FIRMS MARKETS AND PUBLIC

POLICY
PROJECT REPORT
On

THE NETFLIX EFFECT:

Impact of Online Streaming Models on
Traditional Television

Submitted by:
Shweta (531)
Sneha Singh (607)

Department of Business Economics, University of Delhi

South Campus, Benito Juarez Marg, Dhaula Kuan,
New Delhi

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 Acknowledgement

We would like to express our profound gratitude and deep regards to our mentor Prof.
Yamini Gupt for her exemplary guidance, valuable feedback and constant
encouragement throughout the duration of the project. Her valuable suggestions were
of immense help and kept us working to make the project in a much better way. Working
under her guidance was an extremely knowledgeable experience for us and we express
our warm thanks for her constant support and guidance.

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 Abstract

This project ventures to explain the impact of Online Video Streaming Channels on
Traditional Television and how they have affected today’s consumers’ choices as well
as the Entertainment industry (television and movies). The development of both the
online and the offline television industry has been explored, the threat of online services
to the standard television services, and their respective future expectations have been
investigated. In doing so, the report first identifies the relevant markets and describes
their characteristics and features and describes how they have evolved over the years.
In order to understand the evolution and dynamics of disruptive innovations, the report
will use Netflix, the unchallenged leader of Online Video Streaming services, as a case
in point. As Netflix has successfully entered the television industry by creatively
combining complementary technologies in order to create a new operating model, it
provides an excellent case study for the analysis of disruptive innovation. This report
analyses the different strategies that have been adopted by Netflix and how these have
panned out in its favour. With the help of a consumer survey findings, an analysis has
been performed to identify the challenges that Netflix has currently been facing
especially in India and some solutions have been proposed that Netflix can adopt to rule
the Streaming market.

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 Table of Contents

Content Page No.

Introduction 5

Background about Netflix 6

Objectives of the project 7

 Shift from traditional T.V. to online channels 8-9

 Analysis of the online streaming industry 10-11

 Analysis of Netflix 12-14

 Competition analysis 15-22

 Challenges faced 23-24

 Future strategies 25-26

Conclusion 27

References 28-29

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 Introduction

Since the first commercially traded television set and the first broadcasted television
programs, TV has formed an increasingly important part of the people’s lives. As a
result, the television industry has been developing for decades at an increasing pace and
has evolved to be a huge industry stacking up billions of dollars from advertising,
subscription- and licensing fees. However, among the various technological
developments, which have led this industry to its current position, one development –
particularly the development of the Internet – has the tendency to motivate questions
about where the future of this industry is headed for. Even though the improvements of
the Internet have enabled the further development of digital products and services, many
of which have the ability to lower costs and improve efficiency, it also has the power to
restructure economic activities and create new market opportunities that can be
disruptive to existing ones. Examples of this disruptive tendency often use the music or
newspaper industry, however now, the Pay TV industry seems to be the next possible
victim of technological disruption.
In the early days, watching television meant that the programming was predetermined
and broadcasted on a pre-set schedule, not to mention that the use of a television set
was necessary. However those times have changed and these changes have been mainly
driven by changing consumer demands and the advent of the Internet. New trends have
started to emerge such like “Cutting-the-Cord”, where consumers are cancelling their
expensive traditional TV subscriptions and substitute them with cheaper substitutes or
“Shaving-the-Cord”, where customers are choosing cheaper TV-packages and
supplementing them with other online video content. These new trends have given
turmoil to the rapid rise of a new market, the “Over-The-Top” (OTT) market, which has
quickly gained significant popularity over the past decade. Not to mention with the
widespread use of internet-enabled mobile devices, television is now everywhere. Every
device has practically become a “television”. As the online video streaming services or
the Over-the-Top Video market is gaining larger and larger market share, it is
commonly believed that the future of traditional television is seriously threatened.
This paper will discuss the evolution and state of the industry and analyze what effects
the growth of the OTT market is expected to have on it. As Netflix continues to be the
unchallenged leader of the OTT industry, analyzing the industry using Netflix provides
a great opportunity to see and most importantly understand what challenges the Pay TV
industry is facing, what the incumbents are doing in order to fight off the new
competition and to see whether consumers are benefiting this changes or not.

