StevensC_MKT 461_Netflix Case Analysis

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1 Short Form Case Analysis on Netflix Christopher Stevens Monte Ahuja Business College, Cleveland State University MKT 461: Global Marketing Strategy Donna Davisson February 11, 2023

2 Introduction The business case “How Can Netflix Fund Its International Expansion Goals?” asks difficult and direct questions about the viability of the subscriber growth model Netflix has demonstrated since its inception. It also brings questions about the viability of the OTT (over-the-top) streaming platform model itself. The first and most important piece of this case is the financial viability of Netflix’s financing model. The fact is, Netflix does not make a profit when viewed through the lens of its debt financing, which currently stands at $14 billion in gross debt, 8 billion in net debt, all of which is fixed rate, which means that the interest payments on this debt are being calculated as part of the net profit for the company (Sherman, 2021). However, the debt itself dwarfs Netflix’s reported net profit. Debt financing is not uncommon, particularly in the tech industry however the length of time and the spend required to keep up from a content perspective makes this worrisome, and relevant to Netflix’s future in this business case. We will examine the questions posed in the business case and do our best to answer the question posed about Netflix funding its international expansion goals. Netflix’s Motives in India Netflix has created for itself a corner that it is somewhat backed into. Subscriber growth is one of the primary drivers of success in its reporting. It’s also been a driver of excitement in investors and Wall Street over its financial performance. The crux of the issue is that subscriber growth has been fueled primarily by the United States and Canada historically and drove worldwide subscriber growth. Global subscribers were 40.3 million in Q3 2013 and grew substantially to 223.1 million by Q3 2022. Growth began to slow in 2021, with just 9.43% subscriber growth and through Q4 2022 slowed further to 4.45% and saw net losses quarter over quarter for the first time between Q4 2021 and Q2 2022. This illustrates that United States and Canadian markets are saturated and the EMEA markets are mature. This brings the Asia-Pacific region sharply into focus as a targeted market for penetration (Shafer, 2022). India comes into specific focus for two reasons. The COVID-19 pandemic spurred investments into mobile, streaming and internet technologies in India. India would have been a more difficult target penetration market in the past because of the state of the internet infrastructure in the country. Smart phones were not prevalent and internet speeds did not support the product, so in essence, if you cannot stream it then why pay for it. Second, price is the principal driver for entertainment choices. Piracy is seen as a fundamental right, not illegal so competition is based on low priced options to compete. The business case showed how cable costs remained under $4 USD for decades in India. This was in direct contrast to the United States where the average cost for a cable subscription was approximately $80 USD per month for just television. Netflix has not had to compete on price in most developed markets because they were the lost cost entertainment option for a long time. In India they are among the highest priced options. Netflix subscriptions were simple, paying a set amount, usually starting between $7.99 and $9.99 per month for years, with occasional increases of $1 as the market dictated. Netflix has not experimented with varying its subscriptions or pricing models previously. Putting the above factors together, Netflix’s motives become clear. First, to stave off the stagnation of subscriber growth in home and mature markets, Netflix needs to enter and grow developing markets that are to this point untapped. Second, Netflix is now competing with a variety of OTT services abroad including regional specific offerings from competitors and affordable cable which is not a consideration in many markets. Third, to compete in these markets, Netflix can’t continue with its business as usually practices from a pricing or content perspective. Much of the branded content licensed from competitors is unavailable to it in emerging markets, so the development of new, culturally relevant programming for that region is crucial. Key Differences at Home and in India There are key differences between India and the United States market for Netflix. The first are views on piracy. Pirating content is a federal offense in the United States, while in India it is not. Netflix does not really compete with pirated content domestically, while pirated content is a huge issue in India. Another key difference is

