When Will Netflix’s International Streaming Business Break Even?
Netflix‘s (NASDAQ:NFLX) international streaming business accounts for about 42% of the company’s value, according to Trefis estimates. While the business is currently generating losses, we expect the company’s total international subscribers to exceed its U.S. subscriber base by the end of this year. We forecast international streaming subscribers to grow by 35% in 2017 to 60 million, compared to an estimated 9% growth in domestic streaming subscribers to 54 million. The primary reason for this rapid international growth is the strong adoption of Netflix in regions in which it started operating last year.
Despite the growth in subscribers, we don’t expect the international business’ revenues to exceed those of the domestic segment until 2021. This can be attributed primarily to lower ARPU (average revenue per user) for the international streaming segment. We forecast Netflix’s international ARPU to grow to just under $8 by 2020, well below the $9 mark reported by the domestic streaming business. Based on the growth in subscribers, ARPU and guidance given by the company, we expect the international segment to break even in 2018 and increase its profits considerably thereafter. At present, Netflix spends a huge amount on international marketing as it wants to establish a strong brand image from the outset. Also, Netflix is focusing on bringing original local content to markets it is serving presently, which further adds to its costs.
Currently, the company is unprofitable in international markets due to high upfront spending on the content and a relatively low subscriber base compared to the potential market size. And since these costs are somewhat fixed in nature, strong subscriber gains through continued expansion can easily outpace the growth in costs.
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We project Netflix’s international streaming business to become profitable in 2018 (on a free cash flow basis) and grow strongly thereafter.
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