Netflix's (NASDAQ:NFLX) decision to expand into additional markets in Europe should help the company consolidate its international business. The announcement comes shortly after its decision to raise prices, which is not surprising. Geographical expansion requires significant upfront content spending, and incremental profits from pricing adjustments will help. The company also is likely to enter Australia and New Zealand early next year which underscores its high ambitions. The success will, of course, depend upon how well Netflix can compete with local players and the depth of its content. Below, we briefly touch upon the market potential of the new countries in Europe that Netflix plans to expand into. These countries include Germany, France, Austria, Belgium, Switzerland and Luxembourg.
Our $281 price estimate for Netflix stands at a discount of about 30% to the market.
Addressable Market Growth
Netflix currently has more than 13.6 million international subscribers in Europe, Canada and Latin America. Quarterly international subscriber additions peaked in Q4 2013 and came down slightly in Q1 2014 due to seasonality. However, the expansion planned for the second half of 2014 could push quarterly net additions to as high as 2 million. This would lead to a negative impact on profits in the short term, and international losses are likely to increase. However, given that Netflix's current international operations are nearing profitability, it makes sense for the company to take some risk and consolidate its position in the international market.
Given that Netflix has established its presence in the U.K., Ireland and Nordic countries, it is natural for the company to expand into other regions of Western Europe which offer the best growth potential. These include Germany, France, Austria, Belgium, Switzerland and Luxembourg. A common theme across these markets is high internet penetration and fast broadband speeds. The table above shows the total addressable market for Netflix. The combined population of these countries stood at 175.7 million at the end of 2012, with the total number of internet users exceeding 141 million. Assuming roughly 2.65 persons per household (a figure similar to that for the U.S. in 2010), Netflix's addressable market stands at nearly 54 million potential subscribers. If the company can get to 30% of these households in the long run, it could earn incremental revenues of roughly $1.75 billion annually. A significant portion of this is already incorporated in our forecasts for international subscribers.
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