Keep an Eye on Netflix's Latest Price Tests
Netflix's (NFLX) average selling price (ASP) for a subscription has been steadily moving higher, as price hikes and a greater mix of HD and 4K subscriptions has more than offset the impact of a strong dollar on international ASPs. And with the company having recently hiked U.S. prices and possibly preparing to do the same in Europe, its ASP is likely to rise higher this year.
But while Netflix is likely to see ASP growth in 2019 and beyond in developed markets -- even after its latest price hikes, the company still has a fair amount of untapped, long-term pricing power in a place like the U.S. -- its efforts to win over cost-sensitive subscribers in emerging markets with cheaper plans are likely to be an ASP headwind.
In late 2018, Netflix began testing the sale of cheap, mobile-only, subscription plans in Malaysia and a handful of other countries. Now, the Economic Times reports that Netflix is testing a plan in India that costs just 250 rupees ($3.64) per month, or half as much as its regular, entry-level plan in the country.
The paper points out the cheaper streaming plan, which supports just one standard-definition (SD) stream on a phone or tablet, is still more expensive than local rival Hotstar's subscription offering, which costs 199 rupees ($2.89) per month (Hotstar also has a free, ad-supported service). The plan also costs more than the Indian version of Amazon Prime (AMZN) , which sells for 129 rupees ($1.88) per month or 999 rupees ($14.53) per year, and of course provides a lot more than just streaming video.
Though Netflix appears to be seeing healthy growth off a small base in India, which is expected to have over 600 million Internet users by year's end, its market share in the country is still pretty low. Research firm Kalagato recently estimated that Netflix had just a 5% share in the Indian over-the-top (OTT) streaming market, while Amazon Prime Video had an estimated 10% share and local players Hotstar and JioTV were assigned 29% and 23% market shares, respectively (it's worth keeping in mind that these numbers cover both free and subscription services, though).
Netflix undoubtedly has some valuable strengths as it tries to gain ground in India. These include its investments in local originals featuring star actors, its considerable efforts to optimize its content for mobile devices and low-bandwidth connections and its ability to leverage the massive investments it has made in originals produced elsewhere (the last is also a strength in various other foreign markets).
But when it comes to pricing, Netflix is clearly going to have to rely on a very different strategy in countries like India than the one it's pursuing in places like the U.S. and Europe. And with its shares now up over 60% from their December lows, it's certainly worth keeping an eye on the impact of Netflix's emerging markets pricing on its ASPs and bottom line in the coming quarters.
Tencent Posts Mixed Results, But There's Still a Lot to Like
Mar 21, 2019 | 1:50 PM EDTAfter having risen 19% in 2019 going into its latest earnings, Chinese tech giant Tencent (TCEHY) is down slightly after providing mixed Q4 numbers and earnings call commentary. But there's still a lot to like about this story.
Tencent's revenue rose 28% annually in Q4 to RMB84.9 billion ($12.37 billion), and its non-GAAP EPS rose 13% to RMB2.07 ($0.31). Revenue topped an RMB83.5 billion ($12.37 billion)consensus, and EPS beat an RMB1.93 ($0.29) consensus.
However, Tencent's non-GAAP operating profit came in at RMB22.39 billion ($3.26 billion), up just 2% and below a consensus of RMB22.65 billion ($3.38 billion). And on its call, the company cautioned that both its own game releases and those of peers are "likely to initially be slower than in previous years" in 2019, as Chinese regulators work through a backlog of game monetization approval requests following a temporary freeze.
As it is, the approval freeze led revenue for Tencent's highly lucrative "online games" business to drop 6% sequentially and 1% annually in Q4 to RMB24.2 billion. Smartphone gaming revenue rose 12% annually, but PC gaming revenue fell 13%.
Growth was stronger for other key businesses, however. Social networks revenue, which covers digital content services such as video and music subscriptions, grew 25% to RMB19.5 billion ($2.91 billion), and Tencent's total value-added subscriptions rose 19% to 160.3 million. Online ad revenue rose 38% to RMB17 billion ($2.54 billion) in spite of macro headwinds, thanks in part to Tencent's success at growing ad sales for services running on its wildly popular WeChat platform (hopefully Facebook (FB) is paying attention). WeChat monthly active users (MAUs) were up 11% annually to 1.1 billion.
And Tencent's "Other" revenue, which is fueled by its WeChat Pay platform and (to a lesser extent) cloud services, rose 72% to RMB24.1 billion ($3.6 billion). Tencent disclosed that for the whole of 2018, its cloud revenue rose 100% to RMB9.1 billion($1.36 billion); Alibaba's (BABA) AliCloud remains the top player in the Chinese cloud infrastructure market, but Tencent has established itself as the clear No. 2 player. The company also disclosed that its average daily payment volume topped 1 billion transactions in 2018, and that monthly active merchants were up over 80% annually in Q4.
As is the case for Alibaba, aggressive spending continues to weigh on Tencent's bottom line a bit. Thanks in part to data center and digital content investments, GAAP gross margin fell to 41% in Q4 from a year-ago level of 47%. And while sales and marketing spend fell 5% annually, SG&A spend rose 29%, with R&D spend rising 24%.
Tencent currently trades for about 25 times its 2020 EPS consensus. That's not a dirt-cheap valuation, but it's also not an unreasonable one for a company that's delivering still 20%-plus revenue growth in spite of some major near-term revenue and profit headwinds, and which also has a pretty valuable investment portfolio that needs to be accounted for.
To see Tech Check coverage from the previous trading day, click here.
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