Vivan Sharan, Partner, Koan Advisory
In its year-end blog post for 2017, Netflix, a leading Video on Demand (VoD) platform, announced that its global user-base consumed over 140 million hours of content a day, which translates to an incredible billion hours per week. This highlights the manner and scale at which video content is being consumed globally. No doubt, this has already changed the video content consumption paradigm in India.
To begin with, the manner in which consumers discover content on VOD platforms has influenced the investment decisions of content owners. Take the example of a niche show like Arrested Development, which used to run on traditional broadcasting networks. It was cancelled prematurely owing to lower than expected television ratings, which hurt advertising revenues. Yet, owing to the prevalence of dedicated and loyal fan base, it was resurrected by a VoD platform. That is, the flexibility of alternative revenue streams like subscription-based or pay-per view models, enable VoD platforms to support niche content that would otherwise not find an audience.
India’s consumer base has just started experiencing the benefits of technological convergence, wherein video content is made available over the internet, and it is simultaneously evident that traditional television content is simply not meeting existing consumer expectations. For an audience which has been inundated with an endless supply of soap operas and reality television, the current period can be viewed as a transition phase, where Indian audiences are beginning to explore a wider array of content offerings.
The VOD market is positioned to gain significantly from flagship initiatives of the Modi Government like ‘Digital India’, which strives for increased digitalisation in several economic spheres. Having crossed the 350 million broadband connections mark in November 2017, India has entered a period where the expanding consumer base looks set to dramatically impact supply side realities.
A recent study by the Indian Council for Research on International Economic Relations (ICRIER), highlights that the internet economy is set to grow to around USD 537 billion by 2020, and online video content will be a major driver in realising this potential. Illustratively, around half of mobile traffic already caters to video content and this proportion is set to increase; ICRIER estimates that mobile video traffic will undergo an 11.5 fold growth from 2016-2021 at approximately 48 percent compound annual growth rate (CAGR). Along with hyper competitive telecom tariffs, this means that VOD is poised to become a permanent fixture. Sensing this opportunity and an ever expanding total addressable market, players like Netflix, Amazon Prime, Hostar, Voot, Sony Liv, Alt Balaji and a host of other ventures, are already jostling for supremacy in the Indian VoD market.
This brings us to a fundamental question: does the price-sensitive Indian market offer enough scope for domestic content platforms to gain a foothold against global content players? More importantly, what are the major roadblocks which can directly or indirectly throttle such efforts? In this context, it is incumbent upon market participants and policymakers to recognise and solve for certain inherent ecosystem challenges.
Firstly, convincing discerning middle-class Indians to part with their money will remain a difficult exercise. This is evident from very low free-to-paid conversion rates in the VoD market. As per recent data published by market research firm Counterpoint, the number of paid subscribers for Hotstar, the highest subscribed VoD platform in India, is around three to five percent of total consumers. Even Netflix’s conversion rate in India remains around six to eight percent, according to the same research (these numbers are based on app-only consumption and are not necessarily cross-verified by the VoD platforms).
Such conversion metrics pale in comparison to advanced markets like the US, where around a third of the consumers experimenting with free trials, result in paid subscriptions. Contributing factors include negligible copyright enforcement in India, and therefore, all pervasive online piracy.
Such dynamics place additional pressures on VoD platforms to offer high-quality content, combined with seamless user experience at competitive price points. However, such a value-proposition of high-end content coupled with robust technological solutions, necessitates significant investment. To achieve this, competitors either need substantial capital investment (as observed by experiences of companies like Netflix and Amazon) or innovative content partnerships with traditional broadcasting organisations.
Another challenge that confronts VOD platforms, relates to the behavioural tendencies of the Indian consumer base. This is partially due to the prevailing economic regulatory framework which has shaped the Indian television viewing experience. Artificial pricing constraints imposed by government have distorted India’s TV landscape. The country has hundreds of free to air channels that are solely dependent on advertising revenues, and this “eyeballs-driven market” has deprived audiences of the opportunity to exercise greater choice.
Conversely, companies in mature content economies, which have a large television subscription base, have experienced a smoother foray into the subscription VoD space, since their consumers are already accustomed to paying market-rates for TV. That is, distortionary government interventions in India’s traditional content markets, will continue to have an adverse impact on the time horizon for the commercial success of subscription VOD.
Aside from paid subscription or pay-per view revenue models, some VoD players like VOOT and Hotstar, similarly want to monetise online advertising. However, while at an aggregate level, digital advertising continues to grow at a robust 33 percent CAGR, online advertising remains firmly under the grip of a few technology companies (as was also evident from a recent pronouncement of India’s anti-trust authority). Moreover, Indian advertisers still prefer paying significantly more for television slots.
The above revenue constraints mean that the Indian VoD players are reliant on broadcast sector-led investments, to compete with international players who are willing to invest aggresively until they capture the market. For example, global companies like Netflix plan on spending around USD 8 billion in 2018 to improve their content libraries. Similarly, premium cable package companies like HBO recognise that in order to meet their subscription commitments, there is a need to invest in higher quality content. The final season of Game of Thrones has consequently been assigned a production budget of around USD 15 million per episode.
What Indian policymakers have managed to do well so far, is refrain from imposing any legacy constraints on the VoD space, allowing for an organic and robust market response to the global VoD phenomenon. This is unlike the case in many European countries, where a protectionist approach has often stymied a market-based response to internet businesses. Moreover, there is now a sense of cautious optimism within the content creation ecosystem in India, which stems from greater upstream investments in talent and production, and the possibilities of generating differentiated content not just for the domestic consumer, but also for export.
Even as the Indian Government monitors the evolution of the VoD market, and its impact on infrastructure development, consumer choice and the overall regulatory space, it must not jeopardise market dynamics that bode well for competition, and consequently, the consumer. Moreover, inevitable calls for protectionism from downstream stakeholders within the TV ecosystem, which feel threatened by new inter-platform competition, must be assessed through a holistic lens. And this entails recognition of the fact that the VoD space is a unique example of an online market, wherein Indian companies have managed to hold their own and respond proactively to global trends. There are few analogous examples of Indian industries, in the internet economy or otherwise, which have shown such resilience and foresight.
*Vivan Sharan is Partner and Sidharth Deb is an Associate, at Koan Advisory Group, New Delhi.