There was a pleasant nip in the air at the picturesque Laguna Beach, serving as the perfect backdrop for an open-air dinner on the lawns of the Montage resort, the venue for The Wall Street Journal’s marquee annual tech event WSJD Live. Even as the guests were sampling the lavish spread, Reed Hastings walked up the dais for a chat with a WSJ host. It was just days after Netflix had announced its third quarter earnings and the numbers were good enough to keep the 56-year-old founder of the paid video streaming juggernaut in good humour. Belying investor expectations, Netflix had announced the addition of 0.4 million members in the US and 3.2 million internationally. “We [will] collect about 8 billion dollars of customers’ money and so thank you all [gesturing at the audience] for giving me your money. This money is in a trust to create joy…if a show costs 100 million dollars, how much joy, how much viewing it creates among the audience. If you are happy and tell your friends, we have more money next year to turn into more joy. We think of ourselves as [an] alchemist, we take in money and out comes joy,” said Hastings, even as he urged the audience to watch Netflix’s new show The Crown.
Clearly, America’s iconic CEO knows what the audience wants. At the recent 74th Golden Globes, The Crown, based on the life of Queen Elizabeth II, ended up winning the best TV drama award even as leading lady Claire Foy took home the honours as the best actress. The Crown is the first time that Netflix has come out on top in the TV drama category after nominations in the past for House of Cards, Narcos, and Stranger Things. Even as its original shows are garnering acclaim in the US, Hastings now wants the whole world to watch Netflix. Today, the video streaming major is available across the globe and is inching towards the 100 million subscriber mark from the current 87 million, with the US market accounting for a majority (47 million). Early last year, it added 130 more countries, barring China and North Korea, in its fold. Besides its marquee movie library, Netflix is now increasingly relying on originals to woo the audience. “As much good as they are today, five years from now we want them to be much better,” says Hastings, who has given Ted Sarandos, the chief content architect, a free hand in scripting its bouquet of originals.
The company, which made its debut in 1997 as a DVD-by-mail subscription service, plans to produce around 1,000 hours [60 series] of original content this year with a budget of $6 billion compared with 600 hours [30 series] in 2016. Investors are lapping up just about everything: Hastings says that the company today is worth $57 billion, almost $15 billion more than CBS-Viacom combined and $3 billion higher than Murdoch’s Twenty-First Century Fox. The expectation built-up is evident in the valuation too — the stock is trading at 140x its estimated 2017 earnings and over 355x trailing in 12-month earnings!
While investors are in love with Netflix, the streaming video market is getting fiercely competitive every passing day as the likes of Amazon and Hulu, a joint venture of The Walt Disney, 21st Century Fox and Comcast, gain traction, not to mention the local competition in just about every market that Netflix has entered. With just over $1 billion in cash, a negative cash flow of $500 million and future payments for video programming totalling $14 billion — almost double its revenue — Netflix is raking in money, but it is also burning more cash than ever.
But Hastings is far from ruffled and, instead, sounds upbeat about his entry into India, as we catch up with him at Netflix’s spanking new headquarters at Los Gatos in California. “In India it’s been very frustrating with the [internet] infrastructure. But if you look at it overall, it’s just going to continue to grow. You will get more 4G from Reliance and you’re going to get more fibre optic. Eventually you will probably get electricity and fibre optic to every village,” says Hastings.
The statistics that Hastings is alluding to is indeed impressive. Currently, of the total internet base of 351 million subscribers, there are over 200 million (60%) mobile internet users. Importantly, the average internet speed in India has also doubled from 2.1 mbps in 2015 to over 4.1 mbps in Q32016.
Not surprising that the improving internet infrastructure has also fuelled a video on demand (VOD) boom in the country, since studies have shown that even a five-second delay owing to buffering can cost a VOD publisher a quarter of the audience, while a ten-second delay will be much more damaging. Hence, improving speed has been a critical factor for VOD players mushrooming in the country.
But even as Netflix is timing its entry to perfection, so are the others.
Coming of age
Currently, there are over 10 leading VOD players, excluding the user-generated platform YouTube, in the country, with many more waiting in the wings. The pecking order has an interesting mix of broadcaster-owned video streaming services such as the Twenty-First Century Fox-owned Star India’s hotstar, Viacom 18-owned Voot, Sony Entertainment Television’s SonyLIV and Zee Network’s dittoTV, besides international players such as Netflix and Amazon and independent players such as Spuul, TVF Play and the likes. (See: Small screen, big entertainment)
Gaurav Gandhi, COO, Viacom18 Digital Ventures, believes that the flurry of action in the VOD space is, in fact, late. “Even before mobile internet, people were side loading video content on SD cards and were paying for it. There was a ready market where customers were paying for digital content.”
