Recently, Netflix announced that it intends to launch streaming services in 200 countries by the end of 2016. As of September 2nd 2015, Netflix has established itself in Japan. It plans to expand into South Korea, Hong Kong, Taiwan and Singapore in early 2016.
This article highlights the favorable market conditions in these target countries, as well as the challenges that may negate its growth.
With over 65 million subscribers in over 50 countries, Netflix has established itself as the world’s leading online streaming platform.
According to a report by Trefis, Netflix’s value primarily depends on its U.S. Streaming Services. The report establishes that a decline in DVD subscribers in the U.S., and a rise in streaming subscribers, may have caused this trend.
In addition to this, the report proposes that the value of Netflix’s international streaming business is relatively lower than its value in the U.S. However, due to the gradual saturation of the U.S. streaming market, this report predicts that Netflix’s international contribution margin will increase. This may have encouraged it to expand internationally.
Favorable Market Conditions
Netflix’s expansion strategy is facilitated by favorable trends that are observed in its target markets.
According to an article on Forbes, Japan has a population of approximately 36 million broadband households. Its average Internet connection speed is one of the fastest in the world, and around 87% of Japan’s Internet connections possess the minimum speed that is recommended for streaming high definition content (4 Mbps). Only 38% of these Internet connections have paid TV subscriptions. This indicates that Japan’s Pay-TV penetration is relatively low, and that its subscription market is still in its infancy; this scenario will benefit Netflix, which is able to grow within its market.
Another article on Forbes speculates that South Korea’s market conditions may be just as favorable. South Korea has approximately 18 million broadband households, and 96% of South Korea’s Internet connections are at the minimum speed recommended for streaming high definition content. Unlike Japan, its Pay-tv penetration is close to 100%; this may also benefit Netflix, as it indicates that South Korean nationals are accustomed to the paid-subscription format.
Whilst South Korea’s prospects are extremely profitable, Hong Kong, Taiwan and Singapore’s markets are also lucrative. These countries have an estimated combined population of approximately 9 million Internet households, and most of the Internet connections in this region meet the minimum speed recommended for streaming high definition content. The article speculates that Pay-TV penetration is high in these countries, hence that their nationals are willing to consume content in the paid-subscription format.
Challenges of Expansion
Netflix will capitalize on these target markets by implementing a tiered pricing structure, and will offer 4K ultra HD services to these countries’ subscribers.
Despite the feasibility of these strategies, Netflix may expect a negative international contribution margin. Experts believe that Netflix may experience low subscriber counts in the initial period. Due to this, they may lack operating leverage in these new markets. In addition, Netflix may incur large marketing costs in its recent target markets. Along with the rise of regional competitors, as well as the looming threat of piracy, these challenges may negate the profitability of Netflix’s international subdivision.
Although Netflix’s bold expansion will introduce several challenges, the company insists that it will be able to complete and profit from its international expansion strategies. Analysts predict that Netflix will achieve operational efficiency as it establishes itself in its target countries, and that its marketing expenses will gradually decrease. Netflix’s international contribution margin is expected to stabilize by 2017, and should be positive from 2018 onward.
Despite these favorable prospects, Netflix should not become complacent. In order to remain competitive in an Asian market, analysts believe that Netflix must offer competitive prices, and must propose a “unique value proposition for Asian consumers”.
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