All roads lead to a freemium model

Netflix CEO Reed Hastings announced that the platform will introduce more affordable plans, supported by advertising.

Netflix CEO Reed Hastings seems to have finally given in to running ads on the streaming service that began in 2007. In the next year or two, Netflix plans to launch an ad-supported layer for those consumers who prefer to pay a lower price to watch content on the platform.

In the company’s Q1 2022 earnings call, Hastings said, “Those who have followed Netflix know that I have been against the complexity of advertising and a big fan of the simplicity of subscription. But I’m a bigger fan of consumer choice. And, allowing consumers who would like to have a lower price and are advertising tolerant to get what they want, makes more sense.”

Analysts say that this move was inevitable for the streaming giant once it entered emerging markets like India. “The section of the audience that is willing to pay to watch content on an OTT platform, is a small fraction of the overall video streaming audience base,” says Karan Taurani, senior vice president, Elara Capital. He estimates that paying viewers account for 35 per cent of the overall video streaming market in India.

According to a MediaPartnersAsia report, Netflix, Amazon Prime Video and Disney+ Hotstar account for 83 per cent of direct paid video streaming subscribers in India. As of 2021, Netflix had an estimated 5.5 million paid subscribers in India. It lags far behind Amazon Prime Video (21.8 million) and Disney+ Hotstar (43.66 million). As per the report, India’s AVoD streaming market is poised to touch $2.4 billion by 2026, while the SVoD market will be worth $1.8 billion.

With a user base that is a fraction of rival platforms, Netflix has an uphill task, even in the AVoD space. “Pivoting as a freemium service requires recalibration in multiple functions and processes, from the tech stack to UI and building an ad sales unit. All this before the platform catches up with its peers on reach to justify the CPMs,” points out Mihir Shah, vice president, MediaPartnersAsia (a Singapore-based media and telecom consultancy firm). He adds that it is not going to be easy for the platform to pivot to AVoD, since it has been built as an SVoD service.

Further, competition has turned rather intense in the last two years for the platform, both globally and in India. In India, multiple OTT platforms, including Disney+ Hotstar, Amazon Prime Video and ZEE5, revised their subscription plans and introduced cheaper and mobile-only plans in 2021. Each of these platforms have also been investing in original content.

In fact, in a previous interview with afaqs! Chanpreet Arora, SVP and business head, Voot AVoD, advocated for advertising as an important revenue stream for OTT platforms. She had said that "the cost (of creating great content) can’t be borne by subscription alone".

Taurani says that Netflix’s AVoD foray is unlikely to put pressure on Indian OTT platforms that have a robust sports offering. But other broadcaster-led OTT platforms could feel the heat.

India is a sore point for Netflix. Hastings remarked in the investor call, "the great news is in every single other major market, we've got the flywheel spinning. The thing that frustrates us is why haven't we been as successful in India. But we're definitely leaning in there."

In a bid to address the price-sensitive consumer in emerging markets like India, Netflix undertook an exercise to reduce subscription prices and introduced a mobile-only plan. In December 2021, Netflix slashed the subscription of its basic plan by 60 per cent - users can watch Netflix on any device for Rs 199. The mobile-only plan costs just Rs 149 per month, instead of Rs 199. This seems to have helped the company’s India market. Netflix stated that it is seeing “nice growth” in multiple markets, including India.

During the investor call, Gregory K. Peters, COO & Chief Product Officer, Netflix spoke about the price cuts in India and said "early data that we are seeing very much supports a positive read on that lens of revenue maximization through these changes."

In emerging markets, the streaming service loses revenue on account of multiple users sharing a single account. Netflix has piloted a plan to share a single account among multiple households at a cost in Chile, Costa Rica, and Peru in a bid to monetise the households from where it is losing out revenue. Introducing an ad-supported option for users is one more ploy to unlock growth outside the US.