Sizing Up Netflix’s International Subscriber Growth Potential

Netflix (NASDAQ:NFLX) has been expanding aggressively in international markets for the past two years. Following its launch in Canada towards the end of 2010, the company expanded to Latin America, the U.K., Ireland and Nordic countries of Denmark, Sweden, Finland and Norway. We currently estimate that international streaming accounts for just 15% of Netflix’s value.

Although we forecast healthy subscriber growth, the business is still unprofitable, and we expect it to remain so for at least the next couple of years. Our valuation for this segment is hinged on our expectation that Netflix will be able to gain 30 million international subscribers by the end of our forecast period. This may seem like an optimistic forecast, but given the recent trends, we believe that such subscriber growth is probable. Within two years of its launch in international markets, Netflix has gained 6 million subscribers.

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Expansion In Europe & Canada

Canada and Europe being developed markets, Netflix is positioned well to capture share in these regions. Canada’s population is roughly 35 million, and the region had close to 13.4 million households in 2011 out of which, 78% had internet. ^[1] This gives a target market size of over 10 million subscribers currently. If Netflix can acquire 30-40% of this market over long term, it can gain close to 5 million subscribers from Canada alone (accounting for growth in population and increase in broadband penetration). This is possible since the company seems to be approaching a similar penetration in the U.S. Moreover, Canada’s average broadband speed is close to 6.7 Mbps, more than enough to guarantee an enjoyable streaming experience. ^[2]

If we look at Europe, the potential market is bigger. The U.K. has a population of close to 63 million, and roughly 26 million households. ^[3] The Nordic countries, together with Ireland, have a combined population of close to 30 million. If we assume an average of 2.5 persons per household (as indicated by U.K.’s statistics), we get close to 12 million households for Nordic countries and Ireland. The broadband is not an issue as some of these European countries are ranked quite high in terms of average broadband speeds. ^[2]

Netflix can target a total of 38 million households in its current markets in Europe and can gain more than 12 million subscribers if it can emulate its success in the U.S. in these markets, and can achieve a penetration close to 30% of households.

Improvement In Growth In Latin America

Netflix launched its streaming services in Latin America in 2011. The initial growth was slower than expected, but given the growing middle class, expected improvement in payment systems and lack of pay-TV penetration, we expect Latin America to be an important growth driver in the future. Latin America has close to 150 million households, which is much higher than the households in Canada, the U.K., Ireland and the Nordic countries combined. Although the broadband penetration and speeds are still low, we expect them to increase over the next few years driven by shifting consumer preferences, growth in media content on internet, and competition between telecom companies that will inspire innovation and growth in broadband services.

The middle class income will increase over time and more consumers will own credit cards, thus making it easier for them take make online payments. Issues with payment system have hindered Netflix’s growth in the region but the company is making efforts and collaborating with banks to simplify the payment system. In addition to this, low pay-TV penetration can also help as consumers will consider Netflix as a cheaper viable alternative to more expensive options.

If Netflix can achieve a penetration of even 5% of Latin American households over the course of the next 6-7 years, it can gain close to 7-8 million subscribers in this region alone.

Possible Launch In New Markets

Netflix has global ambitions and the company will look to launch in more European countries as well as Asia. The broadband speeds in some of the South East Asian countries and Japan are among the highest in the world, making them good target markets. The company posted a job sometime back which indicates that it might be looking to expand into new geographies. The company has been looking to hire linguists to localize its service into several new languages, which hints that it may be looking to expand to India, Japan and several other countries.

India has a population of over 1 billion and broadband usage has been increasing. According to a U.N. report, India had 1 fixed line broadband connection per 100 inhabitants in 2011, implying close to 10 million broadband households. Although this looks like a relatively small market, it is growing rapidly. According to a report from Digital TV Research, the number of broadband households in India will increase to 38 million by 2017. ^[4] There is no doubt that Netflix will explore India, China and other Asian markets in the future, and try and establish a lead in these streaming video markets.

Hurdles In Success

Given the shifting consumer preference for watching content on the web, more local and international streaming companies will emerge. Netflix will face increasing competition from Lovefilm and BSkyB in Europe. Lovefilm is owned by Amazon (NASDAQ:AMZN), which has already built a good streaming service in the U.S. and has the capability of investing more money on content. BSkyB, on the other hand, has a good hold of content rights in the U.K. Netflix is going to face bidding wars that may drive content prices up. The company may not always be able to get the right content which can hinder its growth in Europe and the U.K. In addition to this, it will face piracy issues in Asia and Latin America. The piracy rates are still high in these regions and that might discourage potential customers to subscribe to Netflix’s services when they can easily watch something for free. Low broadband penetration may also moderate the growth in near term. In addition to this, the biggest challenge will be acquiring the right mix of content, which has to be both local and global and depends on Netflix’s ability to strike deals with local media houses.

Despite the potential hurdles, the recent success in international markets and the sheer potential that exists leads us to believe that Netflix can reach 30 million subscribers in next 6 to 7 years.

Our price estimate for Netflix stands at $127, implying a discount of about 30% to the market price.

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1. CRTC issues annual report on the state of the Canadian communications industry, Canadian Radio-television and Telecommunications Commission, September 4 2012 [↩]
2. Akamai Q3 2012 State of the Internet Report [↩] [↩]
3. Families and Households, 2012, Office for National Statistics [↩]
4. 745 million fixed broadband homes by 2017, broadbandtvnews.com, Nov 21 2012 [↩]