Netflix surprised Wall Street this week with an aggressive new target: It plans to grow its global footprint to a whopping 200 countries within the next two years. And, the company, claimed, it can do so while maintaining profitability.
That ambitious goal led several analysts to raise their price targets on Netflix’s stock, which is up more than 20% since the streamer announced fourth-quarter 2014 earnings. The stock was lifted in no small part because Netflix topped expectations on international subscriber adds of 2.43 million (vs. previous guidance of 2.15 million).
But Netflix — already the world’s biggest subscription VOD service, operating in 50 countries — will face a host of challenges in expanding to new territories in that relatively short time frame. Those range from broadband limitations in individual markets to varying local regulations, as well as how comprehensive Netflix’s global content-licensing deals are.
“When you go to launch an over-the-top network globally, it’s not that simple,” said Howard Bass, EY’s global media and entertainment advisory leader. “You can have a framework to scale globally, but you need an understanding of each local market. You need to be learning all the time.”
Bass, who declined to comment specifically on Netflix’s plans, said the cost of Internet bandwidth and the adoption of broadband is a crucial factor. Also important is which devices consumers use in individual countries — in many countries, mobile phones are the primary access device, and wireless services often include data-consumption limits that make watching online video infeasible.
The pace of Netflix’s outline is daunting: On average, Netflix would be launching in around six new markets per month over the next 24 months.
Some analysts believe Netflix’s rollout target is achievable. Expanding to 200 countries by 2017 “is aggressive but possible, with the rapid proliferation of connected devices,” BMO Capital Markets managing director Edward Williams wrote in a research note. “Perhaps more importantly, this signals the timing of when the heavy investment phase could end.”
Considering the CIA’s World Factbook service tracks population for 240 countries and other entities, reaching 200 countries would give Netflix virtually global coverage. It would possibly include such far-flung locales as Kyrgyzstan (114th biggest in terms of population) and Fiji (No. 162).
Of the 150 or so new markets, many — particularly smaller ones — “will not be launched with the same level of localization as Netflix has undertaken with international launches to date (less local dubbing, less local content, etc.),” UBS analyst Doug Mitchelson wrote in a note. “Clearly, management feels the need to get to market globally as broadly as possible as quickly as possible, but it is unclear at this point whether there will be an international investment long tail in 2017 and beyond.”
Broadband penetration in particular could put a damper on Netflix’s global reach. While 78% of households in developed countries have Internet access, only 31% of households in developing countries were projected to be connected by the end of 2014, according to the International Telecommunication Union.
Netflix said it accelerated its global-expansion strategy after achieving strong progress in its existing markets, which span Canada, Mexico and Latin America, and Europe. Execs also cited growth of the Internet in general across the globe, including on phones, tablets and smart TVs.
“We already offer Netflix in about 50 countries and have learned a great deal about the content people prefer, the marketing they respond to and how to best organize ourselves for steady improvement,” Netflix CEO Reed Hastings and CFO David Wells said in their Q4 letter to shareholders.
As for content-licensing challenges, chief content officer Ted Sarandos said Netflix has increasingly been looking for worldwide distribution rights, for its originals and off-network pickups. He cited global deals with Sony Pictures Television for “Better Call Saul” and with Warner Television for “Gotham.”
“It might be that there are some cultural barriers to U.S. content as we get into more exotic markets,” Sarandos said on a call with investors Tuesday. “But my guess is that we’re going to continue to see our original programming travel and carry the Netflix brand around the world.”
However, other challenges remain. Each individual country will require unique attention in terms of product packaging, marketing and delivery. Many countries have very specific regulations about privacy and how companies bill customers, according to Bass. In addition, payment systems in each country are very different: “You have to work out the right payment system and currency,” Bass said. “People pay with prepaid phone cards and other mechanisms.”
The issues, of course, are not insurmountable. In France, where Netflix launched last fall, the company successfully navigated a myriad of tax and content laws, including one stipulating that movies cannot be made available on SVOD until 36 months after theatrical release.
In the third quarter of 2014, Netflix also launched in Germany, Austria, Switzerland, Belgium and Luxembourg. “With all of the additional new original content set to premiere in 2015, it will be a big year for us in France, Germany and our other recently launched markets,” Hastings and Wells wrote.
In late Q1 2015, Netflix plans to launch in Australia and New Zealand, and the company expects to add “additional major countries” later in the year.
As for when it might enter the world’s most-populous market — China — Netflix is more circumspect. “For China, we are still exploring options — all of them modest,” Hastings and Wells wrote. “We’ll learn a great deal if we can successfully operate a small service in China centered on our original and other globally licensed content.” On a call with investors, Hastings added that in China, Netflix needs to get a license to offer service, and “It’s not 100% clear we’re going to be able to do that.”
Netflix wants to become a global brand as fast as possible for three reasons: to grow revenue faster, which will consequently let it develop and license more content; to be able to source content from around the world; and to gain efficiencies by licensing content on a truly global basis.
At the same time, Netflix’s Hastings and Wells added a note of caution in their message to investors: “As with our initial round of international expansion, we’ll get some things wrong and do our best to fix them quickly.”
