Netflix (NASDAQ:NFLX) last week cut its U.S. subscriber forecast for Q3 by 1 million causing a drop in its shares and also prompting us to revise our price estimate to $195 in light of the revised guidance and rising competition from Dish Network (NASDAQ:DISH), Comcast (NASDAQ:CMCSA), Amazon (NASDAQ:AMZN) and Hulu that are aggressively expanding their online offerings. (See Netflix Estimate Revised to $195 on New Guidance) Then over the weekend, CEO Reed Hastings announced the company’s plans to split the streaming and DVD by mail businesses. We wrote about this in Hastings Apologizes, Announces DVD & Streaming Split for Netflix.

Despite these announcements, the company is maintaining its overall outlook for Q3 as well as its international subscriber forecast.^[1] We expect Netflix’s average subscriber fee internationally to be lower compared to the U.S. offering, but this gap should converge as the DVD business is separated and as the number of free trial subscribers internationally diminishes. Netflix is also focusing on making more quality content available for its international subscribers in Latin America and Canada, which should drive subscriber volumes for the company.

While we estimate Netflix’s monthly average subscription fee for international customers will increase from $6.70 in 2012 to $7.50 by the end of our forecast period, Trefis members expect an increase from $6.90 to $8.50 during the same period. The member estimates imply an upside of 5% to the Trefis price estimate for Netflix’s stock.

We currently have a Trefis price estimate of $195 for Netflix’s stock, which is about 20% above the current market.

Subscriber Fee Expected to be Lower Internationally Compared to U.S.

We expect Netflix’s average fee to be lower internationally compared to the U.S. due to the absence of higher priced packages internationally that include DVD-by-mail service. Over time, the difference in average fee between U.S. and international subscribers is likely to diminish as the DVD business is split from the streaming business. This assumes, however, that streaming service will continue to be priced comparably between the U.S. and international markets. Netflix may not be able to charge higher prices in markets like Carribean and Latin American region where consumer income levels are lower.

Hence this is expected to keep its average subscriber fee low as well. However, it’s betting heavily on international markets to drive its overall subscriber growth as it expands its streaming service to 43 countries in Latin America and the Carribean region this month. (See Netflix’s Success Story Rides on International Growth)

Avg. Subscriber Fee will Come Closer to Sticker Price Over Time

Netflix’s international subscription fee for streaming-only priced of $7.99 per month is impacted by the number free subscribers as well as the subscriber base growth rate. As the business stabilizes in international markets, we expect the proportion of subscribers on free-trial to come down and the average subscription fee to trend toward the actual pricing pf $7.99.

Netflix is working on building its content to attract more international subscribers. While its deal with Starz has ended, it hasn’t stopped it from looking at other deals. The company recently signed a multi-year agreement with film and TV show studio Miramax to make hundreds of its film titles available for its Latin American customers.^[2] In July Netflix also signed a 2-year deal with CBS to offer content to its subscribers in Latin America and Canada.

Our complete analysis for Netflix’s stock is here.

Notes: