Late last year, Netflix (NASDAQ:NFLX) confirmed that it was beginning to test cheaper, mobile-only subscription plans in select international markets. Today, Netflix is running these plans in India, Malaysia, the Philippines and perhaps other test markets. In India, Netflix's three subscription plans cost the equivalent of $6.98, $9.08, and $11.18 per month at today's exchange rate while the mobile-only plan costs the equivalent of $2.78.
Some investors worry the lower prices of the mobile-only plans are bad for Netflix as they bring in less per subscriber, but a bigger-picture look shows that what's far more important is overall subscriber growth and total revenue.
Smartphones in India look like the bigger opportunity
India has a population of about 1.4 billion and an estimated 298 million households. But it is estimated that only about 18 million of those households have fixed internet connections. Yet there are an estimated 374 million smartphone users in India, and that figure is projected to increase to 442 million by 2022.
As a result, Netflix seems to have a much larger opportunity pursuing India's smartphone users than it does pursuing India's limited number of internet-connected households. While the number of households with fixed internet connections will likely increase over the long term, it is more important to attract as many subscribers as possible as soon as possible to compete most effectively.
Revenue matters more than revenue per user
Adding millions of lower-revenue users would certainly put downward pressure on the average revenue each user pays Netflix, but it would also drive up overall revenue. It seems unlikely that many household subscribers would cancel their plans and trade down to a mobile-only plan, as the mobile-only plan in India is only for a single mobile device; is only for a lower-quality, standard-definition ("SD") stream; and doesn't allow "casting" to a television. It is an inferior user experience compared to the household plans.
The much more likely mobile-only subscribers are the hundreds of millions of Indians who don't live in a household with a fixed internet connection but who do have a smartphone. As a result, the vast majority of new mobile-only subscribers should be new incremental subscribers, not those who trade down from a household subscription.
This is key because higher revenue will allow the company to reinvest greater sums in more content, particularly locally produced content. More content creates a better service, which attracts and retains more subscribers and drives more revenue that can be reinvested in more content. Plus, many of the mobile-only subscribers could potentially upgrade to a household plan when they get more affluent or fixed household internet connections become more prevalent.
During the company's third-quarter call in October, Greg Peters, Netflix's chief product officer, in answering a question about the mobile-only plans in India, said
...we think about revenue as a guiding principle for us. We do these different tests and try to figure out what is the right set of plans that have the right benefits, the right features that are delivered at the right price for the subscribers in any given market. And I think what we're exploring is, as we are operating in markets that have very, very different conditions, very different levels of affluence and other forms of entertainment competition, et cetera, what is the right structure for us.
Go to where the watching happens
In a Netflix press release announcing the new mobile-only streaming plan in India, Ajay Arora, Netflix's director of product innovation, said, "Our members in India watch more on their mobiles than members anywhere else in the world -- and they love to download our shows and films. We believe this new plan will make Netflix even more accessible and better suit people who like to watch on their smartphones and tablets -- both on the go and at home."
In fact, a report by India's Omidyar Network said Indians spent 30% of their mobile phone time on "entertainment," defined as movie streaming and video playback, compared to just 18% for Americans. It is clearly a market better-suited to watching Netflix on mobile than more affluent markets like the United States, where there seems to be a clear preference for watching long-form video on television screens.
Netflix's push into cheaper mobile-only plans seems justified by the far larger addressable opportunity on smartphones, Indians' clear willingness to watch video on their phones, and Netflix having revenue as its north star. While Netflix faces competition from larger streaming peer Hotstar, owned by Disney, and Amazon Prime Video in India, these mobile-only plans should help improve the company's competitive position in India and elsewhere over time.