in the US, up from an estimated 200 in the late 2017.” Netflix’s continued growth is a testament to its shrewd creativity and strategic business planning to differentiate its product offerings from other key players. And yet, the company has been subject to and affected by the ever-increasing, much-appealing competition. While Netflix added 9 million subscribers in the third quarter of 2018, it fell short of its projected ten million subscribers that it had originally forecast. Also, Netflix's streaming service was increasingly popular up until case-time, but the company's stock fell that year by 3%, taking a low market hit in December 2018. Its DVD business had also declined; in 2018, there were 2.15 million subscribers to Netflix's DVD rental service in the US, a drop from 11.17 million in 2011.
Increased competition not only created pressure on the demand side, it also caused supply-side headaches. The vast majority of Netflix’s vaunted content library was licensed from other content creators—in 2018, Netflix held a total of nearly $20B worth of “net content assets,” of which $14B, or 70% was licensed. These license agreements typically required Netflix to make an upfront payment to the content owner in exchange for the right to stream a particular content asset in a particular geography and over a particular distribution window. The upfront payments varied widely in amount, with an obscure reality TV show costing little, but tentpole shows, like Friends, costing up to $100M for a few years of streaming rights. Most licenses were either for domestic rights (in the home geography of the content creator) or worldwide rights. As content creators like Disney and NBCUniversal began to invest in their own streaming services, Netflix could expect to face a diminishing pool of content assets from traditional large-scale creators, which would drive up licensing costs. This, along with the need to create exclusive content to attract subscribers, spurred Netflix to invest heavily into verticalizing its business into content creation.
Another primary concern for Netflix was international growth. Although the company has pursued expansion of its global reach, it struggled to capture the audience in non-English-speaking countries and areas lacking high-speed internet and low-level of broadband penetration. Continued pressure from well-funded incumbents and difficulty achieving international growth targets made success among India’s growing middle class seem crucial for the future of the company. Alternatively, maybe it would never be able to unseat the local incumbents and would be better off removing itself from the market and reallocating resources in other markets it operated in. To recommend a path going forward, we must first evaluate the local Indian market so that we can determine the extent to which Netflix’s competitive advantages were likely to translate there, and if so, what steps it should achieve to triumph.
As of 2018, India was the world’s fastest growing major economy, with annual GDP growth of nearly 8% and a population of over 1 billion. It had a rapidly growing middle class, expected to eventually expand to well over ⅓ of the population, or ¼ of its total households. Nearly 40% of the population was under eighteen years old. Labor costs were regionally competitive to other Southeast Asian countries, and over 10% of the population was fluent in English, making India one of the largest English-speaking countries on a nominal basis. It was ranked 63rd on the Ease of Doing Business Index; and according to the World Bank, it was ranked 164th in contract enforcement, with the average time of dispute resolution languishing at over four years. The Indian rupee, the local currency, was relatively weak, with approximately 70 rupees equal to 1 US dollar. Major sectors of the economy included manufacturing, pharmaceuticals, and entertainment—Bollywood, India’s Hollywood, was a major regional player in content production and distribution, with a reach extending beyond India’s borders into the Middle East and the Indian diaspora.
The Indian political and regulatory system was highly bureaucratic and resistant to reform. India was a “quasi-federal” system, made up of individual states with specified legislative and executive authority, and overseen by a more powerful central government. There is a moderate amount of political risk; the current ruling party, the BJP led by Prime Minister Narendra Modi, is an ultra-nationalist Hindu political organization, and there continues to be serious ongoing conflict between the Hindu majority and the Muslim minority. Recent street clashes in New Delhi left nearly thirty dead, and Modi himself presided over a massacre of Muslims in Gujarat in 2002. There was also significant long-simmering political conflict between neighboring states. In particular, Pakistan, which was separated from India in the violent Partition of 1947, and China, which shared a long land border with India, frequently exchanged bellicose sentiments with the Indian government, occasionally erupting into actual violence.
Although rules limiting Foreign Direct Investment have been relaxed in recent years, there are still hard caps in strategic sectors of the economy. Perhaps most troubling is the fact that corruption continues to be endemic at many levels of government, while intellectual property protections are generally weak and underenforced. Despite its vast size and high growth rate, it was plagued by a large-scale “informal” economy, and a miniscule proportion of Indians pay income taxes.
The overall Video-on-Demand market in India has been vigorously growing. Revenues increased by 62% from $193 million in 2017 to $313 million in 2020. The growth is estimated to continue such that in 2024 the overall market will generate revenue of $460 million, representing an average CAGR of 10%. The number of users in the Indian Video-on-Demand market is expected to grow from 74.3 million in 2017 to 110.4 million in 2020. The overall market may be divided into three clusters: (1) Video Streaming (SVOD), (2) Per-per-View (TVOD), and (3) Video Downloads (EST). SVOD, the segment Netflix belongs to is by far the largest part of the market, capturing ca. 72% of the overall revenue while TVoD and EST both capture 14% (2020). For a detailed market overview, see Exhibit 1.
Various factors have contributed to the fast growth of the streaming market in India. First, India has the second highest online video consumption per inhabitant in the world. This high demand has forced providers into a price war and has intensified the constant need to expand content libraries. Second, Indians are enjoying growing access to cheap and fast internet connections, which has led to a strong increase in Internet usage per inhabitant. In 2016, a person consumed an average of 0.88 GB per month—a small amount compared to 8.7 GB in 2018. Third, the availability of internet in rural areas of the country has been growing rapidly. While internet penetration in these areas was 13% in 2015, it nearly doubled to 24% in 2018. Last, the growing penetration of smartphones is also playing an important role. From 2015 to 2018 the number of smartphone users grew by 70% (2015: 200 million users, 2018: 340 million users). Smartphone users may take advantage of a high-speed wireless system capable of streaming content on a large-scale distributed basis.
Despite the strong growth of the overall industry, there are several challenges in the streaming market in India that companies need to consider in their corporate strategy. First, there are highly heterogeneous customer demands and tastes that streaming providers need to adapt to. Additionally, there exist multiple languages in India which makes it difficult for movie producers to target a vast majority of the country. Further, India belongs to the countries with stricter censorship guidelines, which makes the production of certain genres more difficult. For example, Netflix faced in 2018 legal problems with the release of the series "Sacred Games" due to offensive content and criticism of politicians.
Another important challenge the video streaming industry faces is coping with piracy and copyright issues that remain prevalent as the country breaks into digitalization. On one hand, movie producers continue to struggle with the dropping of new movies by cinema-goers - sometimes even as organized crime in cooperation with cinema owners - who then publish the content on the internet. On the other hand, illegal distribution of famous and exclusive TV shows, for example via file sharing tools, like BitTorrent surges in India. According to reports, this development is due to the high price of streaming services and various series that are not featured on the more well-known streaming websites, as well as the evolving technological capabilities. Streaming providers suffer in various ways from piracy practices - loss of potential revenue, loss of production funding, and reputational damage as the content is circulated in inferior quality.
To mitigate this development, the Indian government has already been escalating the penalties for illegal file sharing, abolishing pertinent sites, and introducing stronger algorithmic blockades. However, the local government usually only enforces the law once any party, like streaming providers and content producers, reports these piracy websites or file sharing tools. In other words, streaming providers, such as Netflix, must watch closely to see if there are any new piracy players. In addition, streaming providers see their own influence to combat piracy primarily in offering a superior customer experience, content quality, and reduced costs. If the services offered are so excellent that file sharing is no longer worthwhile, then this is also an effective fight against piracy.