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By Oren Laurent
President, Banc De Binary
California-based Netflix (Nasdaq: NFLX) has cracked the U.S. home front and has launched successfully in Europe’s English speaking regions. Now, for the next step in its international expansion, the streaming site is pushing further into Europe and seeks to win over audiences in France, Germany, Austria, Belgium, Luxembourg and Switzerland. This will no doubt be an expensive endeavour, but one which, if successful, could pay off for Netflix’s keenest viewers, its investors.
Netflix has an interesting business model. In the last quarter, the company’s revenue rose at a rate of 25% per annum, and the current expansion will likely see revenue continue to climb. Yet, and here’s the catch, revenue does not translate automatically into an appreciating stock price. The company has high costs and must invest significantly in producing content and marketing the product before it even has a chance of attracting users. Past expansions indicate that it takes around 2 to 3 years for an individual market to break even before then becoming profitable.
In 2012 the company launched in Britain, the Netherlands and Nordic countries.
Although the costs of entering the UK and Ireland in January contributed directly to a $43 mln increase in the company’s international loss in the first quarter of 2012, it now looks set to break even next year in these regions.
Chief Executive Reed Hastings will be applying the same long-term strategy and business model to the new markets. The six additional countries being targeted have more than 60 mln broadband households, almost double the number in the European countries where the site already operates. So while the potential is huge, the risk is also greater.
Netflix will encounter two additional key challenges during this stage of its expansion. Firstly, it faces a language barrier and will need to invest significantly in localised content given the preference of natives to watch shows in their own language. Secondly, in order to be taken seriously in Europe, it must contend price and quality wise with the strong presence of pay-TV and streaming competitors.
Despite the challenges, initial estimates predict that the company will acquire an additional 4 to 6 mln new international users from the move. This sentiment and optimism about the tech stock led to its 52-week high of $489.29 on September 9. It seems that in the case of Netflix, given that short term profits are not the goal, even short term traders are considering the long term game. Over the coming months, we can expect the stats to override sentiment. It will become increasing apparent whether or not one of the largest ever international expansion projects will pay off.