The fact that India is more than just warming up to VOD is visible in the stats. According to App Annie, the San Francisco-based mobile app analytics firm, the time spent on Indian VOD apps grew 49x on Android phones in the second half of 2016, compared with 230% over the same period for non-Indian VOD apps. (See: Who is watching what)
Ajit Mohan, CEO, hotstar, believes VOD is booming on the back of a wider bouquet of TV shows, movies, live sports and originals. “People are spending more time on TV shows, live sports and not necessarily on short clips or two-minute cooking videos. They are viewing long-form content,” says Mohan. Though the number of TV households in India is estimated at 174 million, with paid cable and satellite subscriber base at 121 million commanding a lion’s share of 70%, a whole new generation in the age group of 19-34 are moving beyond the idiot box.
Sameer Nair, group CEO, Balaji Telefilms, which produced the most popular prime time show Kyunki Saas Bhi Kabhi Bahu Thi in the 2000s, believes that video streaming is coming of age because there is a growing segment of fatigued television viewers. “If 2000 had Kyunki and Kahaani Ghar Ghar Ki trending, even today Indian TV is dominated by daily soaps. New mythological shows and channels have sprung, but fundamentally the content offering has been in a status quo for the past 16 years,” points out Nair.
Getting it right
Creating differentiated content for a complex market like India is what each of the player is working on. “Till date, only 150 hours of original content has been created by VOD players in India, with a majority of them relying on TV shows and sports,” points out Nachiket Pantvaidya, CEO, ALT Balaji. While Netflix has opened a portion of its international library in India, it is discerning about the desi content it wants to stream. The streaming major acquired the first exclusive global licence for an Indian film — Brahman Naman and the first Indian original TV series based on Vikram Chandra’s Sacred Games that will be produced in partnership with Anurag Kashyap-owned Phantom Films. Besides an agreement with Red Chillies Entertainment to showcase Shahrukh Khan’s movies, Netflix has acquired rights of offbeat movies such as Sulemani Keeda, Loins of Punjab, Kshay, Amal, and Fandry.
Hastings believes Netflix’s strength lies in its content that can be savoured across markets. The streaming major’s most popular shows last year in India included The Crown, the widely popular political drama House of Cards and science fiction series Stranger Things. Though it is producing an Indian series, Hastings points out that 100% localisation strategy won’t work for it. “We are worried about sharing all that content [globally]. So, we are not going to be all Bollywood because if it’s about catering to very specific local taste, we are not going to be differentially great at that.
“Where we can be differentially great is in making content that not just appeals to Indian families but also to families in Europe and Japan. If it’s only going to be watched in India it would not make much sense for us,” explains Hastings, pointing out to the popularity of Narcos. Filmed in Bogota, Colombia, starring a popular Brazilian and produced by a French studio and largely [75%] shot in Spanish, Narcos has been popular around the world. In fact, viewers in India were way faster than the rest of the world to binge-watch a series in three days against the global average of four days for some of the globally popular shows, including Narcos. “We are trying to do global content, but global content based in India,” points out Hastings. For instance, Anurag Kashyap’s two-part blockbuster Gangs of Wasseypur was streamed on Netflix in 2015 as an eight-episode series subtitled in English, Spanish, French, Arabic and Chinese, indicating that beyond the diaspora there is an audience for Indian films.
Nair though has a different take. He believes that fatigued TV viewers in India are not the ones who will straightway start watching Narcos. “If Naagin [the fiction show produced by Balaji Telefims for Colors] is the No 1 weekend show and Narcos is the cutting edge of Netflix, there’s a big world in the middle. A world which wants to be told new stories, and who can possibly pay for it.” Last year, Balaji Telefilms raised Rs.150 crore to produce 300 hours of original content for ALT Balaji. To be launched early this year, ALT will unveil its first web series on the Indian armed forces. Directed by Nagesh Kukunoor, the first of the 30-35 episodes features Nimrat Kaur. On the other hand, The Viral Fever is producing videos that are exclusive to its own platform TVF Play before releasing it on YouTube.
Amazon is reportedly setting aside Rs.2,000 crore for Prime Video in India and has announced 18 original shows. Amazon Prime Video has partnered exclusively for original content with producers such as Dharma Productions, AIB, Equinox Features, Excel Media, Big Synergy, T-Series among others to produce multiple shows across genres. Nitesh Kripalani, director and country head, Amazon Video India, says, “Our goal is to work with the best content creators, the best filmmakers, and the best writers. We want them to come up with scripts that they have always wanted to make but couldn’t make it before. Passionate film writers make great content and we have seen that worldwide and India is no different.”
While Netflix, Amazon and local content producers such as ALT Balaji are focusing more on originals, the broadcast-backed players are not obsessed about it. “A lot of the conversation around originals is because most over the top (OTT) players don’t have access to content like we do. The focus on originals is actually about those OTTs which are trying to address a fundamental gap in their content portfolio, something we don’t face,” says Mohan. hotstar, whose investment is estimated at over $200 million, has till date only streamed one original web series titled On Air with AIB.
