Netflix aims to reach 50 million Jio GigaFiber users but it ain’t gonna cut it

Sunny Sen July 24, 2018 13 min

Story Highlights

  • Reliance Jio's GigaFiber wired broadband packages, which start at Rs 200 a month, will have a wide, tightly woven package of programming, including Netflix.
  • It is almost imperative for Netflix to succeed in India, the last big, single, open English-speaking market in the world. Partnerships are key to get to Indian consumers.
  • But, even such a big partnership may not translate into much for Netflix in the short- and medium-term. Its target for 100 million Indian customers will take much longer achieving.

Two years. 50 million users. 1,100 cities. Gigabits per second speeds. Pricing starting at Rs 200 a month.

These will be the five defining features of Reliance Jio’s GigaFiber wired broadband network, the rollout of which begins on August 15. The GigaFiber project is the next big thing for Mukesh Ambani, chairman of the Reliance group, as he grows his pet Jio telecom project into a vertical business of access, entertainment, and commerce that is unprecedented in India.

“Fixed-line broadband offers hundreds of megabits, even gigabits per second of data speeds,” Ambani had said at the Reliance annual general meeting earlier this month. The anchor device for GigaFiber will be set-top boxes – it is being called GigaTV boxes – to pipe ultra HD television to Indian homes. The boxes are being tested at the homes of a few thousand Reliance employees.

GigaFiber users will pay a security deposit of Rs 4,500 to install a Wifi router and the set-top box, a source close to the development said. There were suggestions internally of capping monthly charges at Rs 500. “The monthly charges of Rs 500 is too much for launch… It might be somewhere around Rs 200-300,” said the source, asking not to be identified.

Reed Hastings, CEO, Netflix, has said the company's next 100 million customers will come from India
Reed Hastings, CEO, Netflix, has said the company’s next 100 million customers will come from India

The research arm of investment bank Credit Suisse has called the GigaTV box “serious competition” to satellite-based direct to home (DTH) companies such as Tata Sky, which has over 17 million customers. Share prices of cable TV companies Hathway Cable & Datacom, Den Networks, and Siti Networks shed as much as 15% value on July 5, the day Ambani announced GigaFiber.

But, there is a big beneficiary of GigaFiber: Netflix, the world’s largest paid online video platform, whose CEO Reed Hastings has said that the company’s next 100 million customers will come from India – a statement received with scepticism both in India and abroad.

Jio and Netflix are already forging a partnership that will go beyond offering Netflix to Jio mobile users. “Netflix and other OTT platforms that are there on Jio will also be there on the set-top boxes,” said the source. (OTT is short for so-called over the top platforms that stream content directly to consumers.) In one stroke, Netflix can be accessed by 50 million users in India, the second-largest English speaking country in the world.

The plan is that it will be available as an app on the set-top box, which will pipe Netflix on to the television. Not just Netflix, Hotstar, ALTBalaji, other OTT platforms, and TV channels will also be available on the GigaTV box – most of them part of JioTV or JioCinema and not a separate app like Netflix.

The service will either be free or subsidised. “It is not yet decided but the Netflix service might be bundled as a post-paid offering – technically it won’t be free,” said a second source, who works closely with Jio on the content side. This person, too, did not want to be named in this story.

That works perfectly for Netflix, as it allows viewers to watch high-definition video on large screens without worrying about buffering or a ruined viewing experience. In the US, Netflix is mostly enjoyed on larger screens unlike in India, where 89% of data consumed is on mobile phone networks, according to data tracker comScore. Even networks with 4G technology promise speeds of between 6 Mbps to 15 Mbps today making them a pale shadow of what optic fibre-based networks can deliver. “Optical fibre-based fixed-line broadband is the future,” Ambani said at the 2018 annual general meeting.

Netflix has already partnered with phone firms Airtel and Vodafone. With Vodafone, the partnership offers an annual Netflix subscription if a user signs up for a Rs 2999-per-month mobile plan. The arrangements are similar with Airtel but it has taken it beyond mobile phone customers to offer Netflix on its DTH platform. Users of Airtel DTH will be able to stream Netflix at an additional cost through their set-top boxes, which will a tad more expensive compared to the current ones as it will offer capabilities to hook on to the internet.

Indeed, if GigaFiber can meet its targets – already comparisons are being drawn to Jio’s growth of mobile phones services customers to 215 million over 22 months – it will be the first serious attempt at wired broadband in India. The country has just 18 million wired broadband customers, which is a fraction of the some 400 million people accessing broadband services. (An important contextual point: India defines broadband services as data access with speeds of 512 kbps or above.)

Even on wired broadband, internet speeds lag in India. The Speedtest Global Index for June 2018 places India at No. 63 with a speed of 23 Mbps ranking alongside Macedonia, Mongolia, and Croatia. Speeds in Singapore (180 Mbps), South Korea (114 Mbps), US (94 Mbps), and China (78 Mbps) are significantly faster.