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 Background

Netflix, in full Netflix, Inc., is a media-streaming and video-rental company founded in 1997
by American entrepreneurs Reed Hastings and Marc Randolph. It is also involved in the
creation of original programming. It has corporate headquarters in Los Gatos, California.
In 1999 Netflix began offering an online subscription service through the Internet. Subscribers
chose movie and television titles from Netflix’s Web site; the shows were then mailed to
customers in the form of DVDs, along with prepaid return envelopes, from one of more than
100 distribution centres. Although customers typically rented for a flat monthly fee as many
movies per month as they wished, the number of DVDs in their possession at any one time was
limited according to their subscription plans. Netflix had tens of thousands of movie titles in
its catalog.
In 2006 Netflix launched the $1 million Netflix Prize contest to see if anyone could improve
by 10 percent its recommendation system, an algorithm for predicting an individual’s movie
preferences based on previous rental data. Three years later the prize was awarded to BellKor’s
Pragmatic Chaos, a team made up of seven mathematicians, computer scientists, and engineers
from the United States, Canada, Austria, and Israel.
In 2007 Netflix began offering subscribers the option to stream some of its movies and
television shows directly to their homes through the Internet. For most subscription plans, the
streaming service was unlimited. Netflix subsequently partnered with manufacturers of various
consumer electronics products, including video game consoles and Blu-ray Disc players, in
order to enable its videos to be streamed over an Internet connection to those devices. In 2010
Netflix introduced a streaming-only plan that offered unlimited streaming service but no
DVDs. Netflix then expanded beyond the United States by offering the streaming-only plan in
Canada in 2010, in Latin America and the Caribbean in 2011, and in the United Kingdom,
Ireland, and Scandinavia in 2012. By 2016 its streaming service was available in more than
190 countries and territories. Netflix had announced in September 2011 that it would split its
streaming and mail-based services, with the latter to be called Qwikster, but abandoned the
planned split a month later, citing an outcry from its subscribers. While its streaming services
became the biggest revenue generator—with more than 139 million subscribers in 2018—the
rental division remained profitable.
Beginning in 2013 with the episodic drama series House of Cards, the company offered video
content produced specifically for its streaming service. Such content became a major focus of
Netflix, and by the end of 2018 it offered approximately 1,000 original titles. Its notable series
included Unbreakable Kimmy Schmidt, Stranger Things, Narcos, and The Crown. It also
produced numerous movies—notably Roma (2018), which won three Academy Awards,
including best foreign language film.

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 Objectives

The major objectives of this research project are:

1. To compare Netflix with Traditional Television. Identify how the young crowd
has shifted towards online streaming channels rather than old TV?
2. To study the various economic and business aspects of Netflix’s unique business
model (Pricing behaviour, new product strategy, research and innovation,
advertising, legal tactics and market performance)
3. To analyse how a 20 year old company created a new market through the internet
mainly by providing great user experience (Suggestions and Personalization).
4. To compare the market performance of Best Online Streaming Giants (Netflix,
Amazon Prime, HotStar)
5. To study the issues faced by Netflix in the current market and to formulate
strategies which can be followed.
6. To analyse where Netflix is headed towards in terms of growth and innovation
opportunities. It is a master at capitalizing on technology developments and
taking advantage of information driven advantage to continually refine its
business model. But can it continue to rule the market?

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Shift from Traditional Television to Online
Streaming Models
In just a decade, Netflix has grown from a video service with 7 million U.S. subscribers to one
reaching 139 million people worldwide.[1] Its growth and ability to break into well-established
industries – first video rental, now television and film – is a rare accomplishment.

Neflix.com was launched 20 years ago and the movie business has never been the same before.
For the first time, online videos were another source of entertainment for the TV viewers and
offered choice to view the type of content they want to see. As a result, viewers responded
positively by spending more hours on online streaming which expanded Netflix’s customer
base and increased the revenue of the company. The cash flow provided was used by the
company to build better content to attract more users and earn more money. Many have
struggled to understand the Netflix’s strategy, Netflix has continued to evolve and build its
subscriber base.

The seeds of Niche T.V.

When Netflix first launched in the late 1990s, it distributed DVDs – mainly films – by mail.
The convenience of the service disrupted the existing film rental industry and eventually led to
its demise.

Television, meanwhile, was experiencing a renaissance. Cable channels began running series
with complex storylines that were targeted at niche audiences. Because many of these channels
earned revenue from both subscribers and advertisers, they could be successful even if these
programs didn’t reach a mass audience. Then, during the early 2000s, advances in compression
technology – coupled with more homes gaining access to high-speed internet services –
allowed large video files to be easily streamed over the internet.

These developments set the technological stage for Netflix to evolve its business from DVDs
by mail to a national video streaming service, which it launched in 2007. Soon, television series
became an integral part of its business model.

Streaming Technology
For years, television was distributed by broadcast wave – a revolutionary technology that sends
a wireless signal over huge swaths of the country. But broadcasting technology can send only
one message at a time to everyone in its range. Because video streaming services such as
Netflix deliver programming “on demand” via the internet, viewers can choose what and when
to watch instead of watching “what’s on.” So where a traditional channel’s task is to develop a
schedule, the key task of Netflix is cultivating a library of programs. This leads to different
business strategies that, in turn, lead to different programs. Broadcast networks and cable
channels make money by selling audiences to advertisers.

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Internet Trend

With the advent of internet, more and more consumers are cutting the cord and opting instead
to for direct internet streaming. The shift to the internet is a tremendous threat to traditional
television networks. The below tells the story of the customer gains and losses for cable
companies in comparison to gains for online streaming companies such as Netflix, Hotstar,
and Amazon Prime.

