A Closer Look At Netflix’s Foray Into Japan

Netflix (NASDAQ:NFLX) recently announced that it will be launching its services in Japan this fall. ^[1] This launch is part of the company’s aggressive international expansion strategy that includes the launch of streaming services in 200 countries in the next two years. Netflix is currently available in about 50 countries and has over 57 million subscribers globally. This launch will be Netflix’s first in an Asian market and we try to analyze why this move makes sense.

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Why Japan Makes Sense

Netflix has stated earlier that the company intends to continue expanding internationally and Japan seems a logical choice. Competitor Hulu actually beat Netflix to Japan and launched its services in the country years earlier in 2011. Hulu has since sold off its Japan business to Japanese television network Nippon TV. Japan has a population of about 127 million and has 36 million broadband households, behind only China and US. ^[1] The country’s average Internet connection speed is one of the fastest in the world and was measured at 15 Mbps in Q3 2014. ^[2] Around 87% of Japan’s internet connections have connection speeds of 4 Mbps or above, the minimum speed recommended for streaming high definition content. A survey conducted by Deloitte reported that only 38% had paid TV subscriptions. ^[3] This is an indication that Pay-TV penetration is fairly low and this scenario will benefit Netflix. As far as the competition is concerned, Netflix will face off against cellphone carriers such as KDDI, NTT Docomo and Softbank,  which operate their own streaming services.

Netflix will also launch 4K ultra HD services in select areas in the country. We believe that there could potentially be many takers for this service as 33% of Japan’s Internet connections operate at speeds of 15 Mbps or higher. ^[4] Additionally, Netflix will be available on mobile devices and smartphones. This is a smart move because the country lends itself exceedingly well to the mobile platform. The average connection speeds for Japan’s mobile networks is around 6.7 Mbps and approximately 86% of the connections have speeds exceeding 4 Mbps, the highest percentage in all of the Asia Pacific region.

Impact Of Netflix’s Expansion Policy On Its Subscriber Base And Margins

Going forward, Netflix’s international expansion could have a significant impact on both its subscriber additions as well as its contribution margins. The company launched operations in France, Germany, Austria, Switzerland, Belgium and Luxembourg in September 2014, which gives it access to a potential market of about 66 million broadband households. ^[5] It will also launch in Australia and New Zealand in March 2015. After the launch in Japan, there are some other Asian countries with fast Internet service that Netflix could venture into later, including China, Hong Kong, Singapore and South Korea . The subscriber growth in the International segment has been very robust so far, with the subscriber base increasing from 1.9 million customers in 2011 to 18.3 million by the end of 2014. We believe that Netflix can cross 50 million international subscribers by the end of our forecast period if it continues on its current expansion plans.

Netflix’s international operations are still unprofitable as the company continues to invest heavily in its expansion. However, the markets that Netflix launched into prior to 2014 (Canada, Latin America, the UK, Ireland, the Nordic countries and the Netherlands) became profitable on a contribution basis in Q3 2014 and continue to grow. ^[6] The company acknowledges that progress has been so strong that it now believes it can complete its global expansion over the next two years while managing to still be profitable. This is possible as Netflix will start experiencing operational efficiencies as it grows operations in the target countries. The marketing expenses will also come down as a percent of sales once the company establishes itself in these countries. We believe that Netflix’s international segment will start to break even by 2017 and will start having positive contribution margin from 2018 onward.

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1. NETFLIX TO LAUNCH IN JAPAN THIS FALL, Feb 04, 2015, Netflix [↩] [↩]
2. Akamai’s State of the Internet Q3 2014, Akamai [↩]
3. State of the Media Democracy Survey 2nd Edition, Deloitte [↩]
4. Akamai’s state of the internet Q3 2014, Akamai [↩]
5. Q3 14 Letter to shareholders, Netflix Investor Relations [↩]
6. Q4 14 Letter to shareholders, Netflix Investor Relations [↩]