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As subscriptions slow down, Netflix focusses on content: Q1 2017 results

The most significant take away from Netflix’s Q1 result announced Monday is that subscriptions have slowed down across markets. The company missed its 100-million subscriber forecast for Q1 by 1.25 million. It added 1.42 million streaming subscribers in the U.S. and 3.53 million in the rest of the world. It had set a forecast of 1.5 million domestic subscriptions and  3.7 million internationally.

Currently, the company has 2lakh-3lakh subscribers in India, based on RTIs and an analysis by MediaNama. There are no reliable numbers available for its closest rival Amazon Prime Videos in India.

Here are the takeaways from the earnings interview. The interview was addressed by David Wells, the chief financial officer at Netflix, Ted Sarandos, Netflix’s chief content officer and Reed Hastings, the founder and the chief executive officer at Netflix.

Growth is co-related to content

Reed Hastings: Content is making a little trickier to do the quarterly forecasting… I wouldn’t get too focused on predicting each quarter by the content. We’re continuing to learn on that. But mostly, we’re just trying to do better and better shows that are more and more popular… We certainly feel good about the near-term as we’re expanding and just getting bigger content budget, more shows, more marketing

This year, Netflix plans to spend $6 billion on content, compared to Amazon, which is expected to spend $4.5 billion. Both are optimistic about India and are investing in setting up offices in the country.

The company is pinning its expectations around Q2 and Q4 with news shows, seasons and exclusive movies. Q2 will see new seasons of House of Cards, Orange is the new Black, Unbreakable Kimmy Schmidt, Bloodline, Master of None. And Q4 will feature a Netflix exclusive movie, Bright, starring Will Smith.

In India, Netflix has tied up with Red Chillies Entertainment and Viacom18 and will start streaming movies from from the two production houses in the Q2.

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80:20 ratio content strategy

The company works with an 80:20 ratio for content: 80% Hollywood content vs 20% local content.

Ted Sarandos: Not to say that some countries won’t be some variance of that. But I’m not seeing a reversal of it in any territory.

It remains to be seen how this strategy will work in India, where Internet consumption is growing in rural rather than urban centres. Netflix’s 80:20 strategy means the content remains urban-centric. Amazon, on the other hand, is investing heavily in regional content.

Change in growth metrics

“For the last several years we’ve had flat operating margins due to established markets funding international expansion with every spare dollar we had. Because of that, the major indicators of our progress were member and revenue growth and U.S. contribution margins. Starting this year, we can be primarily measured by revenue growth and [global] operating margins as our primary metrics,” Reed Hastings wrote in his quarterly letter to shareholders.

Focus on mobile

Reed Hastings: We are trying to figure out aspect ratio. So if you think of there were movies originally were very widescreen. When they showed on televisions that were 4:3 Technology developed pan and scan to be able to make that picture look a little better on a 4:3 screen. And so we’re just experimenting with variations of that of trying to figure out how to zoom in to be able to basically have faces be larger. But it’s super experimental. It’s a neat idea about how to adapt to the future.

Ted Sarandos: What we do know too is that the next 100 million subscribers are going to be far more likely to be watching content on mobile than the first 100 million, whether or not they want to watch anything differently, we’re going to find out.

According to KPMG, video currently accounts for 60% mobile data traffic in India and is expected to grow at a compounded annual growth rate of 63% between 2016 and 2021.

In March we had reported, Netflix has already deployed its content caches, known as Open Connect Appliances, across Pune, Chennai, Bengaluru, Hyderabad, Delhi and Bombay and has also entered into partnerships with Airtel, Videocon, and Vodafone, to ensure better viewing at low data.

 On Amazon Prime Videos

Reed Hastings: We’re competing with sleep on the margin. We’re like two drops of water in the ocean of both time and spending for people. And so Amazon can do great work and it would be very hard for it to directly affect us. It’s just home entertainment is not a zero sum game. And again, HBO success, despite our tremendous success is a good way to illustrate that… So it’s up to us just to figure out how to provide the best entertainment possible.

Amazon vs Netflix in India

In the past six months, Amazon has moved aggressively in India partnering with with Yash Raj Films, Dharma Productions, T-Series, Shree Venkatesh Films, Everest Entertainment, V Creations and Dream Warrior Pictures. It has also announced 18 original shows for India, making it largest market for original shows outside the US. Netflix on its part has two content partnerships–Red Chillies Entertainment and Viacom18–and has only invested few India specific content, including a stand-up show with Vir Das and Sacred Games, which is expected to premier later this year.

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Amazon has also priced itself aggressively in India at Rs 499-a-year (Rs 41.50-a-month) compared to Netflix which is priced at Rs 650-per-month at nearly its US subscription costs. Hastings was quoted by the Times of India: “We are targeting mostly the high-end -10 or 20 million -for whom our pricing is not a problem.”

Netflix also seems cold to the idea of live streaming, something Amazon is investing heavily in. Last week, Amazon entered into a $50 million deal to stream NFL game slated Thursday. In India, there are rumours of Amazon bidding for live streaming rights to IPL. Star India’s rights to digital broadcast expire this year. “Our focus also is on on-demand, commercial free viewing rather than live, ad-supported programming,” Hastings added in his letter to investors.

India is a big market with nearly 29 over-the-top content providers, according to KPMG India-FICCI Media and Entertainment Report 2017. It is also price sensitive and extremely hyper-local. With slowing subscriptions in the US, Netflix will be forced to reckon India as a serious market for growth sooner than later. And its biggest roadblocks would be its premium pricing and lack of local content. For now, Amazon seems to have an advantage over Netflix.

https://www.youtube.com/watch?v=Y2jaDMko9JQ

MediaNama’s mission is to help build a digital ecosystem which is open, fair, global and competitive.

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