Table 1: Customer gains and losses for Cable TV

Year Pay TV Gains/Losses Internet Gains
2012 170,000 2,000,000
2013 -100,500 2,600,000
2014 -125,000 3,000,000
2015 -385,000 3,100,000
2016 -795,000 2,700,000
2017 -1,495,000 2,100,000
[3]
Source: Leichtman Research Group

However, traditional television still has an established position in the world. This can be
attributed to an increasing hesitance of older generations to cut the cord. According to a report
by Statista14, Approximately 50% of adult’s age 18-44 claim to use streaming services more
than they do traditional TV. That number decreases to the 13% – 27% range for adults ages
45 and older.[4]

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Online Streaming Industry Analysis
Industry Outlook
GICS (Global Industry Classification Standard) classifies Netflix as an Internet & Direct
Marketing Retail firm.[2] Online media streaming is one of the features of the continuously
evolving information technology era that we are a part of. Streaming began with YouTube in
2005. The streaming space has evolved rapidly with Netflix being the first company to stream
television shows and movies online in 2007. Increasingly, convenience and immediate
satisfaction is becoming a demand from consumers. The internet and direct marketing retail
industry is catering to that norm. We have seen an exponential adoption of online streaming
services due to their accommodative and innovative nature. For example, viewership is
enhanced with the unison of more than one device. Consumers can quickly stream content
through content through PC’s, televisions, and smart phones as long as they are connected to
the internet. User experience is another feature the industry focuses on as a way to disrupt the
entertainment industry.
Unlike traditional television, online media streaming companies utilize the data they have on
you to provide you with an optimal set of choices when deciding what to watch. Accessing
entertainment through the internet was a trend that is now becoming a norm.
Since the built up of this industry is rather complicated, the following segment attempts to
explain or simplify the actual relationships and competitive conditions prevailing so that a
better understanding could be attained.

1. Pay TV Industry

In general, the Pay TV industry is served by several interconnected players. These

distribution companies most often provide TV, internet and phone services either
individually or in some sort of a bundle (for example TV+Internet or TV+Internet+Phone).
The TV service is usually available in form of a package deal including several different
TV channels and possibly other services as well, such as VoD.
Satellite service providers have a major advantage over the cable companies, when it comes
to providing services to people living in remote areas that cannot obtain any cable service
(Digital Landing, 2012), but even though that satellite and telco companies can have larger
coverage areas or that satellite providers can offer programming, which would not be
possible to obtain by cable companies, cable services are the most popular. As mentioned
above, in 2013 cable providers dominated the Pay TV market with 53% share of the
subscribers, whereas the satellite and telco companies had the remaining 34% and 11% of
subscribers respectively (NCTA). [26] Some major players are DirecTV, Dish Network and
Airtel Network.

2. Over-The-Top Industry

As a result of the widespread use of internet and not to mention the improved attributes of
the service (speed and reliability), consumers today have much more control over their
content then before. Today OTT services provide access for consumers to most of the same

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 digital content what traditional TV provides but the provided service is significantly
different.
Although the OTT industry shares some similarities with the Pay TV industry, it is not
correct to list these services under the Pay TV services. While both industries occupy the
same position in the aforementioned three-tiered system, these two industries have different
business models, “delivery systems”, content and costs, just to mention a few. The most
important difference, though, is that while Pay TV companies use their own networks or
infrastructure to delivery their services, most OTT providers have no ownership over the
network or infrastructure Content is delivered through the Internet using a network
managed by another company. Therefore all of the operating costs of OTT service
providers are mostly related to providing their core service, whereas Pay TV providers have
significant costs related to their infrastructure as well. Major players are Amazon Prime,
Netflix etc. Our main focus is going to be on OTT industry and its leading player Netflix.

Revenue Streams
The two primary streams of revenue for OTT are
1. Subscription payments
2. Advertising
The subscription based model is becoming increasingly popular. Usually, companies within
the industry structure their services in such a way that consumers pay a fixed fee at various
price levels based off how much they want to get out of the service. For example, Netflix offers
a base rate that allows you to lets you stream TV shows and movies from Netflix on one device
at a time in standard definition whereas its gold membership gives you access to lets you stream
TV shows and movies from Netflix on four devices at the same time and in high definition.
Companies can also chose to receive revenue from streaming advertisements. 2017 was the
first year that digital advertising spending was higher than traditional TV. This reflects the
increase in popularity of the industry and we expect companies that show ads such as Hotstar
to leverage this trend.
A relatively new revenue stream is original content production and licensing. The move for
Netflix to license out Narcos to Univision in 2017 was the first of its kind. This is becoming a
norm now-a-days generating massive fan-following. Other players have also started to make
their original content in order to attract the consumers towards them.

Innovation and Trend

The global video streaming market size was valued at USD 36.64 billion in 2018 and is
anticipated to expand at a CAGR of 19.6% from 2019 to 2025.[26] Innovations, such as block-
chain technology and Artificial Intelligence (AI) to improve video quality are expected to boost
the growth. AI is playing an important role in editing, scoring, cinematography, voice-overs,
scriptwriting and most aspects of video production. Various providers use AI to improve
content quality. Popularity of online streaming over media such as Netflix and YouTube is
likely to rise in near future. Moreover, rapid adoption of mobile phones owing to the rising
popularity of social media platforms and digital mediums for activities such as marketing and
branding is projected to further fuel the market.

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Netflix: The Company Analysis

General information
As the pioneer of entertainment distribution, Netflix was the first to established market reach
both domestically and abroad, positioning itself as a leader in the internet and direct marketing
retail industry. In 1997 Netflix became the first ever DVD internet rental service, and in 1999
Netflix strategized an unlimited subscription model. In 2000 they began using break-through
algorithmic technologies to improve upon the user recommendations of their model. In 2007
Netflix became what we know to be today, a streaming service. As of January of 2019, they
have 139 million subscribers across the globe. They are recognized not only for their licensing
capabilities with exclusive access to movies such as Dave Chappelle’s stand up special, but
also their producing capabilities with Emmy award winning shows such as The Stranger
Things. Netflix’s content experience service commands the largest domestic and international
presence among its peers in an industry that still has room for exponential growth.

