Netflix Q4 Preview: Netflix’s Strong International Growth Will Continue But China Still Remains Elusive

Netflix (NASDAQ:NFLX) will release its fourth quarter earnings report on January 19^th. ^[1] The company reported strong subscriber growth for the first nine months of 2015. We believe that Netflix will continue to add new subscribers in the domestic market in this quarter and beyond, as the streaming service will continue to hold its own amidst an increasingly competitive market. But the real star of the show will be the international subscriber growth, which will remain robust in the near future as the company has recently expanded into 130 countries and now has a presence in 190 countries. However, Netflix is yet to expand into the Chinese market. Netflix knows that China is too lucrative a territory to be left unexplored and continues to map out potential routes for entry. We believe that Netflix will eventually break into the Chinese streaming market, but will potentially have to share its profits from the region with a Chinese partner, making the prospect relatively less lucrative.

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Netflix’s International Growth Story Going Strong

Netflix’s international growth has been exceptional and the subscriber base has grown by more than 10 million in the last four quarters. ^[2] Subscriber growth has been helped by the company’s aggressive expansion plan, the aim of which is to have a presence in 200 countries by the end of 2016. Netflix recently went live in more than 130 countries on January 6, in addition to the 60 countries where it previously operated. ^[3] The streaming service is now available in more than 190 countries across the world, thus becoming truly “global.” Netflix plans to make its content available at the same time to members everywhere around the world and has added Arabic, Korean, Simplified and Traditional Chinese, to the 17 other languages it already supports. Additionally, Netflix has been targeting the Asia-Pacific in a big way and the company entered its first Asian market when it launched into Japan last September. South Korea, Singapore, Hong Kong, Taiwan, and India were some of the other major markets that Netflix launched in, as part of the January 6 global launch. The Asia-Pacific holds a lot of promise for Netflix as the region offers a potential target market of around 280 million households (assuming one high-speed internet connection per household). ^[4] We believe that Netflix will experience healthy adoption rates in the newly launched countries on the strength of its original content and its competitive pricing. Resultantly, we believe that Netflix can cross 70 million international subscribers by the end of our forecast period.

Chinese Puzzle Still Unsolved

The one major market that continues to elude Netflix is China. The country makes up around 60% of the 280 million Asia-Pacific broadband households that Netflix is targeting, which makes it extremely crucial to Netflix’s success in the region. ^[4] However, the company’s entry into China will not be easy, as online streaming is a very restricted domain in the country. China’s State Administration of Press, Publication, Radio, Film, and Television has given Internet TV licenses to only seven companies. Netflix would most certainly need to partner up with a company that has licenses to distribute content on all platforms, including computers, mobile phones, and set-top boxes. China also has a very strict censorship policy and the concerned authorities could object to some of the potentially objectionable content in Netflix’s programming. Additionally, overall efficiency and reliability of internet services in developing countries such as China and India is inferior to those of developed nations such as the United States.

Netflix knows that China is too lucrative a territory to be left unexplored and continues to map out potential routes for entry. The company has held talks with Jack Ma-backed Wasu Media Holding Co. and other content companies in the past and CEO Hastings believes Netflix is on “a slow and steady path” to entering the country. ^[5] We believe that Netflix will eventually break into the Chinese streaming market, but will have to share its profits from the region with its Chinese partner, making the prospect relatively less lucrative. Accordingly, we have factored this loss of income into our international contribution margin projections. We believe that Netflix’s international contribution margin will be just over 30% by the end of our forecast period, as compared to the domestic contribution margin, which will cross 40%.

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1. Netflix to Announce Fourth-Quarter 2015 Financial Results, December 21, 2015, Netflix Investor Relations [↩]
2. Netflix’s SEC Filings [↩]
3. Netflix Is Now Available Around the World, January 6, 2016, Netflix Media Center [↩]
4. List of countries by number of broadband Internet subscriptions, Wikipedia [↩] [↩]
5. China Remains Roadblock to Netflix’s Global Expansion Ambitions, January 7, 2016, Bloomberg [↩]