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- Netflix's competitive edge from knowing what is watched and what is not.
- Netflix's control of its content acquisition costs.
- Netflix's laser-like focus on being the best at what they do.
Today, I'll show how using those three aspects will help grow Netflix well beyond its current subscriber base of 23.6 million. Tomorrow, I'll wrap it up with a discussion on the threats Netflix faces and how it's meeting them.
Canada, the first of many
In the third quarter of last year, Netflix launched a streaming-only service in Canada. This was a test bed, giving it a feel for how the service would work in foreign countries, working out details on foreign licensing, measuring subscription sign up rates, etc. -- all the aspects of offering a domestic service abroad to work out the inevitable kinks that arise when transitioning to a different environment. All right, Canada is not that different from the U.S., unlike, say, India or Brazil. However, the controlled move into a single foreign country did let Netflix see how this foreign thing might play out.
As it turned out, it worked much better than expected. Netflix expects to reach 1 million subscribers as early as this quarter and to reach break-even on operations within the first year, much sooner than the two years management originally expected.
There have been problems with much more restrictive bandwidth caps enforced by Canadian ISP providers, but that's one of the kinks Netflix needed to find out and find a solution for. That turned out to be a change in its streaming to a more acceptable bandwidth size at the expense of a bit of quality. Fortunately, that's been fairly well-received, according to the company.
Who's No. 2?
Given the success in Canada, Netflix will be moving into a second international market in the second half of this year. Management hasn't identified which country yet, but it has said that initial testing has gone well. Personally, I suspect it is the United Kingdom. After all, Netflix cannot afford to let Amazon.com (Nasdaq: AMZN ) build up too much of a lead through its Lovefilm subsidiary.
Management is keeping its expectations conservative -- expecting this second market to be break-even in two years -- but if the move goes smoothly, it'll accelerate the international expansion to two or more countries per year starting next year. Europe and Central and South America seem likely candidates. Parts of Asia, as well.
There are more broadband connections outside the U.S. than here at home. That's a big opportunity Netflix will be addressing over the next several years. As I mentioned yesterday, according to Jim Cramer, people outside the U.S. "want Netflix bad."
Don't forget the U.S.
International expansion doesn't mean it will ignore its home country, either. As of the last quarter, it had 22.8 million subscribers here in the states. That's essentially the same number that Comcast (Nasdaq: CMCSA ) has. Netflix is growing, however, while Comcast's number of video subscribers is slowly declining.
According to the Census Bureau, there are 117.5 million households in the United States. With 63.5% of households having broadband access as of 2009, according to OECD, that's a potential of roughly 75 million households that could be Netflix customers. Doubling (or more!) the number of households using Netflix in the U.S. is not out of the realm of possibility.
Plus, Netflix has been publicly speculating about switching from a household subscription model to an individual model. Even if that's at a lower price point, the potential gain in revenue is enormous if it can successfully move that way.
Regardless of the actual number possible, I certainly think it's much higher than the 23.6 million Netflix currently has. What's the upper limit? 40 million? 100 million? With a world population approaching 7 billion people, is a 5% penetration level -- 350 million -- too high, if it moves entirely to an individual membership model?
As it collects more and more information about what people watch and brings in more revenue from more subscribers to spend on acquiring content, Netflix will be able to get content that its subscribers will watch, which will bring in more subscribers. The virtuous cycle. Netflix is just beginning to run it for all it's worth.
Come back tomorrow when I wrap up this series by discussing the five major challenges Netflix is facing.