Netflix, Inc.NFLX recently unveiled its plans to launch its services in India. The initiative is a part of the company’s strategy to extend its global presence by 2016.
At present, Netflix‘s services are available across 50 countries with over 62 million users. Last year, the company expanded its services to six new European countries — Germany, Austria, Switzerland, France, Belgium and Luxembourg. In addition, the company is planning to expand into China and Japan.
Therefore, it comes as no surprise that the company is also targeting Asia's third-largest economy, India.
Scope of Growth Vs Challenges in India
First, the positives:
Youngest Population In The World: The emerging nation has the youngest population in the world (65% of the population was aged below 35 in 2014). It is also seeing decent economic growth.
Fast-Growing Urban Population: At present, India has a huge population of 1.2 billion, of which approximately 32% is urban. We believe that initially Netflix will be targeting the urban population of India. According to a 2014 UN-backed report, India is entering a phase of internal revolution with its urban population expected to touch the 600 million mark by 2031. This apart, the steadily rising middle class is also a positive for the company.
Third Largest Internet Population: Most importantly, India ranks third in the world in terms of the number of Internet users, despite the fact that less than 20% of the country’s total population do not have access to the Internet (as of 2014). In Dec 2014, the country had 173 million mobile Internet users and according to the ‘Mobile Internet in India 2014’ report, the number is expected to grow 23% in the first half of 2015.
Telecom Support: Over the long run, Netflix will also likely benefit from the increasing availability of 4G networks across the country as regional telecom providers including Bharti Airtel Limited, Reliance Jio Infocomm Ltd and Vodafone Group Plc VOD are in the initial phases of rolling out.
Growing Demand For VoD: The increasing demand for digital media especially, for on-demand content is likely to bode well for this video streaming service provider. A report from Deloitte predicts that the Digital Video subscription market (excluding advertising) in India is likely to reach $0.55 billion to $0.63 billion (INR 35 billion-40 billion) by 2020.
Government Focus on Growth: Moreover, unlike China, the Indian market is much more open to new entrants because of the pro-growth stance of the current government.
Now the challenges:
Low Purchasing Power: Netflix will have to keep its subscription rates sufficiently low to make the service affordable for a larger section of the population. However, we believe that the pricing issue will be partly offset by the low content acquisition costs in the country.
Growing Competition: Netflix will also have to fend off competition from local players like DTH providers (Tata Sky, Videocon, etc) and video-on-demand players (Hotstar, Ogle, Big Flix). Not only that, other international players are also trying to enter the Indian video streaming market. Recently, Singapore-based Hooq launched its offerings in India. However, none of these players have the resources or content-rich product portfolio like Netflix.
This apart, the company might face challenges in expanding its offerings in India owing to infrastructure and technology related roadblocks, especially in the rural regions.
Conclusion
While operating in India will not be entirely trouble-free for Netflix, we believe that in the long run, the company will have much more to gain. If things go as planned, then it will have an advantage against peers like Amazon.com Inc. AMZN, Apple AAPL and Hulu.
Also, we believe that even if the company can only reach a small proportion of users in India (the upper middle-class and above), the volume will still be decent, given the enormous population of the country.
It seems that this Zacks Rank #3 (Hold) company has strategically chosen its timing of entry into the Indian market. We believe that given the vast untapped growth potential of the Indian video streaming industry, Netflix has much to gain going ahead.
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