For many years, Asia Pacific has been talked about as the great opportunity for many of the global media and tech companies. That is not a surprise. With around 60% of the world’s population and a rapidly growing regional economy, any company that wanted to be taken seriously when it came to its long-term future had to talk to Asia Pacific. However, quietly but firmly, that message is diminishing, even if it has not (yet) been extinguished. Several factors are at play but one of the lesser known ones is the economics of the customer.
The underlying revenue model for many media and tech companies—an explicit one in subscription services such as Netflix, implicit for advertising-based services such as Google and Facebook—is simple. There are two core inputs. One is the total subscribers or users you have. The second is how much each one generates (the famous average revenue per user—or ARPU number).
That seems simple but what it hides is that, for the second input there is a vast difference in a customer globally. Take Meta, for example. In Q4, the ARPU for an average US/Canadian customer was nearly $59 against $4.61 for Asia-Pacific. Currency had a distorting effect but nowhere near accounted for the nearly 13X difference. For subscription services, it is less extreme but noticeable.
For Netflix, the average North American customer generates nearly double that for APAC adjusting for currency. India is a key factor in this. Few companies break India specifically out but one of the few companies who do—Disney—reported last quarter its Disney+’s US customers generated $5.95 of ARPU vs. 74 cents for Hotstar+, a roughly 8X gap). However, nowhere near all the gap is accounted for by India.
For a long time, that differential did not matter.
Prior to the tech crash of 2022, the focus—for both managements and, importantly, investors—was on subscriber/user growth, especially in streaming. This drove share prices and valuations. It also made Asia-Pacific—with the bulk of the world’s population—the key focus for this growth. Meanwhile, the second part of the equation—the ‘ARPU’ side—was its Cinderella, neglected and seen as a lesser metric. Much of that was driven by the view that, eventually, the gap would narrow and so the problem would take care of itself.
However, that differential does indeed now matter and while Cinderella may not be yet the Belle of the Ball, she is on at least equal footing. The rise of interest rates has seen investors swing from supporting these companies’ growth strategy to now demanding the prioritisation of profits and cashflow. That has been reflected most publicly in the job cuts announced by the major players as well as increasing share buybacks (and the ‘year of efficiency’ as Mark Zuckerberg has called 2023). However, it is also reflected in the realisation that it can be easier – and less costly – to get more from your existing subscribers than to chase after new ones.
That was exacerbated by the strength of the dollar, which had a particularly nasty impact on many of the global media and tech companies—while their revenue bases were global, their cost bases are heavily dollar denominated, whether in content (the streamers) or the costs of servers and staff (the tech companies). Margins were disproportionately impacted. Netflix pointed out a $1 billion FX hit in revenues would mean a $800 million impact on profits (the impact was slightly less). For tech, Meta saw its margins drop from roughly 40% to 25%. While substantially higher costs played a large part, so did the FX effect. That, again, increased the need to scale back growth and monetise more effectively existing assets, i.e. the customers.
These issues are unlikely to change. US interest rates are unlikely to unwind substantially any time soon nor will we see a return to the free money era. Shareholders have also been burnt, making them more cautious and therefore more likely to put pressure on managements to be prudent. While the dollar is weakening, the speed of the impact unnerved many management teams.
What does that mean for APAC?
Expect a greater focus from many companies on North America (and Europe) and relatively less on Asia-Pacific. Part of that is because, for many companies, they have given up any hope that mainland China will be a substantial market. However, the greater factor is the economics of the customer. There is a recognition that to increasing monetisation in many APAC markets, particularly India, to close to North American (or even European) levels is very unlikely to happen. In the new world, this is a major issue.
So, expect them to stick to more ‘known’ areas where they feel more comfortable in being able to exploit more monetisation opportunities and at higher levels. Prudence is key, and there is less risk in a more conservative approach to growth especially when shareholders are less willing to accept transformational growth stories than they were a year ago. That may be unfair, but so is much of life.
As usual, this is not investment advice.
Ian Whittaker is founder and managing director of Liberty Sky Advisors.