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Netflix Better Get Its Passport Ready

By Rick Munarriz - Aug 24, 2016 at 9:06AM

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One researcher sees big potential overseas for the leading premium video service, even as it reportedly closes down its office in Paris.

Image source: Netflix.

Netflix ( NFLX -2.38% ) is on the move overseas, in more ways than one. Variety is reporting that Netflix is in the process of shutting down its office in Paris. The source claims that Netflix will move those operations to its European headquarters in the Netherlands. 

This isn't a retreat. It's not Frexit, so stop trying to make that a thing. In fact, the initial reference to Netflix being on the move also refers to a report out of industry researcher IHS Markit. It suggests that Netflix's international operations will become an even bigger component of this growth story in the coming years.

It's a good time to bet on Netflix as it broadens its reach internationally. It's a good time to collect passport stamps.

French diss

Netflix didn't need an office in France. Continental Europe's operations are centralized in Amsterdam. However, with France proving particularly challenging initially with a nearly 20% VAT, stiff France-sourced content requirements, and an insane 36-month block on new titles that screen theatrically it seemed like a nice enough gesture to win the locals.

Variety's source rejects claims that Netflix is shutting down its French office in response to the burdensome tax hurdles, pointing out that Netflix is currently not turning a profit in the country. With an estimated 750,000 subscribers -- less than 1% of its overall base and just 2% of its international audience -- it just may never be a market that Netflix dominates no matter how much it bends to appease. 

Bowing out of France in terms of having a physical corporate presence won't win over the locals, but it's not personal. Netflix just wasn't getting the same kind of love that it was putting into the relationship.

The weight of the world

It will be interesting to see if the move has an impact on French subscribers in the near term, but global domination remains the marching orders at Netflix. International subscribers now represent 43% of the user base and 39% of the revenue at Netflix, and that's shifting with every passing quarter. A meaty 11.7 million of the 17.4 million total subscribers that it gained last year were international customers.

U.K.-based researcher IHS Markit issued a head-turning report this week, concluding that the number of international subscribers will overtake the domestic head count by 2018. It sees Netflix hitting the once-seemingly incredulous mark of 100 million global subscribers that year. 

It gets better. By 2020, IHS Markit expects that more than half of the $13.2 billion in revenue that it takes in ($7 billion) will be international. This may all seem overly optimistic, but if anything, a 2014 report issued by IHS Markit on international growth has actually proven to be too conservative.

A lot can go wrong between now and then, but a lot can also go right. It's clearly international growth that's providing the top-line pop at Netflix these days as the stateside audience settles in. Netflix won't be a winner in every country, but it doesn't have to when this is a team sport. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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