Netflix’s (NASDAQ:NFLX) international business spans Canada, Latin America, the U.K., Ireland and the Nordic countries of Denmark, Sweden, Finland and Norway. Within two-and-a-half years of its launch in international markets, the company has gained more than 7.75 million subscribers.  Revenues from its international business stood at $308 million for the first half of 2013, implying growth of more than 185% over the same period a year ago.  The outlook for Q3 is promising too as the company expects to grow its international revenues by 125% and gain 0.9 million subscribers.  In addition to this, the contribution loss (calculated by subtracting the cost of services and marketing expenses from total revenues) has been coming down due to improving economies of scale. While all of these trends are encouraging, we currently estimate that international streaming accounts for just 20% of Netflix’s value. Strong revenue and subscriber growth is being offset to a certain extent by extremely high content costs that the company is incurring on international expansion.
- Netflix’s Liberty Global Deal To Help Its International Efforts
- Here’s How Broadband Data Caps Can Significantly Impact Netflix
- What’s Driving Netflix’s International Subscribers?
- When Can Netflix’s International Streaming Business Break Even?
- Here’s What Netflix Needs To Succeed In International Markets
- Why Is Netflix’s DVD Subscription Business Dying And Why Isn’t It A Concern?
Expansion In Europe & Canada
As Canada and Europe are developed markets, Netflix is positioned well to capture market share in these regions. Canada’s population is roughly 35 million, and the region had close to 13.4 million households in 2011 out of which, 78% had access to Internet.  This gives a target market size of over 10 million subscribers currently. If Netflix can acquire 30-40% of this market over the long term, it can gain close to 5 million subscribers from Canada alone (accounting for growth in population and increase in broadband penetration). This is possible since the company seems to be approaching a similar penetration in the U.S. Moreover, Canada’s average broadband speed is close to 6.7 Mbps, more than enough to guarantee an enjoyable streaming experience. 
If we look at Europe, the potential market is bigger. The U.K. has a population of close to 63 million and has roughly 26 million households.  The Nordic countries, together with Ireland, have a combined population of close to 30 million. If we assume an average of 2.5 persons per household (as indicated by U.K.’s statistics), we get close to 12 million households for Nordic countries and Ireland. Broadband is not an issue as some of these European countries are ranked quite high in terms of average broadband speeds. 
Netflix can target a total of 38 million households in its current markets in Europe and can gain more than 12 million subscribers if it can emulate its success in the U.S. in these markets and can achieve a penetration close to 30% of households.
Improvement In Growth In Latin America
Netflix launched its streaming services in Latin America in 2011. The initial growth was slower than expected but given the growing middle class, the expected improvement in payment systems and the lack of pay-TV penetration, we expect Latin America to be an important growth driver in the future. Latin America has over 150 million households, which is much higher than the households in Canada, the U.K., Ireland and the Nordic countries combined. Although the broadband penetration and speeds are still low, we expect them to increase over the next few years driven by shifting consumer preferences, growth in media content on Internet, and competition between telecom companies that will inspire innovation and growth in broadband services.
The middle class income will grow over time as more consumers will own credit cards making it easier for them to make online payments. The issues with payment systems have hindered Netflix’s growth in the region, but the company is making efforts and collaborating with banks to simplify the process. In addition to this, low pay-TV penetration can also help as consumers will consider Netflix as a cheaper viable alternative to more expensive options. The company is reportedly planning to launch original programming in Brazil to attract customers and replicate the success it has received in the U.S. from original content.
If Netflix can achieve a penetration of even 5% of Latin American households over the next 6-7 years, it can gain close to 7-8 million subscribers in this region alone.
Possible Launch In New Markets
Netflix has global ambitions and will look to launch in more European countries as well as Asia. The company recently announced that it plans to introduce its streaming service in the Netherlands in the second half of 2013.
Broadband speeds in some of the South East Asian countries and Japan are among the highest in the world, making them good target markets. The company has been looking to hire linguists to localize its service into several new languages, which hints that it may be looking to expand to India, Japan and other countries.
India has a population of over 1 billion and the broadband usage has been increasing. According to a U.N. report, India had 1 fixed line broadband connection per 100 inhabitants in 2011, implying close to 10 million broadband households. Although this looks like a relatively small market, it is growing rapidly. According to a report from Digital TV Research, the number of broadband households in India will increase to 38 million by 2017.  There is no doubt that Netflix will explore India, China and other Asian markets in the future, and try to establish a lead in these streaming video markets.
Hurdles In Success
Given the shifting consumer preference for watching content on the web, more local and international streaming companies will emerge. Netflix will face increasing competition from Lovefilm and BSkyB in Europe. Lovefilm is owned by Amazon (NASDAQ:AMZN), which has already built a good streaming service in the U.S. and has the capability of investing more money on content. BSkyB, on the other hand, has a good hold of content rights in the U.K. Netflix is going to face bidding wars that may drive content prices up. The company may not always be able to get the right content which can hinder its growth in Europe and the U.K. In addition to this, it will face piracy issues in Asia and Latin America. The piracy rates are still high in these regions and that might discourage potential customers to subscribe to Netflix’s services when they can easily watch something for free. Low broadband penetration may also moderate the growth in near term. In addition to this, the biggest challenge will be acquiring the right mix of content, which has to be both local and global and depends on Netflix’s ability to strike deals with local media houses.
Our price estimate for Netflix stands at $127, implying a discount of about 30% to the market price.Notes:
- Netflix’s Q2 2013 Letter To Shareholders [↩] [↩] [↩]
- CRTC issues annual report on the state of the Canadian communications industry, Canadian Radio-television and Telecommunications Commission, September 4 2012 [↩]
- Akamai Q3 2012 State of the Internet Report [↩]
- Families and Households, 2012, Office for National Statistics [↩]
- ref:1 [↩]
- 745 million fixed broadband homes by 2017, broadbandtvnews.com, Nov 21 2012 [↩]