Ambani sees that gap as the opportunity. “Jio is determined to move India to among the top five (markets) in fixed-line broadband,” he said.

Reliance Jio did not respond to an email seeking comments for this story. A Netflix spokesperson said the company wouldn’t comment “on rumour or speculation”.

India Central

For the gargantuan it is globally, Netflix is still very small in India – a country of 1.3 billion people that has the fastest growing mobile broadband user base anywhere in the world, has a GDP per capita touching $2,000, and counts 125 million English speakers, second only to the US.

Hanish Bhatia, senior analyst with Hong Kong research firm Counterpoint, estimates Netflix has some 600,000 customers in India (its global customer count: 125 million). Each pays at least Rs 500, or $7.25, a month. “Netflix is a premium service in India, so few people use it,” Bhatia said. To put that in context, India’s per capita spending on media, entertainment, sports, and other forms of leisure is estimated at just $75 versus $500 in China and $2,000 in the US.

Reliance group chairman Mukesh Ambani (right) with son Akash Ambani, director, Reliance Jio
Reliance group chairman Mukesh Ambani (right) with son Akash Ambani, director, Reliance Jio

The challenge for Netflix in India is two-fold: one, reach a wider audience and, two, not dilute the strong, $10-a-month customer billing that helps it make about $14 billion in annual worldwide revenues – almost all of which (and debt) goes into buying content on the platform. The company has negative cash flows and will turn cash flow positive, according to some estimates, only in 2022. This and rising content costs have experts questioning its $160 billion valuation.

Aswath Damodaran of NYU Stern, in a well-reasoned piece titled “Netflix: The Future of Entertainment or House of Cards?” in April, pegged the value of Netflix stock somewhere close to $173, well below its current price of $361. Those who are bullish on Netflix, expect it to grow its subscribers rapidly. This is where India – the last big, open market – fits in.

Amazon took a bet on India in 2012 launching into an internecine war with homegrown ecommerce leader Flipkart. Its investors in the US were forgiving even as it committed to spend $5 billion in India and took a hit on profits. Amazon’s ability to convince the markets of its long-term bets is peerless and, to its credit, it has done well in five years: it has an estimated 35% share of the Indian ecommerce market and is neck-to-neck with Flipkart, recently acquired by Walmart.

Netflix’s ability, then, to deliver on the promise of 100 million subscribers from India will be closely watched. Girish Menon, a KPMG India partner heading media and entertainment consulting at the firm, says, the online streaming business is conceptually similar to ecommerce. “Since the last 18 months and for the next 24 to 36 months, (Netflix’s) focus will be on getting more customers on the platform,” he says.

But in doing so, it will run smack into competition from at least two players who are as strong and stubborn: Rupert Murdoch-backed Hotstar and Amazon Prime.

Like Netflix, Amazon Prime is commissioning originals, and forging tie-ups with telecom operators (has done one with Vodafone), and signing contracts with production houses to get movies quickly on to its platform soon after they are released in cinema halls. Amazon has an advantage as it offers more with its Prime subscription. It’s a premium membership into the Amazon world, just at Rs 999, annually – faster and free delivery of goods bought on Amazon, special sale previews, and access to ad-free music, movies and a number of web series.

Amazon was also quick in announcing that it will bring out 21 originals – two are already out: Inside Edge (based on the Mumbai IPL cricket team offers everything that sells from sex, politics, relationships, and, of course, the game) and Breathe (a emotional thriller starring R Madhavan and Amit Sadh).

For all the money that Netflix and Prime have poured into India, Star Network-owned Hotstar is still ahead in the number of downloads with a 69.4% market share, according to the Jana Mobile Majority report.

Hotstar offers a wide catalogue of movies and TV serials that is available on Star, has entered into an arrangement with HBO to stream its original content including Game of Thrones, and hit over 10 million concurrent views with its exclusive streaming IPL coverage. “I can’t think of any streaming platform in the world that has a better catalogue than Hotstar. I cannot think of any platform that has brought together TV, sports, news and local and international content on the same platform,” Ajit Mohan, CEO of Hotstar told FactorDaily in an earlier interview.

Other experts suggest Indians may alternate between multiple platforms. “People might use two platforms to view different kinds of content. Hotstar has legacy content and streams live sports events. It’s different (from Netflix),” says Haresh Chawla, the founder-CEO of Network 18 and now partner at private equity form True North. “These dynamics have not played out elsewhere in the world.”

Ted Sarandos, chief content officer, Netflix
Ted Sarandos, chief content officer, Netflix, says the company’s investment in India is the fastest and largest in local programming

Besides its catalogue of content, Netflix is betting on its engineering to become a core differentiator with the competition. In an interview with The Economic Times last month, Ted Sarandos, its chief content officer, talked about “the most distinguishing feature of Netflix among OTT players” being its play button. “It works across 1,600 different devices around the world, no matter what your internet speed is. It works when you push play — that is core to the brand promise,” he said.

