Can Partnerships With Telecom Service Providers Drive International Subscriber Growth For Netflix?
After it expanded globally in 2016, Netflix (NASDAQ:NFLX) is working on several initiatives to grow its international subscribers. According to our estimates, the company’s international segment accounts for nearly 42% of its valuation, and we expect its international subscribers to grow rapidly and reach 110 million by the end of our forecast period.
The company is taking several steps to achieve this growth, and recently entered into a partnership with Spark, a New Zealand-based telecommunications company which will offer a free one-year Netflix subscription to subscribers signing up for a 24-month unlimited data, Spark broadband plan. This is Netflix’s first such deal in New Zealand, and the company might be looking at several such deals as it looks at an aggressive global growth strategy. As subscriber growth in the U.S. stagnates and the company faces intense competition from other players such as Amazon Prime Video, international markets can provide the next wave of growth for Netflix. A partnership with telecom companies can give Netflix access to a large subscriber base, which can be converted into loyal users based on the strength of its programming. Netflix’s deal with Spark comes after New Zealand regulators blocked Vodafone’s attempt to merge its New Zealand segment with Sky Network Television on the grounds that it would impact the competitiveness of the market. While Netflix’s deal is different from Vodafone’s proposed partnership, some experts believe that it is more beneficial to Spark than to Netflix. Spark is losing broadband market share in the region, currently standing at an all-time low of around 42%. However, Netflix does get access to Spark’s large subscriber base in a region where it is still trying to establish itself. The company is also focusing on local content to gain market share in the international segment.
International markets hold strong growth potential for Netflix, and while its international segment is not profitable yet, we expect it to break even later this year and expect its contribution margin to grow steadily thereafter to reach nearly 41% by the end of our forecast period.
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This estimate assumes that the company’s international contribution margin will approach the domestic margin by the end of our forecast period as the international business matures. However, if Netflix is not able to achieve this margin expansion, there could be a downside to our price estimate.
Netflix is focusing on international markets to drive much of its growth going forward. We believe partnerships with telecom providers is a good marketing strategy for the company and could aid its growth in international markets.
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