Launching Into Spain, Italy And Portugal Makes Sense For Netflix

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Streaming giant Netflix (NASDAQ:NFLX) recently announced that it will be launching its services in three countries – Spain, Italy and Portugal – in October 2015. [1] [2] [3] These launches are part of the company’s aggressive international expansion strategy, in which it intends to launch streaming services in 200 countries in the next two years. We believe that a launch in these countries is a good move and could be very beneficial for the company. Netflix is currently available in more than 50 countries and has over 62 million subscribers globally. [4]

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Why The Launches Are A Good Move

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Netflix has stated on multiple occasions that the company will continue expanding internationally and Europe seems a logical choice. The company launched operations in France, Germany, Austria, Switzerland, Belgium and Luxembourg in September 2014, which gave it access to a potential market of about 66 million broadband households. [5] Now Netflix has set its sights on the previously untapped countries of Spain, Italy and Portugal. These countries have an estimated combined population of about 118 million [6] and, assuming one connection per household, are home to an estimated 28 million Internet households. [7] [8] [9] 4 Mbps is the minimum speed recommended for streaming high definition content and most of the connections in the target countries fulfill this criteria. Over 75% of Internet connections in Spain and Portugal have speeds of 4 Mbps or above, while the same is true for 61% of Internet connections in Italy. [10] Using these percentages, we calculate that launching in these countries will effectively open up a potential market of over 19 million households for Netflix. Netflix also plans to localize its content with either dubbing or subtitles, which will go a long way in removing any language barriers. [11]

The pay-TV penetration in both Spain and Italy is below 25%. [12] [13] In comparison, the pay-TV penetration in the U.S. is around 84%. [14] This is an indication that pay-TV penetration is fairly low and this scenario will benefit Netflix. Netflix also plans to launch 4K ultra HD services in all three countries. However, we believe that there might not be many takers for this service as less than 10% of internet connections in the countries operate at speeds in excess of 15 Mbps, the recommended speed for 4K ultra HD. [15]

Expansion Policy’s Impact On Company Metrics

Going forward, Netflix’s international expansion could have a significant impact on both its subscriber additions as well as its contribution margins. As stated earlier, the company launched operations in six European countries in September 2014. In March 2015, Netflix launched its services in Australia and New Zealand and met with a positive initial response. The company is also poised to launch into Japan later this fall. (Related – A Closer Look At Netflix’s Foray Into 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 company is very keen on entering the Chinese market and is exploring potential routes for entry. (Related – China Makes Sense For Netflix, But It Won’t Be Easy) 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 almost 21 million as of March 31, 2015. We believe that Netflix can cross 60 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. [16] 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 meaningful positive contribution margin from 2018 onward.

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Notes:
  1. NETFLIX TO LAUNCH IN SPAIN IN OCTOBER 2015, June 03, 2015, Netflix Press Release []
  2. NETFLIX TO LAUNCH IN ITALY IN OCTOBER 2015, June 05, 2015, Netflix Press Release []
  3. NETFLIX TO LAUNCH IN PORTUGAL IN OCTOBER 2015, June 06, 2015, Netflix Press Release []
  4. Netflix’s SEC Filings []
  5. Q3 14 Letter to shareholders, Netflix Investor Relations []
  6. List of countries and dependencies by population, Wikipedia []
  7. Press release – Instituto Nacional de Estadística, Instituto Nacional de Estadística []
  8. List of countries by number of broadband Internet subscriptions, Wikipedia []
  9. Statistics, International Telecommunication Union []
  10. Akamai’s state of the internet Q4 2014, Akamai []
  11. Netflix to Launch Streaming Service in Italy and Portugal, June 06, 2015, The Hollywood Reporter []
  12. Spanish pay-TV subscribers pass 5 mln milestone, April 16, 2015, Telecompaper []
  13. Sky Europe: What will BSkyB’s new TV empire look like?, July 25, 2014, CITY A.M. []
  14. U.S. pay-TV penetration flat at 84% of homes … and Netflix has little to do with it, study says, FierceCable []
  15. Akamai’s State of the Internet Q4 2014, Akamai []
  16. Q4 14 Letter to shareholders, Netflix Investor Relations []