Netflix (NASDAQ:NFLX) is now in nearly half of all U.S. households. That means it's depending on international markets for the majority of its subscriber additions -- including India.
With a population of 1.4 billion, India is the key to the streaming giant's next 100 million subscribers, Netflix CEO Reed Hastings said during a visit to the country earlier this year. However, India is a tough market, and these 100 million new subscribers won't come overnight, Netflix CFO David Wells warned investors during the company's latest earnings call covering the third quarter of 2018.
Netflix uses local content to win subscribers in India
In its latest quarter, Netflix added 5.9 million subscribers internationally compared to just 1.1 million subscribers domestically. The company is on fire overseas because it has refused to take shortcuts with content in other countries. Rather than relying on dubbing, it's been funding original local-language content in 17 different countries.
Even before launching its first original series in India, Netflix had been growing at a steady rate in the country since launching in 2016. However, releasing local titles like Sacred Games and Ghoul in 2018 has really pushed Netflix to a new level in India, Netflix Chief Content Officer Ted Sarandos said on the third quarter earnings call. Following the launch of its local programs in India, Netflix's viewer engagement saw a healthy boost.
And that explains why Netflix believes it can hit 100 million subscribers in India despite the intense competition from Amazon (NASDAQ:AMZN) Video and India-based Hotstar, which is controlled by 21st-Century Fox. Netflix won't break out a specific figure for its subscribers in India; however, the organization is estimated to have about half a million Indian subscribers, according to a recent report from IHS Markit.
The simple explanation is that local content is simply more relevant, so Netflix's subscribers in India simply talked to their friends about those shows more, explained Sarandos on the earnings call. In addition, such shows received more press and more attention from local influencers.
This strategy explains why 30 of Netflix's 700 titles for 2018 were international projects. Sarandos said the company is specifically looking for local titles that will inspire passionate fandoms, much like Stranger Things has done in the U.S. These types of shows can grow into empires with multiple seasons, video games, and a merchandise lineup.
The good news, Sarandos observed, is that these types of high-quality, addictive shows aren't hard to find for Netflix's local markets abroad. There are great storytellers everywhere, but many of them just haven't had a chance to showcase their content on a big scale, he said.
Netflix to experiment with pricing in India
The downside of producing high-quality local content in India is that Netflix doesn't have competitive pricing in the country. The service is currently available in India at a price of $7.80 to $12.30 (roughly 500 rupees to 800 rupees) depending on the subscription plan. This is significantly higher than Amazon Video's $1.90 (129 rupees) per month plan and Hotstar's $3 (199 rupees) per month plan.
However, the company is open to experimenting with different pricing models, with a specific focus on creating a lower-priced tier. Netflix understands that it would be alienating a good portion of India if it can't offer a cheaper plan in the future. However, Netflix feels that it still has a lot of room to run with its current pricing model in India, according to Netflix Chief Product Officer Greg Peters on the third-quarter call.
Investors should be encouraged that Netflix is already thinking about switching up its premium pricing model in India. Because while the company may have tapped into the wealthier pockets of the population, it's going to have a hard time competing over the long term against the significantly lower-priced plans from its competitors. If Netflix wants to eventually reach 100 million subscribers in the country, it needs to make a cheaper plan available.
In fact, Amazon is already beating Netflix in India. By the end of 2017, Amazon held about 10% of the over-the-top streaming market in India versus Netflix's 8% market share. But both companies are just getting started in the country -- and the effort is well worth their time. India's online video market is expected to grow from $700 million in 2018 to $2.4 billion by 2023, according to Media Partners Asia. So, whichever service emerges as the go-to streamer in India is going to win big.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Natalie Walters has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.