3 pricing. Worldwide, Netflix is priced significantly higher than OTT services are priced in India. Among pricing, access to strong internet and the infrastructure to support it nationwide. A final key difference is that in India, there are many regional dialects and many languages spoken overall. In the United States, Netflix is focused on producing content in a single language, and when entering European markets, adding an additional language for subtitles, and dubbing. During the COVID-19 pandemic, pirated content skyrocketed (Jha, 2021), and with little to deter it, Netflix had to contend with that content being widely available. This means that content that in other markets that would only be found on Netflix, could be pirated, and shared widely. The library that could sustain growth was not the draw it was here. Netflix needs to expand its original content offerings in India. This is not an unusual move, as Netflix began relying less on licensed content in the United States and investing billions in its own scripted originals. However, India needs culturally relevant content, and it provides language barriers. Netflix has produced most of its scripted Indian content in Hindi, however rival Disney+Hotstar offers content in 6 languages, including English and Hindi. In fact, there are dozens of officially recognized languages throughout India. This makes pirated content appealing as it is in native languages compared to Netflix content. To compete in India, Netflix has had to experiment with pricing models and ad-supported options. This is something Netflix has not done before while entering new markets. In direct competition to Amazon, Netflix does not have a value-add proposition for users. Amazon can bundle its Prime Video offering with its Prime service which comes with many ancillary benefits. The main benefit is 2 day, or expediated shipping for members. Netflix has no value add-ons to justify its comparatively high pricing in the Indian market. Based on cost alone, Netflix was lagging behind Disney’s Disney+Hotstar and Amazon’s Prime Video in total subscribers. This resulted in Netflix launching a region-specific plan in 2019 called Made for India, a mobile only plan that was the cheapest Netflix subscription worldwide. This test was successful and drove subscriber growth resulting in the plan being rolled out in other markets. This initial success also led Netflix to continue to experiment with pricing models to align lower revenues per subscriber with the right fit for the market. Differences between these two markets are shaping Netflix’s strategy in India, driving innovation and change at the streamer. However, changes in the streaming landscape have made these strategic moves more difficult than before. Scripted content is being cancelled and budgets for original releases are being slashed as the entire streaming industry is dealing with a reckoning (Koblin, 2022). Content has been cancelled or cut at Disney+, HBO Max, Paramount Plus among others. Netflix has not been immune. While future growth lies in India and other developing nations, the most revenue is generated in English language countries. Balancing the needs for fresh content against regional and language specific content will be important for Netflix, and cut backs in budgets make that a difficult act. Netflix’s Internationalization Strategy Netflix has tried multiple approaches in its internationalization strategy specifically in India. First, Netflix has produced Indian specific content like Bollywood Wives, Elephant Whisperers, Delhi Crime along with kids content like Mighty Little Bheem. In addition to scripted originals, Netflix has licensed Bollywood Blockbusters like RRR, the third highest grossing Indian film of all time as of this writing (Ramachandran, 2023) . Netflix’s investment in original content has paid off as according to Ted Sarandos, India is the fastest growing Netflix market in the world during an interview for the release of another high budget Hindu language release, Herramandi. Netflix has continued the push to release Indian specific content, having released 22 originals in 2022, and 100 overall in the Indian market overall since launching. The successful growth in India continues to help fund its ambitious content plans for the market, but it’s not without challenges noted above in respect to the many different languages spoken in India. Netflix has chosen to focus on Hindu language releases, while India has 456 distinct languages as of 2020 ranking in the top five when taking population into account (Ang, 2021). This is an advantage but also a challenge, as their investment financially is very strong, but the diversity is lacking. Another key advantage is that Netflix has been its flexibility around different plans and pricing. Traditionally Netflix has had static pricing with occasional increases being incremental, as covered above. There was slight variation in plans based on total streams, video quality and devices available to use, but overall there has

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4 been little variation in pricing domestically. In India, Netflix has been open to experimentation, with the launch of it’s Made for India mobile only plan, priced at INR 199 or $2.40 USD. This experiment was very successful and spread to other emerging markets. Next, Netflix tested a new subscription called the Mobile+ Plan. Priced at INR 349, or $4.210 USD, it provided HD quality streaming across mobile devices. This continue evolution is allowing Netflix to compete on price, where it’s standard plans are too expensive for that market. Overall Netflix is adopting a 4 A’s strategy in India and its expansion. First, applicability, through its investment in localized content in native languages, Netflix is making sure it has the content to appeal to the market as English only content alone would not be enough for emerging markets. For availability, the introduction of mobile plans, and optimizing its technology to stream with far less bandwidth has lowered the threshold for Indian subscribers to stream content. Plus the investment in Hindu language content has been broad in scope, so there are increasing amounts of titles aimed at the Indian market. Affordability has been benchmarked by Netflix experimenting with multiple low-cost plans allowing it to compete on price in the market. Being willing to change from its normal pricing practices represented a significant step in its approach to internationalization. Lastly, Affinity, will be an area of opportunity in the 4 A strategy. Developing an emotional tie, or personal connection will be difficult in a market that it is entering behind other competitors, however Netflix is partnering with respected directors like Sanjay Leela Bhansali among others, shows Netflix’s respect for Indian culture and its diverse voices (Ramachandran, 2023). This is a good start in building the type of brand adherents needed to fuel growth. The disadvantage to this approach is that it is capital intensive. Borrowing huge sums of money to create a large amount of content specific to that region does reduce its appeal in the larger English-speaking markets. Financially Netflix must take the profits earned in India, invest it directly back into production, marketing and operations in India leaving them in a debt leveraged situation. Currently this strategy is paying off with early success in the market, but with one of the lowest ARPU (average revenue per user) in Netflix (Dash, 2021), this may not be a long-term winning strategy without mass adoption in a crowded market. Recommendations to Netflix in India and Beyond First and foremost, in recommending strategies, Netflix has a cash flow concern to address. The strategy of making culturally relevant content in a foreign market is strong and I recommend Netflix continues to do so, but the issue present is that making said content is quite expensive and can’t fully come at the expense of domestic markets

