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Netflix Just Showed You Another One of Its Competitive Advantages

By Jeremy Bowman – Sep 20, 2016 at 10:15AM

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The video streamer signed a deal with Liberty Global last week, the biggest international cable provider. Here's why it's so important.

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Netflix (NFLX 0.75%) scored another coup in its quest for international dominance last week.

The leading video streamer forged a deal with international cable provider Liberty Global (LBTYB 0.23%) to be included on its set-top boxes. With 29 million customers in 30 countries, Liberty Global is the largest international cable company in the world. Liberty called the deal a "multi-year partnership" in a press release, noting it "follows the successful launch of Netflix on Virgin UK," now part of Liberty Global, in 2013. Netflix CEO Reed Hastings said it allows "millions of our mutual customers around the world to easily access the broadest range of TV shows and movies" and packages Netflix "into the familiar, easy-to-use cable box," making both services more appealing.

Netflix will launch first on Liberty Global boxes in the Netherlands and is expected to reach all of the company's customers in 2017.

No ugly American here

The Liberty Global deal is key as it will help Netflix reach so many more customers in a wide swath of countries, but it's not the first such agreement Netflix has made abroad. In fact, the red-lettered streamer has often been welcomed by international cable companies, while at home it's seen as a disruptive force to cable profits.

After years of jousting, Netflix finally scored a similar partnership with Comcast, the leading domestic cable provider, but it's consistently received a warmer welcome abroad. In years past, Netflix has teamed up with Com Hem Group in Sweden, Deutsche Telekom in Germany and Austria, which even offered six months free to some new subscribers, as well as elsewhere in Europe and Australia, New Zealand.

International providers view a partnership with Netflix as a way to score an advantage over competitors, unlike domestic providers, which often see it as direct competition. An executive from France's cable provider Orange told The Wall Street Journal, "We thought we would be stronger with Netflix being on the set-top box, rather than Netflix developing itself on other devices."

The international opportunity

The domestic market continues to contribute the majority of Netflix's revenue, with 47.1 million subscribers, but the international market remains its biggest opportunity. After expanding at a breakneck speed abroad, the company completed its international expansion in January, and now has 36 million members outside the U.S.

Time Warner's (TWX) HBO, which Reed Hastings sees as Netflix's biggest rival, has 49 million subscribers domestically, including Cinemax, but nearly double that figure abroad with 96 million subscribers.

Netflix offers a similar product to HBO, but the key differences are brand awareness, availability, and content. With its $6 billion annual expenditure in content, Netflix should soon narrow the content gap, and its partnerships with cable providers like Liberty Global help boost its brand awareness and availability in countries where it's launched within the last two or three years. Given that, there seems to be no reason why it wouldn't eventually equal, if not surpass, HBO's subscriber distribution with two international subs for every domestic one.

Management has outlined a goal of 60 million to 90 million subscribers in the U.S., meaning it could reach 150 million international subscribers or more if the above pattern holds true. With 225 million total subscribers, Netflix would generate $27 million in revenue annually, more than triple what it's on track to do this year. 

It's not going to happen overnight, but Netflix's partnerships with cable providers like Liberty Global and Comcast give it an advantage over other streamers. While Hulu and Amazon.com are seen as rivals to Netflix, they have little presence abroad, making Netflix the only true global streaming brand. Local players will exist all over the world, but a start-up won't have the brand power to attract partnerships from big-name cable companies, and being included in set-top boxes gives it the legitimacy of an HBO.

As those partnerships attract new subscribers, Netflix will be able to spend even more on content, making it more attractive to new subscribers, and strengthening its advantage over other entertainment networks.

Jeremy Bowman owns shares of Netflix. The Motley Fool owns shares of and recommends Amazon.com, Netflix, and Time Warner. 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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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$240.83 (0.75%) $1.79
Comcast Corporation Stock Quote
Comcast Corporation
CMCSA
$31.00 (2.11%) $0.64
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$120.94 (4.37%) $5.07
Time Warner Inc. Stock Quote
Time Warner Inc.
TWX
Liberty Global plc Stock Quote
Liberty Global plc
LBTYB
$17.29 (0.23%) $0.04

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