When Will Netflix, Inc.'s International Growth Pay Off?
Since Netflix announced that it plans to expand to six new countries in Europe this fall, investors have been eagerly anticipating its future subscriber growth. However, Netflix investors are also wondering how long it will take for Netflix's new markets to contribute to the company's earnings.
That's a trickier question. The task is made particularly difficult by the fact that Netflix has not provided country-specific profitability data for several years for competitive reasons.
Netflix is expanding rapidly, but this growth is crimping profits in the near term.
Nevertheless, by looking at the maturation of Netflix's international markets as a whole, we can get a fairly good sense of how new markets tend to develop. Assuming Netflix's new markets follow the existing pattern, they will probably turn profitable around 2017.
Netflix's international growth
Netflix began its expansion beyond the U.S. in September 2010, when it launched in Canada with a streaming-only offering. It's hard to believe now, but at that time, Netflix didn't have a streaming-only plan in the United States! Streaming was simply a free add-on to Netflix's DVD-by-mail service.
Netflix has expanded its global footprint significantly since then, with forays into Latin America, the U.K. and Ireland, the Nordic countries, and the Netherlands. Here are the details of Netflix's international expansion so far.
Date of Entry
Age (at 6/30/14)
Number of Broadband Households Today (Estimates)
Netflix is now available to nearly 110 million broadband households outside the U.S., of which slightly more than half are in the developing countries of Latin America, with the remainder in Canada and Western Europe. That compares with roughly 90 million broadband households in the United States. Netflix's international total addressable market is already larger than its domestic TAM.
Estimating time to profitability
Nearly four years after launching its first international market, Netflix is finally on the verge of earning a profit on its international operations. In April, Netflix projected that its international contribution loss would shrink to from $35 million in Q1 to just $12 million in Q2, and that its current international markets as a group would be profitable before the end of 2014.
Using a weighted average based upon the number of broadband households in each market, the average age of Netflix's international markets is 2.6 years. Netflix isn't profitable outside the U.S. just yet, which means it's taking nearly three years (on average) to reach profitability in Netflix's early international markets.
However, the large size of the Latin American market distorts this picture. It represents more than half of Netflix's current international TAM, but Netflix has had more difficulty growing in Latin America than in developed markets. Household income is lower (even among households with broadband), e-commerce penetration is lower, piracy is common, and the demand for English-language content is lower.
If we exclude Latin America, the weighted average age of Netflix's other international markets is 2.4 years. These developed country markets probably reached the breakeven mark recently. That implies an average time to breakeven of a little more than two years, which is close to Netflix's original goal of turning profitable within two years of opening a market.
(This depends on the assumption that Latin America is still posting losses, but relatively small losses. It seems unlikely that Latin America is profitable yet because of the various problems Netflix has confronted there -- however, if it was still generating lots of red ink, Netflix presumably would be looking to cut its losses and exit the market.)
Projecting profitability in Netflix's new markets
Based on Netflix's experience in its current international markets, it appears to take two to three years for a typical international market to reach profitability. Netflix's new crop of markets -- France, Germany, Belgium, Luxembourg, Austria, and Switzerland -- should be easier to penetrate than Latin America.
On the other hand, Netflix may have a slightly harder time reaching profitability than in Canada and its other European markets. English fluency is much lower in the six new markets than in any of Netflix's current international markets outside Latin America. (Indeed, it's not surprising that when choosing new markets, Netflix picked the low-hanging fruit first.)
Additionally, would-be rivals have had extra time to prepare for Netflix's arrival in these new territories. There is still plenty of room for Netflix to be successful, but it will be battling for users and content from day one, whereas it created the streaming video market in Canada.
All told, it will be difficult for Netflix to turn profitable in its upcoming new markets within two years. A more realistic timeframe is 2.5 to three years. This means that barring any unforeseen shocks, investors can expect the profits to start flowing from Netflix's new markets in 2017.
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The article When Will Netflix, Inc.'s International Growth Pay Off? originally appeared on Fool.com.Adam Levine-Weinberg is short shares of Netflix. The Motley Fool recommends and owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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