5 driving the prime revenue. After raising more than $15 billion in outside financing from 2011 through 2021, Netflix no longer wants to raise outside capital and while it is cashflow positive, will issue stocks if funds need to be raised. With plans to buy back $8 million in stock, it’s unclear outside of international expansion where large sums of funding may come from if needed to finance content (Sun, 2021). Given all that, it’s important for Netflix to search for synergies it can take advantage of in other emerging markets, whether through cost leadership, differentiation or focus. Emerging markets like India will be cost conscious so a continued strategy or lower cost mobile plans outside of India is wise. However, an area of opportunity for Netflix is in differentiation. Separating from the competition will be key and the market is crowded. Competitors are well funded and have deep content libraries, so continuing to leverage a technology advantage by continuing to develop ways to compress the data streams needed from streaming high-definition content will give Netflix an edge other streaming services can’t compete with. The world has an infrastructure problem, and mobile internet is oftentimes the only internet available in developing countries. Being able to stream HD content on a mobile device with a slower internet connection is a huge advantage. Streaming at 270kbs presents an advantage over other streamers. Continuing to invest in the technology side of the business will present a huge advantage in those developing markets. Another strategy for Netflix is to use a hybridized model of multidomestic and global approaches to how Netflix approaches internationalization. A global only approach won’t resonate in emerging markets and a domestic only approach will be too resource intensive for Netflix to sustain for long. Finding the synergy in content that can be used in India and in other emerging markets, be it through common language, cultural touchstones of resonant themes, content can be regionalized, but be localized may be too expensive. So far, India has been able to produce Hindu language content in areas of India where it is not the predominant language, and that approach needs to work in regions, not just countries. Africa could benefit from a regionalized approach as opposed to a localized approach. While maintaining the global content that appeals in multiple countries. Lastly, localizing it’s marketing is a smart move and Netflix should dive even deeper. Partnering with directors, writers and actors that resonate in local markets will show a respect for the regional cultures Netflix is trying to appeal and market to. That is more than just plugging in your English language marketing into Google Translate and pushing out a tweet, but understanding the standards, customs, languages, and resonant themes in local marketing. That means that aside from film and TV producers who are local, Netflix needs to invest in marketers who are local. Whether it is outsourcing to a local firm who produces marketing content or hiring talent in India to market the services and content, authentic representation in a market is important, and requires nuanced approaches. Respect for the country you are doing business in requires immersion in the culture, customs, religions, and languages present. Overall Netflix has taken a successful, but perhaps not entirely sustainable approach to penetrating an emerging market in India. The key will be if this strategy can be sustained in India long term and implemented in other similar socioeconomic markets. It may be possible but there will need to be adjustments in how Netflix approaches those markets.

6 Works Cited Ang, C. (2021, March 24). Ranked: The countries with the most linguistic diversity . World Economic Forum. Retrieved February 28, 2023, from https://www.weforum.org/agenda/2021/03/these-are-the-top-ten- countries-for-linguistic-diversity/ Czinkota, M. R., Ronkainen, I. A., & Cui, P. (2023). International Marketing . Brytewave eReader (11th ed.). Cengage Learning. Retrieved February 28, 2023, from https://platform.virdocs.com/r/s/0/doc/2101811/sp/265329844/mi/768733003?menu=table-of-contents. Dash, S. (2021, April 21). Netflix co-founder Reed Hastings says India is a 'speculative' investment – talks about pricing experiments and partnership with jio . Business Insider. Retrieved February 28, 2023, from https://www.businessinsider.in/tech/news/Netflix-co-founder-talks-about-pricing-experiments-in-india-and- partnership-with-jio/articleshow/82175848.cms Jha, L. (2021, February 16). India's OTT industry loses up to 30% revenue to piracy . mint. Retrieved February 28, 2023, from https://www.livemint.com/news/india/indias-ott-industry-loses-up-to-30-revenue-to-piracy- 11613462460632.html Koblin, J. (2022, December 18). Streaming's golden age is suddenly dimming . The New York Times. Retrieved February 28, 2023, from https://www.nytimes.com/2022/12/18/business/media/streaming-tv-shows- canceled.html LaPonsie, M. (2022, July 21). How much is cable per month? | spending | U.S. news . U.S. News World Report. Retrieved March 1, 2023, from https://money.usnews.com/money/personal-finance/saving-and-budgeting/ articles/how-much-is-cable-per-month Ramachandran, N. (2023, February 18). Netflix to continue investing in 'fastest growing market in the world' India, Ted Sarandos reveals in chat with Sanjay Leela Bhansali . Variety. Retrieved February 28, 2023, from https://variety.com/2023/global/asia/ted-sarandos-sanjay-leela-bhansali-netflix-india-heeramandi- 1235527650/ Shafer, S. (2022, October 18). Netflix subscriber growth returns as ad tier launch looms . Netflix subscriber growth returns as ad tier launch looms | S&P Global Market Intelligence. Retrieved February 28, 2023, from https://www.spglobal.com/marketintelligence/en/news-insights/research/netflix-subscriber-growth-returns- as-ad-tier-launch-looms Sherman, A. (2021, January 20). Netflix will consider buybacks as it returns to positive cash flow after 2021 . CNBC. Retrieved February 28, 2023, from https://www.cnbc.com/2021/01/19/netflix-says-cash-flow-positive-after- 2021-no-more-external-financing.html Sun, L. (2021, April 25). Netflix's $5 billion buyback plan doesn't make any sense . The Motley Fool. Retrieved February 28, 2023, from https://www.fool.com/investing/2021/04/25/netflixs-5-billion-buyback-plan-doesnt- make-any-se/

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