Netflix nooks and crannies

Netflix doesn’t try to offer content geared to a single audience with a specific interest. Nor does
it aim for a mass audience. So how does Netflix – with its 139 million subscribers – pull it off?

Netflix has adopted a “conglomerated niche” strategy: It develops programs for a handful of
– maybe a dozen – different audience interests. These include complicated serial dramas, action
series, horror series and exclusive films starring a popular actors. This is possible only because
internet distribution allows Netflix to serve those different audiences simultaneously and
separately.

Netflix can also do this because internet distribution enables it to gather extensive data about
its subscribers’ behavior, which it then uses to cultivate its library and provide users with likely
desired content. Netflix is notoriously tight-lipped about what data it collects, but its ability to
gather viewing data from a global audience has enabled the service to recognize micro-genres
and then patterns of viewer interest.

Features and Options

 When you get cable, you pretty much only have one place that you can watch it – at home.
Sure, there are apps that also enable you to watch certain channels on your mobile phone,
but these apps don’t allow you to flip the channel like you do on your T.V. set.

 Netflix makes it possible for you to sign-in wherever you want to watch T.V. You can also
have multiple users on one account at the same time, Netflix is giving viewers more options
and fewer limitations for pennies on the dollar.

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 Netflix, which started out as a DVD postal delivery service in the late Nineties, doesn’t
function like a traditional broadcaster. It is a game-changer, a disruptive force that
decisively altered the way we watch television and film.

 There are no schedules or live shows: subscribers are simply free to stream any of Netflix’s
thousands of films and series to watch when they want and where they want, whether on a
traditional television, a tablet or a mobile phone.

Business Segments
Netflix operates three business segments,
1. International Streaming
2. Domestic Streaming (Regional Content)
3. DVD-by-mail.
DVD-by-mail subscribers have been dropping their subscription at a YOY rate of 18% since
2011 and they comprise only 3% of Netflix’s revenue.[27] Netflix has been gradually straying
away from their DVD business segment to focus strictly on streaming. This move will help to
cut distribution costs. It is expected that their DVD service will continue declining and
ultimately be terminated by 2027.
With a continuing improvement in the internet infrastructure in global markets and an already
vast reach of 80 million international subscribers, we see the international segment as the
catalyst the primary growth of growth going forward. Netflix is present in 190 countries as of
now after it announced global expansion in 2016. Since then Netflix has averaged a YoY
growth rate in subscribers of 45%. [5]

Content
Netflix pays licensing fees to the producers in order to stream one of their shows or movies for
a set period of time. They also bring production in house and license content to competitors as
an additional source of revenue.
In India, Netflix offers three types of subscription – starting from lowest Basic plan, then
Standard and highest Premium plan. Each plan offers different benefits and has more services
as you pay more.
The subscription charges of Netflix are high but it offers enormous and quality content for its
users. There is no competition to the famous Netflix originals such as House of Cards, Black
Mirror, etc. The entire collection on Netflix is neatly stacked into different categories which
are subdivided into kids, Asian, British, Crime TV shows and many more.
Netflix projects to spend to roughly $8 billion dollars on content in 2019 in addition to their
current $17 billion dollar library of content assets.[7] Netflix has tied up with well known
comedians like Jimmy Carr, Chris Tucker, etc for long standup comedy shows. [6]
Netflix has tied up with Phantom Films to produce original series of best-selling novel Sacred
Games written by Vikram Chandra. Netflix has also tied up with Red Chillies, a production
house owned by Shah Rukh Khan for an exclusive access to view its films.[6] Netflix also serves

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to the Indian independent filmmakers which may not be which may not become great box-
office hits but which definitely cater to a certain kind of audience.

Marketing Strategy
Netflix projects to spend $2 billion dollars on marketing in 2019 in order to continue effectively
penetrate global markets.[7] The Company has an in-house programmatic buying team that uses
big data to determine how and where to place their ads.[8] Though costly, we feel this kind of
individual specific marketing is worthwhile. For example, Netflix will position ads catering to
target demographics within markets that have not been penetrated in order to access the initial
consumer base.
Once their brand name gets noticed word of mouth plays a tremendous role in the addition of
new subscribers. Reed Hastings has been quoted saying that someday he sees a future where
Netflix spends nothing on marketing, with content and word of mouth being the only thing
needed to properly brand themselves.[8]

Technology and Development

Netflix’s technology and development expenses consist of payroll, user face modification,
streaming delivery technology and infrastructure, as well as research and development.
The largest portion of this expense is personnel costs.[5] Netflix requires additional personnel
to expand globally. Once they have sufficient operations abroad to fully penetrate the market,
they will begin to experience economies of scale because payroll expense is largely a fixed
cost. This will reduce technology and development costs in 2027 and beyond.
The second largest portion of this expense is attributable to cloud computing service that
Netflix leases from Amazon. In 2016 Netflix developed the Spinnaker software which is an
open source, multi-cloud continuous delivery platform.[9] The purpose of Spinnaker is to reduce
the cost collecting and managing data of cloud computing companies. Netflix provides
Spinnaker to the cloud services it uses. Google and Amazon are the main proprietors of cloud
storage and compete direct for customers. As Netflix continues to improve upon Spinnaker the
cloud computing landscape will become cheaper and cheaper. This will directly lower the
research and development portion of technology and development expenditure.
Along with an expected decrease R&D expense, this report expects Netflix to benefit from
increasing development in global internet infrastructure. As Netflix continues to expand they
will realize increasing returns to scale as infrastructure improves and won’t have to spend as
much on improving technology and infrastructure.

