Looking At Netflix’s Next Potential Market
Netflix (NASDAQ:NFLX) could potentially launch in Australia next year. While the move will strengthen the company’s international position, it will also weigh on its margins. There is something unique about Australia that makes it a good expansion option for Netflix. The majority of the population speaks English, which means that Netflix can easily adapt to local taste for video entertainment. Additionally, broadband penetration is more than twice the figure for pay-TV penetration, which creates an opportunity for the company to tap these customers. However, it also means that the competition for online streaming already exists. Companies such as Quickflix and Ezyflix are already gaining ground, and Foxtel has now launched its own video streaming service called Presto. We expect more competitors to emerge during the next year.
Our price estimate for Netflix stands at $300, implying a discount of about 20% to the market.
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Online video streaming market
Australia has a population of over 23 million residents. However, the pay-TV penetration is very low, at around 30%. This is in stark contrast to the U.S. where pay-TV penetration stands at around 85%, despite a population of close to 316 million. We believe that high prices of pay-TV pakacges have deterred the Australians from subscribing to the service. Netflix can take advantage of this situation and target these customers first. In fact, the company already has close to 200,000 Australian residents using its service by using U.S. postal addresses and employing VPN (virtual private network) to circumvent Netflix’s standard procedures to avoid correct geography detection. This suggests that the brand awareness in Australia is already very strong for Netflix.
At the end of 2013, Australia had close to 6 million broadband subscribers. [1] In 2011, the country had a population of 22.3 million with around 8.18 million households. This gives an average figure of 2.73 persons per household. Using this figure, and the latest population count, we estimate that Australia has close to 8.4 million households. With 6 million broadband subscribers, the broadband penetration is somewhere close to 70% (assuming one connection per household). There is room for growth here but this is also the target market for Netflix. Considering 30% pay-TV penetration, only about 2.5 million households have pay-TV as compared to 6 million having broadband. This is an advantageous situation for Netflix.
Negotiating content deals is going to be an important element of the company’s international expansion strategy. The challenge lies in acquiring content tailored to local tastes. As far as Australia is concerned, we think that Netflix can leverage a lot of content (English TV shows and movies) that it already has, but will need to acquire geography specific licenses for them.
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Notes:- Australia drops in OECD broadband rankings, ZDnet, July 23 2014 [↩]