Costly affair
While originals do work as a customer acquisition and retention tool, the kind of money VOD players have to pump into producing an original web series is much more expensive than producing a show for a general entertainment channel. The primary reason that web series are expensive is because of the inherent nature of the content and genre of programming. The story telling for a web series and a television show is very different. Web series are short-format stories ranging between 20-25 minutes each, spread usually between 5 and 25 episodes. “Unlike TV which is a static device, the mobile doubles up as a multi-activity device for talking, messaging, chatting and lots more. Hence, the shows have to be kept short as most of them are viewed on the mobile,” reveals Gandhi, whose platform has thus far showcased six original web series.
Concurring with Gandhi, Nair says, “TV shows are created keeping the lowest common denominator in mind. Take the movie Pink. It’s a great concept which can be made into a short web series. But if you stretch it into a daily show, the concept will not fly.”
But in creating differentiated content, money is being splurged. While Netflix has reportedly struck a seven-figure deal with Kolkata’s Q for the worldwide rights of the Indian nerd comedy film Brahman Naman, the most aggressive player is Amazon which has signed a raft of deals with top content producers, including movie makers. Grapevine has it that Amazon is commissioning shows at rates as high as Rs.80 lakh to Rs.1 crore per half-hour episode.
“Every time a boom happens, there’s always the drunken sailor who comes to town with a lot of cash, surveys the market and moves on. I have seen it happening in the 90s. But the amount of money spent is not equal to a story well told,” points out Nair, adding that movie makers have never been successful at making TV shows. That’s true considering that Yudh by Anurag Kashyap for Sony Entertainment Television, Sanjay Leela Bhansali’s Saraswatichandra, Everest by Ashutosh Gowariker on Star Plus, Vipul Amrutlal Shah’s Pukaar on Life OK, and Anil Kapoor’s 24 have not exactly been runaway hits on the small screen.
While ALT Balaji is producing some series at upwards of Rs.30-35 lakh, its average production cost is around Rs.25 lakh per half hour. “There is no rule that if you stretch the benchmark to Rs.1 crore, the market will settle at that. In fact, prices have only gone down. Twenty years ago, I used to give Kyunki Rs.30 lakh per episode, but today the average operating price of a daily soap is around Rs.12 lakh,” points out Nair.
Even as OTT players are coming to terms with the cost of producing originals, they are simultaneously partnering with strategic advertisers. But unlike the comedy sitcom Chalti Ka Naam Gaadi which had Maruti’s car as the protagonist, the video streaming players are teaming up with advertising clients in a more creative manner. For example, the original on Voot’s platform called Untag is presented by Moto Z, but the smartphone maker’s association with the six-part series goes far beyond just sponsorship with the brand neatly meshed into the show. The characters in the series are working for an ad agency which is working on a client that happens to be Moto Z.
Similarly, Eros Now, too has unveiled its first original titled Salute Siachen in January. The five part series, featuring the first ever celebrity expedition to the world’s second longest glacier and highest battlefield in honour of the Indian Army, has been entirely shot on HTC phones. “It’s a one-off deal that we signed with HTC as we have a long standing association with the brand,” mentions Eros Digital CEO Rishika Lulla Singh. While such brand associations will help OTT platforms produce content, such deals will be far and few between. “It’s only depending on the viewer response we decide whether we need to produce season two or not,” adds Nair.
Pricing game
Interestingly in the US, according to the Leichtman Research Group, spends on cable bill has surged 39% from 2011 to 2015, to just below $100. Against such a backdrop, Netflix’s rate of $8-9 a month seems dirt cheap. But in India, it’s completely opposite, as average cable TV/DTH revenue per user is around Rs.200-250. Given Netflix’s base plan starting at Rs.500, it’s an expensive proposition. Hastings though thinks otherwise. “If you compare us to $5 cable with ads then we are more expensive, but if you compare it to an iPhone that sells over Rs.60,000, Netflix is a bargain. So, we are mostly selling to people at the high end,” explains Hastings.
But it’s not just the subscription cost that a subscriber has to incur, the cost of data, too, adds to that. Watching movies or TV shows on Netflix uses about 1 GB of data per hour for each stream of standard definition video, and up to 3 GB per hour for each stream of HD video. The highest quality streaming could end up using 1 GB per 20 minutes or more. Though per GB cost is down to Rs.50, going by Reliance Jio’s introductory pricing, the low tariff seem unsustainable. Jawahar Goel, who runs India’s largest DTH service Dish TV, believes that given the current internet ecosystem in the country, Netflix is too much of an elitist product even within metros.