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Competition Analysis (Major Players)

To understand Netflix’s position in the Indian market we need to understand how Indians
consume media both legally and illegally. Among the lower classes, movie and music
consumption in India often involves downloading pirated films and swapping memory cards
filled with video content, which can be acquired from local kiosks and inserted into a mobile
phone. These are the main ways in which lower-income people consume content. Netflix is not
a feasible or affordable option for these audiences.
Among the middle classes, the smartphone has become the primary method of internet access
for majority of the population and also serves as the primary entertainment hub for users.
According to a FICCI-KPMG report, India is expected to have 500 million Internet users by
2020, out of which 382 million would be smartphone users.[10] This makes India a fast growing
market for digital media services, at least among the middle classes. According to the
consulting firm EY, India is the second-most attractive emerging market in digital media
behind China, notable for its level of smartphone penetration.[11] Almost half of its 1.25 billion
people are aged under 25. Cisco Systems Inc. estimates there will be 651 million devices in
India by 2019. The digital advertising market is estimated to be around Rs. 4,000 crore and is
growing at 35-40 per cent each year.[10] As the smartphone and app economy has evolved,
audio streaming has also migrated to mobile phones.
Subscription based Video streaming services such as SonyLIV (owned by Sony’s Indian
subsidiary Sony Pictures Networks) and Hotstar (owned by 20th Century Fox’s Star India) are
luring customers with a catalog of English-language content, as well as the promise of
uncensored content (a key point of differentiation from Indian TV).
Uday Sodhi, executive VP and digital business head of Sony Pvt Entertainment India states
that, “We are trying to add more and more movies to the library,” he told ET. “Consumers who
consume content in English have always been associated with higher spending power.” [12]
Local players have launched their own streaming services. The Mumbai-based movie studio
Eros International, which releases 70 films a year, shelved a plan to create a television network
to focus instead on a video-on-demand offering, Eros Now, which is optimized for mobile
devices and priced for widespread adoption. According to CEO Krishka Lulla, Eros Now’s
situation in the Indian market is “exactly where Netflix wants to be in the next three to five
years.” [12] The company has its own catalogue of 2000 films and Bollywood songs and music
videos to build a critical mass of devoted users.
Amazon Prime Video came into market in February 2011. Since then it has made its way up to
second place on the totem pole with an estimated 44 million subscribers. Netflix offers three
packages in India – for Rs 500, 650, and 800 per month which can be paid through selected
cards only whereas Amazon Prime Video is priced at Rs. 499 a year which can be availed
through cash on delivery. Amazon Prime subscription gives guaranteed delivery and standard
shipping and 30-minute early access to lightning deals. Amazon Prime Video content is
available in different quality like HD, Ultra HD which is open for viewing to all Prime users
and can be viewed on multiple screens.Amazon’s streaming service is bundled with the
Amazon Prime membership in 16 countries.[13] This can be seen as an advantage in that

15
customer acquisition and data retrieval comes easy due to Amazon’s large presence in areas
other than streaming. Furthermore, Amazon has $20 billion cash sitting on their balance sheet
which can be used for expanding prime video to additional countries. [14]
In 2017, Amazon Prime Video received a greater number of views than Netflix within
Germany, India, and Japan.[16] The narrative that Amazon shakes up any industry it enters stays
true in media and entertainment.

First Mover Advantage

Through first mover advantage, Netflix has a strong foothold within the industry. The company
has been very bullish on the prospects of the Asia-Pacific region, particularly India. As online
streaming has grown in popularity, the level of competition has increased. As Netflix was the
first major player in the streaming industry they have managed to claim 30% of all Internet
traffic in North America.[17] Due to their early entry into the market, Netflix was able to
establish contracts and relationships with the major movie and television show providers and
in some cases has exclusive rights to the streaming privileges.
The streaming pioneer Netflix’s first mover advantage has taken it to nearly 139 million global
subscribers – but serious competition is now coming as traditional media companies and
Silicon Valley rivals fight back.

Price Differentiation
In the US, average lunch costs are $10 and Netflix charges $7.99/month. In India, Netflix
launched at ₹500/month, which is almost the same as that of US prices. Per capita income in
the US is 17 times that of India.[19] Indian per capita Income is as low as ₹1 lakh even in Urban
areas. Average Pay-TV options are start at ₹100/month. Penetration of Smart TV sets is very
low in India. On top of that, Hotstar charges ₹200/month for latest movies and most watched
TV content along with 45 HBO originals shows including “Game of Thrones”.
Netflix offers three packages in India – for Rs 500, 650, and 800 per month which can be paid
through selected cards only whereas Amazon Prime Video is priced at Rs 499 a year which can
be availed through cash on delivery.[20] Amazon Prime subscription gives guaranteed delivery
and standard shipping and 30-minute early access to lightning deals. Amazon Prime Video
content is available in different quality like HD, Ultra HD which is open for viewing to all
Prime users and can be viewed on multiple screens. Subscription service models compete
directly against free services like YouTube and pirated content.

