You can now watch Netflix (NASDAQ:NFLX) just about anywhere in the world. The company expanded to 130 new countries in January, and has just a couple more key markets to conquer -- namely, China -- before its global expansion is complete.
A full 61% of American internet users subscribe to streaming video on demand (SVOD) -- far more than people in other countries. There are many local Netflix competitors around the world, but only 11% of French people, for example, subscribe to an SVOD service, according to a recent survey by Futuresource Consulting as highlighted by eMarketer.
Is such low penetration in international markets a sign of the huge opportunity ahead for Netflix, or is it an indication that demand for its product isn't as great in markets outside of the United States?
The real competition in Europe
Streaming video on demand may not have caught on as much in European countries like France (11%), Germany (30%), and the U.K. (33%) because pay-TV operators are offering their own over-the-top services. As of the end of 2013, almost all of Europe's broadcasters had developed their own online streaming service for catch-up viewing. Pay-TV operators also run their own platforms for on-demand viewing.
"In Europe we have seen pay-TV operators' own services becoming increasingly strong and well-programmed," Richard Broughton, a research director with Ampere Analysis in London told Bloomberg.
After seeing the impact Netflix had on traditional TV distributors in America, many operators in foreign markets wised up. As a result, not only do they have a better competing product with regard to streaming video, networks have strategically held back content from services like Netflix.
As a result, the SVOD services in Europe simply aren't as good as Netflix in America. That includes Netflix itself, which doesn't have the same rights in other countries as it does in the United States, and its local programming in some countries is lacking.
International growth isn't there yet
Netflix can't just waltz into a new market and expect to grow extremely popular. It needs its product to be just as compelling as it is in the United States.
While Netflix saw exceptional growth in international markets during the first quarter, adding 4.5 million subscribers, it was largely due to pent-up demand and free trials.
International subscriber growth fell to 1.5 million in the second quarter, down from 2.4 million the year before despite the more than 130 new markets it added since then. That number reflects higher churn from the influx of free trials in the first quarter and a price increase in more established markets.
Moreover, management expects to add just another 2 million international subscribers this quarter, down from 2.7 million last year.
What Netflix has to do to win Europe
What Netflix has to do in order to accelerate its growth internationally is to establish a better product than currently exists. That'll be more difficult than it was in the United States, since it's facing more competition and its suppliers -- television networks -- are warier of Netflix than they were just five years ago.
To that end, Netflix is investing in original programming in more than a dozen countries including Germany, Spain, Italy, Korea, Japan, France, Brazil, and Cambodia, according to Chief Content Officer Ted Sarandos. But Netflix is being selective in the foreign-language original projects it pursues.
Broadly speaking, Netflix says it doesn't "plan on trying to outcompete local TV networks in local content in every nation of the world." Instead, it will rely on English-language content in most countries. To its credit, Netflix does offer dubbed versions of its English-language originals.
Netflix's international appeal will likely be limited by its willingness to spend on local content. The good news for investors is that's a factor that's mostly within management's control, so if it makes economic sense to invest in a new market, Netflix will pursue that opportunity.
With the relatively low penetration of SVOD services in international markets, Netflix still has a big opportunity to make an impact.
Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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