Netflix's Plan to Win in India: Lower Prices

It's no surprise both Hotstar and Amazon (NASDAQ: AMZN) Prime Instant Video are more popular than Netflix (NASDAQ: NFLX) in India. Customers can subscribe to both services for less than Netflix alone.

Netflix is a premium product in the world's second-largest country. Its standard subscription plan costs 650 rupees ($9.41) per month. Amazon Prime costs just 999 rupees ($14.46) for a full year or 129 rupees ($1.87) per month. Local video streaming service Hotstar also offers an annual plan for 999 rupees or a monthly 199-rupee ($2.88) plan.

For Netflix to compete, it needs to offer a lower-priced entry point for consumers. That's why it's experimenting with a mobile-only plan that charges just 250 rupees ($3.62) per month, according to a report this week from Reuters.

A change of heart

Netflix management had long maintained efforts to keep its plan pricing relatively stable throughout the world. When it raised prices earlier this year, however, pricing in India and other emerging markets didn't follow suit.

During the company's third-quarter earnings call near the end of last year, management said it's willing to experiment with lower pricing in some markets. That time is here.

The experiment in India is targeted at select new subscribers who will see a mobile-only option when they go through the signup process. A mobile-only service makes sense in countries like India where mobile devices are often the primary, if not the only, way many consumers access the internet. In India specifically, cheap mobile data plans are curbing the growth of fixed-line broadband.

Netflix is looking for ways to grow its subscriber base without sacrificing its premium brand. That means offering customers a limited option with the hope that they'll upgrade their plan to a full-service option in the future. Netflix is also reportedly experimenting with a plan that limits total streaming hours per month.

If Netflix can get customers hooked on its content, it can move them upmarket. It's proven quite adept at pushing U.S. and European customers to pay higher prices over the last few years. Netflix's local-market content continues to improve for countries like India and many South Asian markets. Over time it should be able to attract a substantial audience and raise prices.

In the meantime, however, it needs to thwart the growth of Amazon and Hotstar before Netflix becomes merely an also-ran streaming platform. Getting Netflix content into the hands -- literally -- of millions of Indians is key for the short term, and the only way to do that is with competitive pricing.

How a low-priced plan could affect the business

While Netflix likes to keep its pricing comparable across international markets, it's unlikely a mobile-only plan will find a home in developed markets like North America or Europe. The most popular way to stream Netflix in those markets is via a connected television.

70% of global Netflix streaming is on a television. But in Thailand, for example, televisions account for 35% of streaming hours while 36% of hours are streamed on a smartphone or tablet.

Still, the potential growth for Netflix in emerging markets could have a significant impact on Netflix's revenue per subscriber if it moves forward with a mobile-only plan. Netflix CEO Reed Hastings has said the company's next 100 million subscribers will come from India. If the vast majority of those subscribers are paying less than $4 per month, it'll have a massive impact on Netflix's average revenue per subscriber, which was $9.82 per month in the fourth quarter. That number should move higher after its U.S. price hike in January.

But Netflix is all about increasing its scale. The marginal cost of delivering its content to another subscriber in India or anywhere else in the world is extremely small compared to the amount it pays for that content in the first place. Even at 250 rupees per month for a mobile-only plan, the marginal revenue ought to have a positive impact on Netflix's bottom line. Or at least it will if Netflix doesn't reinvest in still more content to draw an even bigger audience to its platform.

10 stocks we like better than NetflixWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Netflix wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.