Consumer Base
Netflix is the only public firm operating entirely on the internet direct streaming platform.
Netflix has the largest subscriber base of 139 million followed by Amazon Prime with 88
million.[22] Brand recognition and word of mouth play an important role in the addition of new
subscribers making it easier for Netflix to capture untapped market share. The industry requires
are amount of fixed costs. There is essential no direct cost to onboard an additional subscriber.
Amazon Video has the largest content library followed by Netflix then Hulu. For every title
that Amazon pays to either produce or stream they have 2,588 paying subscribers [21]. At this
level, Amazon has too much content per subscriber. Therefore a reduction content library may
benefit Amazon by reducing content cost without the loss of subscribers. We expect subscriber

16
per title to remain at current level for Netflix as they create more content as a means of
capturing international subscriber. Hotstar has yet to make concrete steps toward international
expansion so we expect to see a decrease in subscribers per title in 2018 and onward. [21] We
believe that Amazon uses the Prime Video Service as a means to increase prime memberships
and is therefore willing to generate losses. Therefore, we expect the metric to remain at current
levels.
In Indian market, Netflix has grown significantly, however, it is far behind other OTT players.
At present, it is the sixt largest player in India, behind players such as Hotstar, Voot, JioTV,
etc. As per estimates, the market is currently valued at US$280 million with nearly 100 million
subscribers, and it is poised to grow at 35% YoY.
Table 2: Market share of active users
Company % (as of Nov. 18)
Amazon 1.43
Prime
Alt Balaji 0.21
Jio TV 17.60
Jio Cinema 1.86
Netflix 2.08
Tatasky 0.89
SonyLIV 3.17
Voot 11.76
Hotstar 40.18
Airtel TV 4.59
Source: Business-Insider

Table 3: Market shares by installations

Company % (Jul’18) % (Aug’18) % (Sep’18) % (Oct’18)
Amazon 9.03 10.46 11.07 10.77
Prime Video
Alt Balaji 0.20 0.21 0.21 0.18
Jio TV 25.66 25.38 24.94 23.88
Jio Cinema 4.57 4.54 4.43 4.17
Netflix 3.74 5.26 6.03 6.26
SonyLIV 4.78 5.25 6.03 6.75
Voot 8.08 8.08 8.25 8.44
Hotstar 36.13 32.56 30.17 30.40
Source: Business-Insider

17
As we can see from the data above that Netflix have steadily grown their market share in the
country this year at the expense of local firms such as market leader Hotstar, Jio TV and Jio
Cinema.

Differentiation
The value proposition within the industry is content quality and user experience. The type of
content that is delivered is either licensed or originally produced. Thus, exclusivity of content
plays a large role in differentiation. For example, the show Game of Thrones can be played on
both Hotstar and Amazon Video. Whereas Netflix has exclusive licensing deals with
Marvel.[22] This is an advantage because Netflix now has exclusive access to a specific market
of marvel fans. Contrary to licensing content, Original production is a strategy companies can
utilize as well.
Original production can be seen as a way to differentiate your content and also establish a new
revenue stream. For example, in 2016 Netflix licensed out it’s originally produced show
Narcos. With greater quality comes more attention to your service.
User experience is another area that companies want to outperform their competitors in.
Companies work hard to make an aesthetically pleasing and smooth interface for users scrolling
through entertainment options. They also work hard to ensure the entertainment options
provided will be ones the user might want. Thus, the ability to collect and logically implement
data is a key differentiator in the industry.

18
Consumer Survey Findings

A consumer survey was conducted amongst 5400 respondents in India by Krause Fund
Research[23] to find out the consumer behaviour towards Netflix in the country. The survey
results have been taken in order to analyse its implications for the market.
 Most of the people surveyed were in the age group of 20-30. About 68% people were in
the age group of 20-25.
 A major section (61%) were college students and 30% were working professionals earning
more than 2.5 lakhs per year.
 The working professionals comprised of people from major Indian cities such as Delhi,
Bhopal, Kolkata, Jaipur, Bangalore, Chennai etc. Overall, most of the responses were from
Mumbai.
 89% all the people surveyed were either graduates or post graduates.

Fig 1: Time spent on watching shows online

Time spent on watching shows online

4%
8%
36%
21%

31%

Youtube Hotstar Netflix Spuul Voot

Source: Prepared by author

 A major section of people (42%) spend between 0 and 5 hours per week on watching shows
online. Another 36% spend between 5 to 10 hours per week watching shows online.
 61% people have a free time of 1-2 hours per day. Among working professionals, 41% of
the people had more than 3 hours of free time.

19
 Fig 2: Preffered Services

Preferred Services

3%
4%1%
8%
34%

20%

30%

Youtube Hotstar Netflix Spuul Voot Ditto TV Others

Source: Prepared by author

 About 97 people (i.e. 70%) use Youtube or/and hotstar for online entertainment. Only 25%
people were found to use Netflix.
 Almost everyone was found to use the online services for TV Shows, movies and other
entertainment content such as music videos.

Fig 3: Willingness to pay for online streaming services

Willingness to pay for online streaming services

28%

72%

Yes No

Source: Prepared by author

 Only about 28% were willing to pay for online entertainment services. Out of 72%
remaining, 29% were willing to try out Netflix in the future and 63% said “Maybe”.
 About half the people are willing to pay upto Rs. 400 for the services.

