How to Grow a Global Business and Alienate Skeptics

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Netflix (NAS: NFLX) is stretching its red tendrils further and faster than you might've thought.

Reports from film industry rag ScreenDaily confirm earlier reports that Netflix streams are coming to Spain in 2012. That market is ravaged by heavy piracy, so that's an important test of the Netflix model versus other ... let's call them "low-cost services." Observers say that piracy downloads outnumber theater ticket sales by a factor of 4-to-1 in this market. Even Apple (NAS: AAPL) reports having a tough time with its recent launch of iTunes service on Spain.

We already knew this, but it's always good to see independent confirmation of early rumors. ScreenDaily quotes an executive of European movie production organization FAPAE this time.

But wait, there's more!
But that's not all: Another report from the same periodical says that "select Asian territories" are next on the Netflix expansion schedule.

Densely populated and broadband-connected markets like Japan and South Korea would be on tap "by the end of next year," ScreenDaily says. Here, we don't have any named sources -- just the usual "people with knowledge of the situation." That said, Southeast Asia with its high-tech tendencies must have Netflix drooling at the business opportunity. All of this also lines up with Netflix's stated ambition to launch into new markets in the first quarter of 2012.

In most of these new markets, Netflix faces only token competition from the local cable companies' on-demand services and premium channels, perhaps with a sprinkling of home-cooked digital offerings. But the all-you-can-eat subscription approach remains almost unique even here, as everyone from iTunes to Blockbuster Total Access under the wing of DISH Network (NAS: DISH) sells rentals piecemeal. Even the Amazon.com (NAS: AMZN) Instant Video service offers mainly pay-per-view rentals with less than 10% of the available titles going into the Prime subscription product.

So by the end of 2011, Netflix intends to blanket North and South America with several further expansions already planned for 2012. At the same time, the company is making dramatic changes to its domestic pricing plans. Is Netflix moving too fast for its own good, or just striking while the iron is hot?

A Fool's current analysis
The way I see it, Netflix is blazing new paths across the media landscape everywhere it goes. In the DVD-mailing market, it killed Blockbuster and made mighty Wal-Mart (NYS: WMT) cry "uncle!" The Redbox service by Coinstar (NAS: CSTR) and the equivalent Blockbuster Express boxes have a tendency to follow Netflix moves like the 30-day new release delays and even price hikes. Yep, Coinstar is testing 15%-20% higher prices these days.

In short, the Netflix model scares traditional media giants, and they're not likely to cut the trailblazer off at the pass until these sacrilegious business practices have been proven to work. But work they do (said Yoda), leaving Netflix to grab the first-mover advantage largely unopposed.

And then the virtuous cycle at the heart of the Netflix model kicks in. More subscribers means more and better content licenses, more low-cost word-of-mouth marketing, and a bigger R&D budget to expand on the company's technical head start. All of that leads to even more subscribers, and then we're back at square one again. Lather, rinse, repeat until every reasonably attractive market has reached full saturation. That will take many, many years.

Netflix isn't protected by the high barriers to entry that Sirius XM Radio enjoys, for example -- satellite launches are expensive, but online video is technically a very inexpensive product. But as we've seen, the company sits behind a moat of industry inertia and the reputation afforded by more than 20 million subscribers. And the lack of expensive hardware makes it both cheaper and easier to expand worldwide.

Foolish takeaway
So I remain a faithful Netflix shareholder as the company sets its sights on distant shores. As for the much-maligned new prices, I can't find a better entertainment deal than $16 a month for never-ending catalog streams plus the occasional fresher DVD. After getting over the sudden 60% sticker shock, I think most subscribers will arrive at the same conclusion. We'll know for sure when Netflix reports third-quarter results in the middle of October.

Netflix is a Freestyle Love Supreme investment, according to chief Fool Tom Gardner. After this raft of expansion hits plus a nearly 20% drop from recent all-time highs, I think the stock looks cheap here in relation to mid-term and long-term growth. I call it a correction, but others see the beginning of the end for this story stock. Where do you stand? Discuss in the comments below.

At the time this article was published Fool contributorAnders Bylundowns shares of Netflix but holds no other position in any of the companies discussed here. The Motley Fool owns shares of Apple and Wal-Mart Stores.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com, Apple, Wal-Mart, and Netflix. We have also recommended creating a diagonal call position in Wal-Mart and a bull call spread position in Apple, as well as buying puts in Netflix. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. You can check outAnders' holdings and a concise bio, follow him onTwitterorGoogle+, or peruseour Foolish disclosure policy.

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