“Currently, the average cost of data of one hour of video viewing is Rs.100, on mobile it’s even more. If you or your family watch Netflix 30 hours in a month, just your data charges will cost Rs.3,000 a month. Now, add to that the cost of subscription, it’s the most costliest form of entertainment in India,” points out Goel. As of Q2FY17, the number of active DTH subscribers in the country stood at 62 million. “Today, we are delivering 500 channels into a consumer’s set-top box 24/7 and we are servicing customers from as low as Rs.180 per month. Remember, this rate includes entertainment tax as high as 33% in some states, while Netflix does not even have operations in India,” elaborates Goel, who is eyeing a big share of the remaining 45-50 million analogue TV homes in phase III and IV of the digitisation rollout.
However, the rise of OTT platforms is not lost on the cable TV industry, but they are seeing it more as a tech enabler rather than a revenue stream. The country’s second largest cable TV distribution firm by revenues, Den Networks will be the first multiple system operator in the country to launch its own OTT application called Den TV+ for subscribers. “This is not a foray into the OTT space but just an add-on feature for users…why should I threaten my own business with an independent OTT platform,” asks SN Sharma, CEO of Den Networks, which has over 13 million subscribers. “What is Netflix’s presence in India? You move out of Delhi, how many subscribers will be on Netflix? How many of them would be interested in a content linked to another country,” argues Sharma.
Hastings, however, is playing it by the ear. “You can call us a speciality product at this time with incredible content for a western oriented audience. It’s just the beginning. But over time in India, we will build our content in Hindi and other Indian languages,” says Hastings.
Game of thrones
Though these are still early days in the VOD game, a large number of viewers/subscribers on the OTT platforms are largely paying nothing to watch content in India. According to Frost & Sullivan, in India, there are 66 million unique content video viewers, of which only 1.3 million are paid subscribers. In other words, VOD players have not been able to convert a large part of their audience to sign up for paid service despite a humongous content library. Most VOD players are unwilling to reveal the total number of paid subscribers. Given its parent is a listed entity, Eros Now claims it has over 55 million subscribers, of which over 2 million are paid subscribers. But it has not mentioned what is the break-up of the paid base across India and overseas markets where the service is made available. Interestingly, the OTT player since two years of its launch had to settle down at a price of Rs.49-Rs.99 after launching its service at $4.99/month which was later cut to $2.99/month and further down to Rs.25 a month in February 2014. Pointing out that the Rs.25 was just an introductory offering, Singh says it was the process of trial and error over the past two years that led them to the current price points. “Our strategy, including pricing, in India is aimed at getting potential customers to warm up to video streaming. With our library of over 10,000 movies across 9-10 different languages we want to capture a wide swath of the audience,” says Singh. Incidentally, Eros Now’s price in the US at $7.99 is very close to what Netflix is charging its users there.
The broadcaster-backed OTT players, though, are not losing sleep over their content being offered for free as they believe they have the wherewithal to sustain. “If you want to tap millions of Indians then you have to operate at the lower end of the market, which is free or basic pay,” says Gandhi. Not surprising, most of the broadcast players are offering ad-based content as they believe that’s where the bigger pie lies. “It’s a billion dollar digital video advertising market that we are talking of four to five years down the line that can’t be left untapped,” adds Gandhi.
But for new entrants such as ALT Balaji, ad revenue is out of the question. “Advertisers don’t give a rat’s ass about content; they look at media as a vehicle which will deliver them the reach. TV is delivering 40 million viewers in a night, so if you put an ad on TV you will grab 40 million eyeballs. Today, I am not in a position to offer them that reach,” says Nair. ALT Balaji is looking at launching its service at an introductory pricing Rs.40-60 a month, but expects break even to happen at 4 million subscribers on an average price of Rs.60-90 a month.
Even as VOD players in India are trying to find their feet, Hastings is happy being a fringe player. According to data from Statista, whose clients include Google, Unilever and the likes, Netflix India has over 350,000 subscribers in India as of 2016. For a service that’s premium, it’s an impressive number to achieve in just a year. Also, given that Netflix has effectively cut prices by 15%, choosing to bear the service tax rather than pass it on to the subscriber, is enough indication that Hastings knows the price sensitiveness of Indian consumers. Besides, as Netflix continues to churn out originals and provides access to more of its international content, audience stickiness will increase. However, Nair believe it’s still early to pick the winner. “Netflix is the absolute gold standard. They are the ‘Bachchan’ of the game, we all get inspired and aspire to be like them…but who among us will succeed, only time will tell.”
Hastings is in no hurry, either. As per Statista’s projections, Netflix will end up with 2.32 million customers in India, four years from now (See: Perfect script). That adds up to Rs.100 crore, assuming that Netflix sticks to its revised base price of Rs.435. That might be chump change in its overall scheme of things but Hastings is not complaining. “We’ve been running for the past five years at break even…basically zero profit. But as long as we have great content and grow our franchisee, our investors will be very happy,” smiles Hastings.