20
 Fig 4: Reasons for not using online streaming services

Reasons for not using online streaming services

4%4%
16%
48%

28%

I don't have free time Slow internet connection

High data consumption I don't know how to stream
No interest in online shows

Source: Prepared by author

 Slow internet connection and lack of free time emerged as major reasons for not using
online entertainment services.

Previous users
 There were about 42% users who used the Netflix services earlier and have discontinued
using them.
 It was found that 97% out of these 42% had used the Netflix services in the first trial month.
 However, 50% of the Netflix’s past consumers were willing to use Netflix again in the
future. Other 50% were not very clear about it now.

Fig 5: Willingness to use Netflix again

Willingness to use netflix again

50% 50%

0%

Yes No Maybe

Source: Prepared by author

 When enquired about reasons for stopping the usage of Netflix, availability of free content
on internet and end of trial period combined with feeling that the service is expensive
seemed to be the dominant reasons.

21
 Fig 6: Reasons for stopping Netflix use

Reasons for stopping Netflix use

I use other alternatives

Lack of regional content

It's expensive

Lack of sports content

Free Trial Ended

0% 20% 40% 60% 80% 100%

Source: Prepared by author

Non-users:
● Availability of alternatives and expensiveness of Netflix subscription were the major reasons
for not using Netflix.
● Lack of regional content also emerged as one of the major reasons.
Fig 7: Why netfix isn’t used

Why netflix isn't used

I use other alternatives

Lack of regional content
It's expensive
Lack of sports content
Free Trial Ended
Others

0% 20% 40% 60% 80% 100%

Source: Prepared by author

Understanding the current users:

 Only 14% of the people use Netflix currently.
 Most of the current users spend within 0-2 hours everyday on Netflix.
 They prefer using Computer or smartphone for viewing Netflix
 Current users prefer Netflix because of the following reasons:
o English movies and TV content
o HD content
o No advertising
o Personalized content
 It was found that people using Netflix are generally people earning more than Rs 10 lakhs
per year.

22
Major Challenges

1. Maintaining new subscriber growth

New subscriber growth is still an obsessed-over data point for Netflix investors -- and
it could remain vexing as Netflix continues its aggressive charge into international
markets. Subscriber growth is a hard-to-forecast metric because of the number of
relatively new Netflix markets, as well as its reliance (in part) on the viral success of its
shows.

2. Late entry of Netflix in India

When Netflix entered India in January 2016, there were services such as: Hotstar, Ditto
TV, Voot etc. All of them operate at a freemium model. Hotstar, which owned by Star
India, was (is) the current leader in the market. It has TV content from only the Star
channels. Most of it is offered for free. Star India also owns the rights of Cricket
broadcasting in India. Cricket is the most watched sport in India and is offered on
Hotstar for free (with 5 minutes delay though). The premium services cost ₹200/month.
The premium services include live sports streaming, access to latest selected movies
and shows and access to about 45 shows of HBO originals. Popular shows such as
Game of thrones, Modern Family etc. to talk shows such as Last Week Tonight are
available to premium subscribers. To add to what is on offer, Hotstar offers shows in
10 languages. Voot, owned by Viacom 18, streams popular reality shows such as Big
Boss and TV shows of the popular Colours brand of channels. It also allows streaming
of selected movies for free. Compared to Hotstar, Ditto TV and Voot are offering
almost all TV shows and movies for free.

3. Free quality content available

Indian entertainment networks have readily moved to YouTube’s advertisement based
model. The popularity and quality of home grown web series has grown immensely.
Some of the web series such as “Permanent Roommates”, “Pitchers” are among the
most viewed TV content online. This content is currently offered free of cost on
YouTube.

4. Content localisation
Netflix content is primarily TV and movies in English from the USA or UK. Huffington
post mentioned in their article on Netflix in India that, “Netflix has only 3% of the top
100 Bollywood movies while Spuul and Hooq come in at 25.3% and 21.2%. No prizes
for guessing which one Bollywood aficionados will make a beeline for.”
At the time of launch, only 93% of the titles on Netflix US were not available in India.
Other competitors focus mainly on regional/national content and also have popular
English content.

5. Internet Bandwidth issues

Only 34.2% population of India is currently using Internet currently. Internet streaming
leads to heavy data usage and requires high data speeds to stream shows satisfactorily.
Indian ranks 114th in the world in terms of Internet speeds. India’s speeds increased
this year when minimum internet speeds were increased to 1 Mbps by the Government.
Out of total 450 million users, 370 million are only mobile internet users. Mobile

23
 internet packs are limited and India has very few Free-Wi-Fi zones.[27] Voot launched
with Data saving mode which enables users watch video over slower networks such as
2G. Paying for internet and Netflix separately makes it quite expensive for Indian
customers.

6. Scalability
The number one challenge that Netflix faces is that they do not have enough resources
in some markets to handle the demand everything. When Netflix chooses to go into a
market, they bring with them a ton of content that needs to be translated. High volumes,
coupled with the stringent translator vetting discussed above, mean that the main
challenge is simply finding enough bodies to perform the work.

7. “TECH FIRST” Strategy

Netflix has plans to build out their own end-to-end technology solution. Building their
own tools allows Netflix to maintain control over the development and to make sure
that it works for their specific needs. There are a lot of really smart people dedicated to
this initiative, but there has been struggle to define a plan and stick to it.

