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Balancing the Scales: Why Netflix’s Policy of Price Cuts May Be a Losing One

Ian Whittaker 20 December, 2021 

The Indian SVOD market is a highly competitive one where Netflix continues to be something of a bitpart player. In his latest column for VideoWeek, industry analyst Ian Whittaker explains how the company is adapting its strategy and the rationale for its pricing strategy.

Netflix’s Indian business took some very drastic action last week in the world’s second largest (or largest, depending on your views of official population statistics) market. It cut the price of its plans by anywhere from 18 percent to a whopping 60 percent – including for its basic service – as it sought to boost its subscriber growth. The subscriber numbers would seem to tell their own story of how well Netflix is doing in the Indian market. According to Media Partners Asia, Netflix has five million subscribers in India as opposed to the 46 million who subscribe to Disney’s Hotstar platform and the 19 million who take Amazon Prime. Moreover, there are a number of aggressive local Indian players such as Zee also present.

From a share price perspective, I have to say that Netflix’s move does make sense. The primary driver of Netflix’s share price post-results is always its subscriber numbers, not its profitability and the obvious aim here seems to be to boost subscriber momentum going into 2022 for Netflix. If the new offer pulls in a relatively 1-2 million subs, for example, it can make a meaningful difference on sub targets (Netflix’s net sub adds in Q3, for example, was 4.4m globally). If the offer is even more successful, then it literally could adds tens of billions of dollars value to the market capitalisation.

Moreover, Netflix has always seen India as a veritable treasure trove for new subscribers, a valuable commodity as SVOD penetration tails off or even declines in the core North American market as household penetration reaches 80 percent and saturation becomes inevitable. Back in 2018, CEO Reed Hastings stated that India could deliver its next 100 million subscribers and, with the Chinese market out of bounds to foreign players, India truly is the one market that can make a transformational difference when it comes to global subscriber numbers.

However, from a business perspective, the picture looks less rosy. SVOD revenue models are very simple: it is subscribers multiplied by Average Revenue Per User (ARPU). Even though the focus tends to be on sub growth for streaming services, ARPU is equally important – you need to grow both. If you are cutting prices by 60 percent, you need a lot more subscribers to make up ground. Price cuts also have a high drop through to profits (effectively 100 percent drop through) and they tend to have a compounded long-term effect i.e. you are rebasing prices at a much lower level off which to drive growth (in this regards, they are the opposite of ‘one-off’ price increases). Subscribers get use to the cheap drug of low prices and it can be very hard to wean them off their habits.

In the short-term, it is almost certainly the case that Netflix’s moves will invoke retaliation although Netflix’s offer was above others anyway so there is a question how much others need to cut (Netflix’s moves will take its basic package to 199 rupees, or under $3, per month with its mobile-only package at 149 rupees. Amazon is at 179 rupees but does not restrict device usage, unlike Netflix, while Disney charges 1,499 rupees for its service, or 125 rupees). Probably the most pressure will be on Disney, given its Disney+’s sub numbers were seen as disappointing in the last quarter, with Hotstar+ coming under particular focus, not only on the subscriber front but also on ARPU.

In some ways, Netflix’s moves reflect the intense competition of the Indian market. It is worth noting that it the same sort of cut-throat price competition is seen in the music streaming market and, with similar dynamics i.e. local and global players fighting it out for control with heavily backed (both financially and by Government support) local players determined not to let non-Indian groups gain a dominant foothold. It is hard to see that changing anytime soon.

The more worrying issue would be if, assuming the new policy had great success in attracting subscribers, Netflix resorted to such aggressive tactics. The simple truth is that would benefit no one. However, if it did come down to a global pricing war, Disney and Amazon have far greater cashflows behind them than Netflix – although Disney’s has been impacted by the closure of its theme parks – than Netflix does. And, as in most wars, those with the biggest supply of cash and resources usually wins. That may be a salutary lesson for Netflix.

2022-03-15T12:54:55+01:00
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