After losing 200,000 subscribers in the first quarter of 2022, Netflix (NFLX 3.04%) heavily shifted its priorities. As the U.S. streaming market becomes saturated with increasing competition, the company has begun looking at opportunities for growth abroad. Here's why Netflix is right to continue expanding internationally.
New markets bring new opportunities
After a disappointing first quarter, Netflix has turned 2022 into the year it heavily invests abroad. In April, Netflix penned a multi-film deal with Japanese studio Colorido, followed by a partnership with the Kenyan government to produce three films. Then in early May, co-CEO Reed Hastings unveiled a massive slate of Italian content alongside the opening of a new Rome office.
In March 2017, with more than 93 million subscribers worldwide and Netflix offered in more than 190 countries, Hastings predicted the company would pass the 100 million subscribers mark soon, with at least half of that number coming from abroad. In Q1 2022, Netflix reported 221.6 million global subscribers, with over 66% coming from outside the U.S. and Canada.
Additionally, a major drive for Netflix's focus abroad seems to be the saturated U.S. market. In Q4 2016, the company had 49.4 million subscribers in the U.S., after having 44.7 million in 2015 -- a growth of 10.5%. However, in Q4 2015, the streaming platform had 30 million international subscribers, which then grew by 47.8% to 44.4 million in 2016. The stark contrast in U.S. and international growth suggests the company has reached a saturation point in the U.S.
When looking at more recent financials, Netflix's 2021 annual report states that 90% of paid membership additions over the year came from outside the US and Canada. If the company wants to grow subscribers, expanding into less competitive markets is the optimal way to reach a larger audience.
Diverse content creates more value
A recent study found that 67% of consumers view the anime and manga streaming service Crunchyroll as a platform with no easy substitute, while 33% see it as just nice to have. Netflix's deal with Colorido will add a variety of new anime content and allow the company to provide access to stories within an exceedingly popular genre, making it a direct competitor to niche platforms like Crunchyroll. Local-language content from numerous countries will help Netflix offer more value to its subscription, making it less likely to be dropped by consumers.
Multi-language content has already proved successful for Netflix in the U.S. and abroad. Korean drama Squid Game currently holds the record for the most popular Netflix series of all time, racking up 1.65 billion viewing hours in its first 28 days. While the rising popularity of Korean culture is something Netflix can cash in on, the Spanish drama Money Heist also saw success when the series finale received almost 190 million viewing hours the week it premiered.
As Netflix expands to other countries and continues creating local-language content, the streamer's diverse library will add value to its subscription. While Netflix may have to contend with the lower cost of living and therefore varying subscription prices in different countries, the millions of possible new members from untapped markets are worth more.
As of 2021, the lowest-priced Netflix subscription costs $3.28 in Argentina. In March 2022, Netflix had a total of 74.5 million subscribers in the U.S. and Canada -- 20% of the area's population. If Netflix garnered the same percentage in Argentina, the company would bring in an extra $29.4 million a year at little additional cost to the company.In India where Netflix costs $6.81, and the population is substantially larger, that number would be $1.8 billion.
What to look out for
Netflix stock may be down 70%, but don't count it out just yet. The sudden increase in competition has forced the streaming giant to rethink its place in the industry and revamp its business model -- expanding abroad is only one facet of that. It would be prudent to be patient as the changes occur and keep an eye out for where the dust settles. The company's international subscription growth rate is a good figure to watch as it will indicate how positively consumers outside the US are embracing the streaming platform.
It will also be essential to note how the competition is expanding abroad. For instance, Disney is steadily expanding its streaming service overseas, now available in just over 100 countries. However, when looking at Europe, Netflix has reached or surpassed the required 30% local content quota set by the European Commission, more than any other streaming platform. Disney+ is at about 10%. As one of Netflix's biggest competitors, the higher that number grows, the less influence the streaming giant will have in those markets. If Netflix can continue to dominate abroad, its recent business changes will pay off.