8. Turnover – Burning Bridges

Netflix seems to be burning through experienced people fast. This is not just an issue
at the project manager and developer level, but also at the leadership level. Netflix
looked at the localization market and realized that there are probably 30 localization
directors in the world that could be good candidates to hire. The problem is, they have
already hired and fired a good portion of these, and so they are going down that list fast.
It will be hard for Netflix to keep consistently taking steps forward if talented people
are leaving the localization team after a little more than a year.

9. Maintaining Control
In everything they do, Netflix has been seeking to define a process that gives them more
control. They are developing their own technology, they have developed their own
vetting process, they are taking more control over the supply chain. Control is very
important to Netflix.
However, the vendors are of course resistant to giving back the control. With Hermes,
Netflix essentially announced to the world that they were planning to start working
directly with translators, cutting out the LSP middle-man. Essentially, they have told
their vendors that they want to work directly with their translators, and the vendors are
of course pushing back. With the LSP’s refusing to give up their supply chains, Netflix
will have to look for new resources that are not already working on their content through
the vendors, and this only strengthens the aforementioned challenges with scalability.

24
Proposed Strategies

1. Partner with Multichannel Television Provider

By partnering with a multichannel television provider to offer its streaming content
alongside well-­‐ known premium channels such as HBO and Showtime, Netflix will
likely be able to grow its subscriber base and help offset its churn rate. Additionally,
such a move could help strengthen and broaden the Netflix band, as it would provide
an additional communication channel to customers and also benefit for effects of
association with premium names such as HBO.

2. Focus on Brand Management

Given dissatisfaction of customers over the decision to split the business into separate
by-­‐mail and streaming units, along with an associated price increase, Netflix has some
recovery work to perform to repair its brand. Attempting to brand the streaming service
(i.e., Qwikster) separately dilutes the strong Netflix brand. Management must find the
appropriate balance to manage two distinct operations (declining by mail business and
increasing streaming business) under one brand. Focus such branding efforts on the
“ease of use” cornerstones of Netflix’s original philosophy.

3. Continue International Expansion (But Keep a Diligent Eye Open)

Netflix stands to gain significant competitive advantage in the international arena with
its aggressive expansion plans. This advantage will come from Netflix size, related
economies of scale, and early mover benefits in many international markets. The
benefits from a successful international expansion outweigh the risks; however, given
the costs and time required to get operationally healthy in a given foreign market,
Netflix must diligently manage its efforts and control its costs and be smart and
deliberate in its international growth plans.

4. Better Pricing Strategy

Currently Netflix is available in India with 3 levels of subscription fees - Rs.
500/650/800 per month. But for high penetration in Indian Market, copy pasting the US
pricing strategy model would find it difficult to work. Netflix needs to come up with
the better pricing model to handle the parity in income levels. It can come up with some
low cost plans targeted at middle class of India to reach out to larger masses with
competitive pricing and reach out to larger masses.

5. Smartphone focused, app only subscription option for non-metro

users
The penetration of internet through smartphones is increasing at an exponential rate in
India. However, data usage and data speed still remains a bottleneck. Netflix can tap
into this market in non-metro areas by launching an “App only subscription” with fees

25
 as low as Rs 99 per month as mobile devices don’t require high resolution content, thus
using it to leverage low cost offerings for the masses.

6. More payment options like debit cards/ e-wallets

Credit card penetration in India is very low but at the same time the reach of debit cards
is very high. With Netflix giving the option of credit card only payment creates a
negative perception in the minds of people and they don’t find it convenient. Providing
facility for payment through debit cards and e-wallets like Paytm will give more
flexibility of options available for the consumers.

7. Some free content available for everyone for trial purpose

Even though Netflix offers free trial for a month to its users, this facility is available to
users who are subscribed and hence require a credit card which raises hesitation in
minds of users. Making the free content available on the basis of user account without
asking confidential credit card information can increase the awareness amongst the
target audience and thus more penetration

26
 Conclusion

As outlined in the objectives, the main purpose of this research was to identify
how the arrival of the online video streaming services (OTT market) has affected
the television industry and what implications they have on consumer welfare.
The research therefore sought out to investigate how the television market has
evolved.
First of all, the analysis indicated that as a result of new technological
improvements, customers have developed new desirable values. Consequently a
new industry, the OTT industry, has emerged to serve this newly formed market.

Using Netflix, the leading service provider of the Online Video Streaming
industry, the report found that transformation, what the world television industry
is going through, is a result of both the above mentioned changes in consumer
trends and of a disruptive innovation - more specifically, the business-model
innovation of Netflix.

Furthermore, the analysis of past strategic interactions has suggested that the Pay
TV and OTT industries are developing in a way that competitive convergence of
the two markets is increasingly expected. Consequently, these changes should
ultimately lead to the transformation of industry structures and to an altered
competitive environment. A consumer survey finding indicated the issues that
consumers are facing with Netflix and author suggested our solutions to those.
Consumers are expected to benefit from the above discussed developments in
the long-run.
To conclude, the study indicates that the television industry seems to be affected
by the combination of the prevailing consumer trends and the OTT industry, and
therefore industry structures are transforming. These changes, however, are in
favour of the consumers providing comfort, entertainment and wider range of
options.

27
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