Weekly commentary on startups, entrepreneurship and business

Edition 36

“Elon Musk can stick his
submarine where it hurts"
Vern Unsworth

Dear *|HTML:FNAME|*,

Netflix released its thriller TV show Sacred Games this week, to strong reviews and strong political reactions.

Sacred Games has assembled an A-list acting, directorial and production team for the series, and the product lives up to its billing. The narrative is gripping, almost Game of Thrones-esque, providing the story elevated status v/s any of its characters. As Nawazuddin's character Ganesh Gaitonde says, the "story is like a scorpion, once it stings you're done for". Netflix's distribution mechanism has done something incredibly interesting for the product - this show as a movie would have never passed the censor board. The format of a show also disrupts the general order in Bollywood movies. The writers become more important, even more than the cast - who are characters in the narrative arc. This is overwhelmingly positive for viewers looking for a story. 

Sacred Games is being marketed heavily in India. Therefore, while Netflix would amortize its content costs over time, I would look at Sacred Games as a marketing cost to understand Netflix's business strategy. The show is a customer acquisition strategy in a growth market like India, while the US starts to slow down. Back of the envelope, an Indian feature film like Sanju cost ~$15 million, similar to what Narcos cost to produce for a season. Given lesser scale than Sanju, and an India production cost v/s Narcos, I would peg production for Sacred Games at a third (works neatly for PPP!). For an annual subscription of $100, Netflix would need to acquire 50,000 annual paid users to justify Sacred Games (after all those who just watch for a month). For Netflix's ~600K paid users, that is a fairly plausible growth for Reed Hastings target of 100 million in India. 

Apart from Netflix, the rapidly growing India video streaming market of $260 million has a tonne of competition. Local upstarts Hotstar & Voot, and Bezos' Prime are already vying for Indian eyeballs. A lot of commentators have already written off Netflix, using the poor metric of "subscribers". Netflix only pips Ozee TV, with 5 million subscribers to Hostar's 63 million using this metric. But these "subscribers" are actually monthly active users, which includes free users. If you look at paid subscribers, nobody but Hostar, Amazon Prime and Netflix have those. According to estimates, Hotstar has roughly 2 million, Amazon Prime is 600K and Netflix is around 500K. Note that Amazon Prime Video is rightly a percentage of the overall Prime service. Hotstar costs 999 INR ($14), Amazon Prime costs 999 INR ($14) and Netflix costs 6000 INR ($87) annually. Now if you multiply annual subscription costs, Hotstar comes at $30MM, Amazon Prime at $8.4MM and Netflix at $45MM. Netflix is not losing in India, it is might potentially be winning as a business!

On a macro level, video streaming is often seen as the replacement for TV. Unlike Western markets, TV is still a primary source of entertainment in India. From an infrastructure standpoint, the penetration of TV sets beats internet penetration (700 MM vs 500 MM). If you broke this down into TV connections that delivered quality content, v/s internet connections + phones that could support video streaming - I speculate the gulf would be even wider. Even with the internet's rapid growth, there is still a wide gap to fill. You could, at best, deliver high-quality video to 100MM people.  As a consumer, "cutting the cord" doesn't make sense. In the US, cable TV could go as high as $100/month, and a $10/month Netflix is a no-brainer

In India, cable TV costs INR 500-600 for a suite of channels, while Netflix is expensive with limited local content. Hotstar is priced lower, but can't compete with the variety of cable TV. Streaming thus becomes a source of secondary viewing rather than primary viewing, where you "catch up" on shows.  Companies delivering high-quality content through the present infrastructure (through better compression?), at a lower cost, will succeed. While this is hard and requires technological innovation, this will need a very India specific approach. It is no wonder Mr Hastings compares Netflix to a movie ticket, and not TV. The Sacred Games strategy now makes a lot more sense. Create a show that looks, feels and markets like a feature film. The first month free is like a free movie ticket, with the hope that you will keep coming to the theatre every month.

Netflix is being written off as the vanquished Ashwatthama, but may actually be the fierce Rudra for India's video wars.

This week, I look at Lyft, Optionality and Fortnite. 
  1. [Large Startups]: The midlife crisis of venture capital
  2. [Work Culture]: Science behind motivation - change your thinking
  3. [Growing Startups]: Lyft is trying to become the next subscription business
  4. [Buzzwords]: The AI revolution has spawned a chips arms race
  5. [Life x Startups]: Randomness and Optionality - how to invest in the future?^
  6. [The New Monopolies]: The Race to a Trillion
  7. [Data!]: Inside the Binge Factory
  8. [Modern Economics]: MBA students seek tech jobs, and Valley is hiring
  9. [Classic Economics]: When cost-plus pricing is a good idea
  10. [Business is Entertainment]: The Most Important Video Game on Earth
Based on an excellent recommendation by members of the community, I asterisk* paid articles. I have started adding podcasts, which use a caret^. Please do drop in reads that you found interesting this week here and I would love to accommodate them. You can pass on the love by sharing this with your friends and colleagues who can sign up here, and these are all the previous editions

I started this with the belief that there is a whitespace on conversations by venture capitalists in the entrepreneurial and startup ecosystem in India. This is my small way of starting a conversation. In case you have any feedback on the structure, design or content please feel free to reach out to me in reply to this email. 

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