Earlier this year, Netflix (NASDAQ:NFLX) CEO Reed Hastings had remarked that his company's next 100 million subscribers will come from India. Hastings, however, didn't point out how much time it might take to achieve this ambitious number, because in reality, the streaming giant is nowhere close to its goal.
Netflix had just 520,000 paying subscribers at the end of 2017 in India, falling behind Amazon's Prime Video Service, which clocked 610,000 subscribers despite entering the country a year later. So Netflix has a steep mountain to climb before it can even think of making a dent in this fast-growing, video streaming market.
Netflix has made the wrong moves so far
India is still a developing country with a per capita GDP of $1,861. So people won't be spending a lot of money on video-streaming services compared to more developed regions such as the U.S. Still, Netflix decided that it won't offer any introductory prices for the price-sensitive Indian consumer, and it ended up being undercut by rivals such as Amazon and local player Hotstar.
Throw in the lack of content, especially of the local variety, and it becomes clear why Netflix is in the fifth position in the country's video-streaming market. Ernst & Young estimates that Indians spend 93% of their time in consuming content in Hindi and other regional languages when watching online video. This has proven to be Netflix's Achilles' heel, as 75% of its Indian content is in English, according to video analytics start-up Vidooly. Though there's some Hindi content on offer, the presence of regional content is almost negligible.
By comparison, local content comprises 35% of Amazon Prime Video's India portfolio. And the Twenty-First Century Fox-owned Hotstar, which currently leads the video-streaming space in India, offers a wide portfolio of regional programs, as well as 200-plus shows from the U.S. market, including the highly popular Game of Thrones. Additionally, Hotstar's cricket coverage acts as a magnet for subscribers looking to watch the sport on the go.
Not surprisingly, consumers will opt for a platform like Hotstar that gives them a lot of variety at just a third of Netflix's pricing. The good news is that Netflix is course-correcting by lining up a string of big-name local productions that could turn the tide in its favor.
Tuning in on local content
Netflix will be spending nearly $90 million a year on original content in India. The company has partnered with leading production houses in a bid to churn out eight to 12 original movies this year, which will be tailor-made to local tastes by targeting topics such as cricket, political thrillers, and children's animation.
Additionally, the company has decided to adapt books written by Indian authors into films and web series. The first such series -- Sacred Games -- is based on a book that covers an infamous criminal from one of India's largest cities and will be released in July this year. Netflix will follow this up with at least five originals that are based on best-selling books by Indian authors. This will give Netflix access to an established pool of fans who could eventually buy a subscription to watch a film based on their favorite books.
Additionally, Netflix has charted out a smart strategy of exporting content made in India to international markets. Sacred Games, for instance, will suit the tastes of audiences in markets such as the U.S., U.K., and Canada, among others. As such, Netflix will distribute this original globally in more than 20 languages.
This Netflix strategy of developing local stories with a global appeal will help it generate more value from the content that it develops for the Indian market. This could potentially help it reduce overall content development costs thanks to lower production costs in India. For instance, a mainstream film in India has an average budget of around $7 million, which is way lower than the $70 million to $90 million average cost for producing a Hollywood feature film.
Pricing might not be a problem
The Indian Brand Equity Foundation forecasts that consumer spending in India could more than double by 2025. This growth in the purchasing power will increase Netflix's addressable market, as more consumers will be capable of affording its service. As such, Netflix's premium pricing in the Indian market shouldn't be a problem in the long run.
Additionally, India is expected to become the second-largest consumer of online video in the next couple of years, so Netflix could see a massive jump in the number of subscribers thanks to the market's secular growth. In fact, Digital TV Research forecasts that India could become Netflix's seventh-largest market by 2023, with 5.7 million subscribers, which would be more than 10 times the current count.
But it will have to bring its A-game by producing relevant content in light of the stiff competition offered by rivals, or else Netflix's dreams of building a huge subscriber base in India will be a fantasy.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN and Netflix. The Motley Fool has a disclosure policy.