Netflix: International Expansion To Drive Long Term Growth

  • Netflix has expanded into 6 additional European markets.
  • Netflix’s global subscriber base continues to grow at blistering rates.
  • Netflix’s domestic subscriber base is expected to grow to 60-90 million members, whereas the international subscriber base may grow to a much larger figure.
Netfilx international expansion

Netflix (NFLX) continues its expansion into Europe, and this is prompting a lot of speculation over Netflix’s long-term growth potential. Given recent history, it’s likely that the company will continue to expand aggressively, as it progressively optimize its contribution margin (margin based on revenue and variable costs). The company thinks that it can improve its operating profits considerably, and that investment into content in the form of both original content and licensing of movies and TV shows will drive long-term growth.

European/international growth remains a big priority at Netflix

Netflix international expansion map
Source: Statista

Expanding into European markets (Austria, Germany, Switzerland, Belgium, France, and Luxembourg), where there’s strong net-neutrality should be interpreted positively. While promotional activity and the purchase of content licenses will cost Netflix a significant amount of money initially, Netflix believes that it can remain a top competitor in streaming video on demand in many of the markets that it’s entering into.  Unlike Latin America, Europe has much faster data speeds, and a much stronger wireless and wire-line network that can handle higher levels of bandwidth. Furthermore, the average household income in Europe is significantly better. The only downside is the language barrier between various markets, which will prompt Netflix to license local content. Furthermore Netflix will have to figure out the appropriate kind of content for each individual market that it enters into.

Netflix does come armed with some of America’s most popular TV shows. Unlike in the United States, it can afford to export some content due to a differential in licensing costs between various regional markets.

According to The Wall Street Journal:
In addition to first-run rights to FX's "Fargo" and Showtime's horror series "Penny Dreadful," the company says it has licensed access to episodes of popular U.S. shows like ABC's "Modern Family" and CBS's "The Big Bang Theory" —which it doesn't have in its home market.

For the most part, Netflix has a cogent strategy for its international segment, “Our strategy is to expand as quickly as possible while staying profitable on a global basis, as long as there are compelling markets to expand into, and we are continuing to see growth in our current markets.” International expansion, paired with domestic expansion of the subscriber base has continued at a relatively healthy rate, and it’s likely that a further increase in pricing may drive significant sales growth in future fiscal years.

Netflix streaming financial performance
Source: Netflix

For now, Netflix has 50.05 million total members (36.24 million domestically, and 13.8 million internationally). The company anticipates that despite heavy competitive pressure, the company can grow its domestic subscriber base significantly. According to Netflix, “We estimate that we can be 2 to 3 times larger than current linear-HBO, or 60-90 million domestic members.   This estimate factors in that, as we grow, our content and service will continue to get better.” If we work with the figure from the high-end of the range, Netflix’s domestic segment can generate $8.64 billion in revenue, assuming a $96 annual revenue per user figure. Admittedly to grow subscribers to that amount will take many years, but it certainly seems attainable given Netflix’s historic success in the United States.

Furthermore, there’s no visible ceiling for Netflix in foreign markets, as the total addressable market is rather large, and there are more and more people who are coming online. Streaming video on demand is growing more popular by the day, as the content presentation is much better than linear television, and data speeds paired with display technologies is expected to improve considerably over the next decade. Given the relatively low price that Netflix charges its service at ($8 per month), it’s likely that Netflix will emerge as the most cost effective option in economies where household incomes are reaching the $10-$50/per day threshold.

Conclusion

Netflix’s international strategy is to expand as quickly as possible, while it gradually improves profitability. Netflix has the financial resources to license top-tier content like the Big Bang Theory, Modern Family, while also offering its own in-house production Orange is the New Black in its international streaming segment. The ability to offer great content at lower rates, paired with the overall appeal of SVOD should result in significant subscriber additions. The global ramp-up of subscribers should translate into significant sales and earnings growth for many more years.

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