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Meet Netflix's Next Big Threat

Harsh Chauhan, The Motley Fool

Netflix (NASDAQ: NFLX) is counting big on India, believing that it will get its next 100 million subscribers from the region. Not surprisingly, Netflix's chief content officer, Ted Sarandos, claims that India is the company's biggest content market, as it's commissioning more shows there than anywhere else in the world.

And the company finally seems to be getting its act together in India; it was earlier criticized for offering a very shallow content library at premium prices when compared to rivals. But cracking the Indian market will be easier said than done for Netflix, as one of India's biggest production houses -- Eros International (NYSE: EROS) -- has now decided to join the video-streaming party.

Rows of movie-theater-style seats on a laptop keyboard, angled to watch the laptop screen

Image source: Getty Images.

Netflix's new problem

Eros is a 40-year-old production house based in India's movie capital, Mumbai. The company's rich history of producing, acquiring, and distributing Indian films has helped it stitch together a huge library of local content that puts it ahead of Netflix in this market. In fact, Eros' library of more than 11,000 movie titles means that it has more local Indian content than both Netflix and Amazon combined.

This isn't surprising, as Eros has produced or distributed 30% of the movies released in India over the past five years. The company is now using this rich content library to its advantage through the Eros Now video streaming platform, which was launched six years ago. The strategy has worked wonders: Eros Now has gathered an impressive following, scoring 100 million subscribers globally across 135 countries.

Netflix, by comparison, has 117 million subscribers across 190 countries, so Eros Now has scaled impressively despite hitting the market 15 years after the American streaming giant was established. Eros is now planning to boost the monetization of its streaming platform. It plans to double its paying subscriber base to 16 million by March next year and believes that producing local content will help it hit this target.

Eros Now will be spending $50 million to produce original shows, including short films and episode-based content. This pales in comparison to Netflix's $8 billion global content budget for this year, a substantial portion of which could be spent in India, given the company's statement that it's commissioning more shows there than anywhere else.

But Eros Now has a two-fold advantage over Netflix already, and it doesn't need to spend big money to capture eyeballs.

The Eros advantage

Eros Now's first advantage is its vast and diverse content library. Out of the 11,000 films that it holds the rights to, only 7% are in foreign languages, and the remaining are in Hindi or other regional languages. In fact, Eros Now boasts a highly diversified multilingual content library, as 40% of its Indian-language films are regional in nature.

By comparison, three-fourths of Netflix's Indian content is in English, giving Eros Now a better pan-India appeal and putting it in a strong position to attract more subscribers with local content. This has been crucial to Eros Now's growth in India, boosting the company's paid subscriber base by an impressive 276% during the latest fiscal year to 7.9 million. Netflix, meanwhile, had just over half a million paying subscribers in the country at the end of 2017.

Pricing is the second-biggest advantage for Eros Now. The platform gives users access to movie trailers, unlimited music, and music videos for free under its basic plan. By spending less than $1 a month, users can upgrade to the Plus plan to enjoy unlimited movies, TV shows, and original short films.

Finally, the premium plan, at less than $1.50 per month, gives users access to the full portfolio of Eros Now's offerings, including high-definition movies, full episodes of original shows, and offline playback. On the other hand, Netflix's cheapest plan in India costs just over $7 per month.

So Eros Now has established a multi-pronged strategy of luring subscribers into its ecosystem with a free plan. This makes it easier to convert those users into paid subscribers, thanks to attractive pricing and plenty of content. Netflix falls short on both counts.

Fear of missing out

According to an Ernst & Young report, the online video-streaming audience in India will double in the next three years to 500 million, while subscription revenue will almost triple to nearly $300 million. But Netflix has failed to cut its teeth in India despite being in this market for more than two years now.

An expensive offering and lack of content have hamstrung Netflix, and its problems are rising day by day as local players are getting more aggressive on both fronts. Netflix currently runs the risk of missing out on India's online streaming revolution -- and the associated financial gains -- to companies like Eros that have a better understanding of its viewer base.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN and Netflix. The Motley Fool has a disclosure policy.