Is Netflix the Amazon of media?

While the global giant is yet to make a significant impact on India, disruption is imminent

Amazon has been a true success story. It was only 20 years ago that the company listed with an initial valuation of $438 million. Today, it has a market value of nearly $460 billion. It took 18 years for Amazon to cross the market value of Walmart, with its value again doubling in the following two years. There has been huge value transfer from the traditional retailers to Amazon. In the last two years, Amazon market value has surged by $250 billion, while the traditional retailers have lost $230 billion in market capitalisation. Amazon’s market capitalisation today is almost 55 per cent of all the traditional retailers combined. While it is true that the company makes hardly any net profit, it has consistently delivered operating cash flow since 2001, with the net operating cash flow touching $16 billion in 2016. Despite all its success, the company is still only 33 per cent of US e-commerce sales; this machine can become more powerful still as it continues to gain share globally.

Given its value creation, every investor is looking for the next Amazon. Many see a parallel between the company and Netflix.

The pattern recognition is clear. Amazon used technology disruption (e-commerce) to provide a better product at a lower price with ease of use. It quickly gained huge scale and built a network business. Netflix is also using technology disruption, SVOD (streaming video on demand) to provide a better product at lower prices with ease of use. It has also gained disproportionate scale and built a network business. In both cases the incumbents face a dilemma: Do they cannibalise themselves at zero margin or milk the remaining tail of the old business? Like in the case of retail we have seen significant value transfer away from the incumbent media players towards the disruptor. In the last two years, the market value of Netflix has risen by $35 billion and the media giants have lost $30 billion of market capitalisation.

Netflix has acquired 50 million subscribers in the US over the past nine years (pay TV took 15 years to get the first 50 million) and 100 million globally. Surprisingly the conventional pay TV companies have only lost 3 million subscribers in this time, implying most consumers use both services. What is scary for conventional linear TV is that audiences are shifting towards new platforms such as Netflix. You have had audiences for conventional TV declining by high single digits for the last three years in the US. If you look at the data adjusted for demographics it is even scarier. The younger audience (more valuable for advertisers) has the most loss of viewership. Older citizens, anyone over the age of 50, are actually watching more television. Over the last four years the average person in the US is watching about 20 minutes less of conventional TV, switching this viewing to new platforms. Despite this, even today viewership on conventional TV at 251 minutes dwarfs the 74 minutes spent on alternative platforms (largely Netflix), indicating how early we are in this shift.

Netflix has created a true network business. It has the most subscribers, thus it can spend the most on content, attracting even more subscribers, and the cycle continues. Just for context, Netflix will probably spend $8 billion on content in the coming year. None of this is for sports. If you look at global content spend (ex sports), Netflix will be the single largest buyer of content in the world. It will account for more than 20 per cent of global non-sport content spend. This is a huge barrier to entry. Bernstein Research makes the point that adjusted for reach, Netflix has five of the top five most watched TV shows in the US last year. Obviously all this spend on content is yielding viewership.

Illustration by Binay Sinha

Now why does all this matter? How does it affect us in India? First of all there are multiple Netflix wannabes trying to launch in India: From Eros to Balaji to Hotstar, not to mention Netflix itself. Media stocks in India are also expensive. We are still valuing the TV networks as growth stocks with high multiples and high embedded growth expectations. Do we run the risk of a sectoral de-rating, similar to what is now happening globally?

The media Bulls argue that India is very different. First of all Netflix was able to succeed in the US because pay TV is very expensive with monthly ARPUs of $82. At $10 per month Netflix is great value. In India Netflix is actually at a premium to pay TV, with cable/DTH ARPU of Rs 300-350. In India most of the content is actually owned by the broadcaster, not the studio. They are not going to licence it to Netflix, it will take years for Netflix to build an adequate library of suitable content. You cannot get away with only global content, to penetrate beyond the urban elite, you will need localised content. In India broadband access is largely through wireless and mobile. Despite the launch of Reliance Jio, you cannot build a streaming business entirely on wireless broadband. In wireless you will charge for data on usage, not a bucket all-you-can-eat basis and even the technical complexity of streaming hours of video is not trivial.

While the above points make sense, and India may not face disruption from Netflix just yet, we need to watch this space. SVOD is undoubtedly a serious disruption for conventional media. It is simply a better way to view entertainment. Whether Netflix or someone else, it will gain share in India. We will eventually leapfrog this technology as well. Someone will crack the code of SVOD for India and create huge wealth.
 

The writer is with Amansa Capital