Netflix sent its stock way up north on Tuesday by disclosing plans to head south, leaving questions about its travel plans — like whether it’s going to fly solo.
The streaming company declared its intent to launch its service later this year in 43 countries across Latin America and the Caribbean.
With Netflix saying so little on the subject to date beyond generic pronouncements of its international ambitions, Wall Street seized upon the new details with great zeal as the company’s already sky-high stock took another stratospheric surge. After notching an all-time high of $291.23, Netflix settled at $289.63, up $21.64, or 8.1%.
But there are still reservations about whether Netflix can match the expectations it is setting. “It’s an interesting expansion, but it doesn’t necessarily justify this huge excitement,” said Stuart Skorman of Stuart Skorman Group, a consultancy helping entertainment companies with digital initiatives. CEO Reed Hastings is “very good at creating a high stock price, and that stock price feedshaving more money to have more content to grow his company.”
While Netflix became popular in the U.S. on the strength of its DVD-by-mail biz, it’s expected to offer streaming only overseas. Netflix took that approach in Canada last year and is expected to announce the addition of just over 1 million subs in that country in its next earnings report.
Content offerings in the new markets will be available in English, Spanish and Portuguese, with both local and imported product likely available.
While Latin America had been projected to be Netflix’s first market outside North America, some analysts anticipated Netflix would crack Europe as well.
Wall Street’s reaction to the announcement should come as no surprise because overseas represents the only realistic arena in which Netflix can continue the torrid subscriber growth that’s driven its stock price. Few analysts believe the company can maintain in the U.S. the incredible trajectory it saw last year.
In March, Credit Suisse issued projections that Netflix would grow its domestic subscriber base of more than 20 million subscribers to as many as 69 million worldwide by 2016.
A Barclays Capital report out Tuesday estimated that Netflix could add as many as 3 million subs outside North America by the end of next year. Citi telco analyst James Rivett projected Netflix could take 12-18 months to gobble up about 8% of the 45 million broadband subscribers in Latin America and the Caribbean.
That’s about the same take-rate Netflix experienced in Canada, though Latin America could be more challenging given widely varying broadband penetration and speeds. That’s why traders dreaming of stock prices north of $300 may need to have some patience.
The biggest obstacle in Netflix’s path to international dominance may be the brand’s unfamiliarity outside North America, and some analysts expect Netflix to partner with one or more existing brands to penetrate those new markets. Facebook may be the most logical partner. In recent months, Netflix and the social network have moved closer together; Hastings joined Facebook’s board of directors in June.
Facebook and Netflix seemed like potential rivals earlier this year when Facebook announced an experiment with Warner Bros. to distribute select titles on its platform. But since then both companies have been talking up integration opportunities that could position Netflix to be to video delivery what Zynga has been to social gaming on Facebook.
Facebook has also been pretty vocal about its ambitions to become more of a player in the media biz, and Netflix could be its global partner to that end. The streaming service could take on a more social-oriented user experience under Facebook’s influence.
As globally pervasive as Facebook is, Latin America is actually one of the few spots on the planet where other social networks are viable rivals; the integration of Netflix could offer a competitive edge. That said, Latin America reps a significant piece of Facebook’s audience, with six of its top 20 markets in that region.
Hastings joined Microsoft’s board in 2007, a move that preceded Netflix’s inclusion in XBox Live Marketplace — a key driver of the streaming service’s eventual ubiquity across connected devices, notes Arash Amel, analyst with Screen Digest.
“Netflix doesn’t have any brand recognition outside the United States, so they need Facebook,” Amel said. “If Microsoft was the watershed for streaming domestically, then Facebook is the watershed internationally.”
Meanwhile, there’s plenty of logistical hurdles that stand in Netflix’s way overseas, which may explain why Netflix defied many analysts’ expectation that it would try to crack Europe; the company nearly ventured into the U.K. in 2004 only to beat a hasty retreat.
But given the limited traction other digital players from Apple to Hulu have gained on the continent, as well as the ascendancy there of a similar company, Amazon-owned Lovefilm, Netflix may not feel ready for such a market, where established companies like News Corp. and Canal Plus would also provide stiff competition.
While avoiding Europe may seem pragmatic now, however, such a decision could haunt the company later if barriers to entry only continue to rise as competing services are given more time to play defense in anticipation of the newcomer’s arrival.
As huge and sophisticated as markets in both Europe and Asia are, content costs could be prohibitive and language barriers are numerous.
And then there’s the price of the content itself, which will be relatively cheaper in Latin America given the prevalence of the Spanish language, but the region is still not entirely monolithic.
However, there’s huge upside to be had given the estimated 600 million residents across Latin America and Caribbean and the number of emerging markets experiencing explosive economic growth, particularly Brazil.
In that respect, Netflix isn’t exactly blazing a new trail here, either. The company may already be peeking at DirecTV’s playbook; the satcaster credited growth in its first-quarter revenues to progress made in Latin America.