Making the numbers work

In many ways, there are proxies that suggest that Netflix and other streaming players may be on to a good thing in India. Telecom access services is more or less a given today in large, if not most, parts of the country. Jio has without doubt been the biggest reason for affordable wireless internet connections in India – giving rise to wide adoption of 4G services and data consumption. It has done that by sinking billions of dollars into the network and forcing incumbent operators to slash prices of 4G services and improve their networks.

As data access spreads rapidly in the country, the addiction of Indians to video is only increasing. In 2016, KPMG notes, video streaming accounted for 49% of data consumption in India — it is expected to reach 75% by 2021. Last year, 70% of data used on Jio networks was on video; more recent data is not available but there is no reason that percentage would have fallen.

That, then, would seem to make a slam dunk for Netflix but corporate history is replete with examples of 30,000-feet market views failing over the details of execution. KPMG’s Menon says Netflix will need to focus sharply on distribution, access and pricing. “That is where Netflix’s deals with telcos and set-top box companies are playing out. India is a mobile internet economy and the best way to get access of the users is through telcos,” he says.

The secret recipe of success for OTT platforms is not different from television channels, says Chawla. “There should be conversations happening around the show, which will lead to more people viewing it. What works is if you are investing in enough blockbusters so that people don’t drop off.” He points to Netflix’s latest show Sacred Games that has received rave reviews as a case in point.

Netflix’s strategy in India today is to bulk up the content to give consumers their fix of video content. Globally, it is producing or onboarding 700 new shows – some of them Indian originals – which will mean the biggest new catalogue of video content on the planet. The Saif Ali Khan and Nawazuddin Siddiqui-starrer Sacred Games is just the beginning. It has also managed to bag some mega movies like Baahubali and has commissioned comedy series to Vir Das and Aditi Mittal.

In 2017, Netflix produced enough content for a person to view it non-stop for 50 billion hours, but that doesn’t seem to be enough. The company had said last October that it would spend $7 billion to $8 billion on content in 2018. That number has since been revised to $12 billion to $13 billion – a significant portion of which will go into developing non-English content, including for India. David Wells, the company’s chief financial officer, said in February that 80 of the 700 productions planned will be in non-English languages.

Still, Netflix has the task of converting all those who sample its content through tie-ups like those with Jio, Airtel, Vodafone and others into subscribers and paying customers — which will be an almost direct function of the cost of the product, especially in a price sensitive market like India.

Which brings us to the second challenge before Netflix flagged earlier: not let its $10 (or Rs 500 in India) monthly per customer billing slip. Netflix’s current pricing works for India’s richest 25 million, Jayanth Kolla, who runs consulting firm Convergence Catalyst in Bengaluru, told Financial Times recently. “But if they are looking at the bigger India – one billion or so Indians – they have definitely, definitely got that wrong.”

For sure, as it goes deeper into India both on wired and wireless broadband, Netflix’s pricing will change. “The price will change with the content catalogue and target audience and scale of operations,” says Chawla, a veteran of Indian television.

Two of the four experts quoted in this story predicted an average revenue per user (APRU) of between Rs 250 and Rs 350 a month. If mobile phone services and discounted ecommerce are examples to go by, the tend-towards-free pressure on video content will likely drag Netflix’s India average revenues per user even lower than what the experts estimate.

Then, do the math: if Netflix were to sign up an optimistic 10 million customers in, say, three years, and receives, net of discounts, Rs 200 a month from each, it will make Rs 2,400 crore in annual revenues from India. Slide that customer number or ARPU by 50% upwards and it will be Rs 3,600 crore a year – more than $500 million and a respectable number in India’s television and movie industry.

But, half a billion dollars will hardly move the needle for Netflix and Hastings. Ergo, perhaps, the 100 million bombastic number. For sure, in the longer term – say, 10 years – things could be dramatically different especially when Indian incomes double to the magical $4,000 mark, widely considered an inflection point for wider and deeper consumption behaviour.

The price of Netflix shares has increased nearly 50% since Hastings made his “next 100 million customers from India” announcement on February 23. It is not clear how much of that $50 billion expansion in its market value is attributed to Netflix’s India prospects but if it is anything more than a thin sliver, it will take a lot of doing to service investor expectations.

(With reporting inputs by Jayadevan P K)


Visuals by Rajesh Subramanian


Updated at 09:06 am on July 24, 2018  to add one more picture and a graphic. The conclusion was beefed up to reflect the long-term prospects of Netflix in India. A visual credit was added.
Updated at 09:44 am on July 24, 2018  to add the per capita spending on media, entertainment, sports, and others leisure activities.

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