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Netflix's Mobile-Only Plan Is Working

By Adam Levy - Jan 24, 2020 at 12:09PM

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The streaming giant's new low-priced plan is already having an impact on its subscriber and revenue growth.

Netflix (NFLX -3.33%) started testing a low-priced mobile-only streaming plan in India last summer, and the early results are great.

The company sees the mobile-only plan as a means of winning subscribers in markets where average discretionary income is significantly lower than markets like the United States. So far, the mobile-only option is available in India, Malaysia, and Indonesia, all of which are in its new Asia-Pacific (APAC) reporting segment.

Management is pleased with the results so far, which were quite evident in the company's new reporting structure. "We're going to continue to test that [mobile-only] in different countries," Chief Product Officer Greg Peters said during the company's fourth-quarter earnings call -- a ringing endorsement of the plan.

A woman watching Netflix on a smartphone.

Image source: Netflix.

Netflix is accelerating net additions

Netflix added 1.75 million net subscribers in the APAC region in the fourth quarter, a jump of about 600,000 from the fourth quarter of 2018.

Granted, that's not all due to the mobile-only option. Management was keen to point out its big investments in local content for Japan and Korea drove subscriptions in those countries, and the subscriber growth is broad-based throughout the region.

But the mobile-only offering certainly had an impact. Management said the option increased gross additions and retention. Peters even said offering customers the low-priced option increased subscriber retention for standard plans in those markets (which is some next-level behavioral economics at play).

Most notably, Netflix's introduction of the mobile-only plans (which are priced significantly lower than its standard plans) had only a slight impact on its average revenue per user (ARPU). ARPU declined just over 2% sequentially in the fourth quarter, and it was down just 1% year over year. On a foreign exchange-neutral basis, those numbers are even closer to flat. 

That trend could change as Netflix expands its tests to more markets, but so far, many subscribers are happy to stay put instead of downgrading their plans. Management noted several times that the plan has produced incremental subscriber revenue, i.e., it's not cannibalizing higher-priced plans. "We're not managing to ARPU," CFO Spencer Neumann said. "We're managing to revenue maximization."

More opportunities for subscriber growth

As mentioned, the mobile-only plan is currently only available in three countries. While two of those countries (India and Indonesia) are massive markets, there's still a lot more opportunities for Netflix to expand the product to other markets.

Not just in Asia, either. Netflix's Europe, Middle East, and Africa (EMEA) region represents a huge growth opportunity. Management points out EMEA already drives the bulk of its net additions. But like the APAC region, it represents a range of markets from mature developed markets in Western Europe to more emerging markets in Africa. "I anticipate that what we'll find is that, we'll have a mix of plans and approaches that will spread across that region," Peters said on the earnings call.

While EMEA is driving millions of net additions each quarter, it still lags behind Netflix's more mature regions (U.S. and Canada and Latin America) in terms of penetration. Management says it's still less than 20% penetrated. Stifel analyst Scott Devitt expects Netflix to increase its market penetration in the region over the next five years to a level comparable with where Latin America is today. A mobile-only option in certain emerging markets will likely help get there. Likewise for APAC.

The early success of the mobile-only plan for Netflix should encourage investors concerned about its ability to compete in markets where consumers are used to paying much less for their entertainment. Netflix has found a solution that doesn't dilute its brand or the value of its standard plans. That's a big win as Netflix faces increased global and local competition for streaming-video subscriptions.

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