Why Netflix's CEO Compares His Company to Facebook and Google

What do these tech giants tell us about Netflix's international growth prospects?

Adam Levy
Adam Levy
Jun 5, 2017 at 4:41PM
Technology and Telecom

Netflix (NASDAQ:NFLX) isn't exactly in the same business as Facebook (NASDAQ:FB) or Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google. Sure, Facebook and Google both do video, but Netflix is all about premium content. Nonetheless, CEO Reed Hastings thinks his company has the same mass appeal as both companies, and that bodes well for Netflix's international subscriber growth.

"Most of our growth now is international," Hastings said at Re/Code's Code Conference. "We're about 50/50 in terms of memberships. And if you look at the big internet companies like YouTube and Facebook, they're 80%-85% international and 15% domestic. So we have a long way to go in international."

Considering Netflix still believes it has a good amount of growth left domestically, the streaming service could be absolutely huge if Hastings' assertion is correct.

The front desk at Netflix's Los Gatos, California, office.

Image source: Netflix.

Just how international are Facebook and YouTube?

Facebook is nice enough to break down its users by geographical territories. It lumps the U.S. in with its neighbor to the north, Canada, which combined to have 234 million users as of the end of last quarter. That's just 12.1% of Facebook's 1.94 billion users. That's an even smaller percentage than Hastings threw out in his conversation at Re/Code.

Google isn't as forthcoming with YouTube statistics. According to research group Socialbakers, 80% of YouTube users come from other countries.

That said, both Facebook and YouTube are free for users, generating revenue through advertisements. Netflix, however, requires subscribers to pay. Facebook and Google's domestic revenue split may give a better indication of what's attainable for Netflix.

Last quarter, U.S. and Canadian users generated 49% of Facebook's revenue. Alphabet generated 48% of its revenue from the United States. Meanwhile, Netflix generated 58% of streaming revenue from the U.S. in the first quarter.

So while Netflix does have some ground to make up internationally, it might not be as big of a gap as Hastings is indicating because of the lower average buying power of international Facebook and YouTube users. A better split may be closer to the 65/35 international-domestic subscriber split of HBO and Cinemax.

Netflix is still growing domestically

Surely, there's still a lot of growth left for Netflix -- both internationally and domestically. The company believes it can reach between 60 million and 90 million domestic subscribers in the long term. With 50 million members already, it may be just a couple more years before it reaches the bottom edge of that projection. And if it gets there that quickly, it bodes well for its continued growth up toward the top of the projection.

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The continued growth of Netflix's profitable domestic subscribers will provide Netflix with cash to fuel its international growth with new local originals. The company is investing aggressively around the world with new localized content, and it's had several modest international hits, such as 3% from Brazil.

It's important to remember that Netflix is still only about a year and a half into many international markets. The customer ramp-up ought to be more accelerated than domestically because of better brand recognition and everything Netflix has learned over the past decade of domestic streaming. Still, it's going to take time for Netflix to fill out its catalog in every market with compelling originals and must-see licensed shows and films to give it the same mass appeal as it has in the United States.

Even as domestic subscribers continue to grow, albeit at a slower pace than just a couple of years ago, international subscriber ought to outpace it for a long time to come. And if Netflix succeeds in reaching its long-term view, that means a lot more international subscribers have yet to sign up.