Netflix Wants to Be Everywhere but China

Netflix (Nasdaq: NFLX  ) has been quite the globetrotter these days. By the time it launches its streaming service in four Scandinavian countries later this year Netflix will be available in 51 different countries.

That's not too shabby for a company that was only breaking into Canada as its first expansion market two years ago.

However, the fast-moving flinger of flicks appears to be in no hurry to enter the world's most populous market.

Seeing red in China
"It's unclear in the long-term how it might work for us in China," Hastings said in a Wall Street Journal interview -- published on Wednesday -- when asked if Netflix would eventually be available all over the world. "But if you said almost everywhere other than China, I'd be pretty confident we'd be there in less than 10 years."

All but nixing China from the expansion menu may seem premature. The country continues to embrace many free market ways, and it recently overtook the U.S. to become the largest market of Internet users.

However, Hastings is right to be cautious. For starters, there's already a major player in video streaming.

Youku (NYSE: YOKU  ) -- after completing its acquisition of Tudou this summer -- commands roughly a third of the Chinese streaming market. Youku joined forces with Time Warner (NYSE: TWX  ) to launch Youku Premium last year, and the pay-per-stream platform has gone on to land other leading American and Chinese movie studios.

It also probably isn't lost on Hastings how badly non-Chinese companies have fared in taking on the hometown faves. Google (Nasdaq: GOOG  ) figured that it could be the top dog in China the way that it is in many countries all over the world. It never happened. Big G was far behind Baidu (Nasdaq: BIDU  ) long before it staged its partial retreat out of the country. It may have left on principle, but Google was never going to be more than a distant silver medalist in China.

There may be an opportunity if Netflix is able to partner with a Chinese company, but Netflix appears more likely to break into neighboring Asian markets before it even entertains the notion.

It's a small world after all
Then again, sidestepping China may not be such a bad idea. Investors haven't exactly profited from Netflix's global push. The stock peaked last summer at just over $300, when the service was only available in the U.S. and Canada. A whopping 45 -- and soon to be 49 -- market rollouts later, Netflix has shed more than 80% of its market value.

The international expansion obviously isn't the lone culprit, but it may very well be an unlikely accomplice. The video giant has warned of quarterly deficits as it invests in new overseas markets, and that has made it difficult for Netflix to woo value investors shocked by the stock's earnings multiples.

There will hopefully come a time when Netflix is so globally pervasive and profitable that breaking into new markets won't bump its profitability. One would think that Netflix will eventually get better about that, keeping costs in check and lining up its content licensing deals so it can overcome initial losses sooner.

However, no one should be surprised that by the time that Netflix gets to that point, China will be the only expansion market left.

I've streamed enough
I initiated a bearish CAPScall rating on Youku since its IPO popped. It's been the right call so far, but the company's long-term prospects are starting to look more appealing. I may switch gears on Youku soon.

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The Motley Fool owns shares of Baidu.com, Netflix, and Google. Motley Fool newsletter services have recommended buying shares of Netflix, Baidu.com, and Google. Motley Fool newsletter services have also recommended creating a bear put ladder position in Netflix. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Netflix. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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  • Report this Comment On September 30, 2012, at 10:32 AM, Geoge wrote:

    We don't have to wait for Netflix to come to us. I'm using Unotelly to watch Netflix from Germany. Highly recommended.

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