International markets have been crucial to Netflix's (NASDAQ:NFLX) growth in recent quarters as the streaming giant's subscriber additions in the U.S. have slowed down as that market moves toward saturation.

Netflix shares were punished in the middle of 2018 after the company failed to meet its subscriber growth targets, coming up short both domestically and internationally. But the company hasn't taken long to get back on track, with international paid memberships jumping 40% year-over-year in the fourth quarter while paid U.S. memberships jumped 11%.

So Netflix will be relying on markets abroad for the majority of its growth going forward, but investors shouldn't forget that it will face some difficult challenges on this journey. Let's take a look.

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The content challenge

Netflix's international expansion will force the company to create more content that resonates with the markets it is getting into as it runs into local competitors that already have regional content.

Netflix initially failed to crack the Indian market thanks to a shallow content library and lack of regional programs. Indian consumers were unwilling to pay high subscription costs for Netflix's limited content library, as the competition was offering more local options at far lower prices. When Netflix started developing India-specific content based on themes liked by the Indian audience, its growth picked up the pace in that market.

Not surprisingly, Netflix is now going all out to develop international content. According to Netflix International Originals Vice President Erik Barmack, the company will soon start producing around a hundred non-English language series for international markets.

But producing so many shows for so many markets will lead to higher costs. Netflix has already been burning a lot of cash, and it seems there won't be much improvement on this front thanks to its international expansion.

The pricing challenge

Netflix's international growth means that it has to come up with different pricing structures to suit the sensitivity of each market. For instance, Turkish users can get a Netflix subscription for just $3.27 a month. Subscribers in Argentina, Brazil, Japan, and Mexico don't pay more than $6 a month for streaming Netflix, which is much cheaper than what users in the U.S. pay. You also have to consider the price of a Netflix plan as it compares to a region's average income.

Netflix is reportedly looking to experiment with lower pricing tiers in some markets and that would be a good idea if it wants to be more than a niche players in markets where there is cheaper local competition.

The infrastructure challenge

The lack of speedy internet across the globe poses yet another challenge for Netflix, especially in developing markets. This is something out of the company's control, but it has the potential to harm Netflix's long-term international growth.

Africa is the world's second-most-populous continent, with more than 1.2 billion people. The median age of 19.7 makes it the youngest population of all the continents, presenting Netflix with a solid opportunity to grow its business by appealing to young Africans. But the problem is that only 22% of the African population has internet access, and the governments don't seem to be too interested in boosting internet penetration.

Not surprisingly, internet speeds in Africa are slow and services are expensive. According to one set of data, a broadband user in Namibia would have to shell out over $380 each month for an average internet speed of just 2.62 megabits per second (Mbps). For comparison, the average cost of a broadband plan in the U.S. is $66 a month, while the average download speed is around 95 Mbps.

The lack of fast and affordable internet in a market as big as Africa presents a major challenge for Netflix's long-term growth, but the company is doing its bit to overcome this obstacle.

Netflix has deployed dedicated servers in Africa in the past so that users can stream video faster. Additionally, it is using its video compression technology to reduce data consumption without diluting the viewing experience.

It isn't surprising to see Netflix focused on removing the barriers that it faces in markets abroad by producing relevant content and addressing infrastructure and price-related challenges. That's the right thing to do considering how important international markets are for the company.

 

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.