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Netflix, Inc. International Expansion: A Test For Margins

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Netflix, Inc. (NASDAQ:NFLX) has expanded internationally, primarily in Europe, living up to its slogan, “Have content, will travel.” However, the potential of this strategy is still not known with the company moving into new markets, says a report from the Wall Street Journal.

Canada similar to U.S. market

Netflix shares dropped after the company reported less than expected net subscriber additions in the United States for the third-quarter. International subscriber additions totaled 14.4 million in the latest quarter and garnered mixed reactions. The company performed below the level it forecast for net additions. However, the markets are collectively profitable on the basis on contribution profit, which is revenue less cost of sales and marketing.

The online streaming company announced that its margin in Canada was almost equal to that in the United States. Moreover, the company noted that it is working to close the margin differences in other markets as well. However, when compared to the U.S. market, Canada is only marginally different in terms of the competitive landscape, content preferences and high-speed broadband infrastructure. In other markets, garnering huge sales and achieving such high margins will be difficult.

Barriers to expansion for Netflix

Netflix sailed smoothly in its initial expansion such as Canada, the U.K., Scandinavia and the Netherlands, primarily markets with an English speaking population. In Europe, except for the United Kingdom, other countries have relatively few English-speaking citizens. Likewise, Latin America is also a difficult market for Netflix, where the company debuted in 2011. The sluggish broadband does not support fast video streaming, and only a handful of people can afford to pay with credit cards and other complicated online payment methods.

The online video service said that it has now made a point to analyze the e-commerce familiarity of the market before launching its service. However, the same concerns and factors apply as Netflix enters other developing markets such as Eastern Europe. Even Western European markets such as Germany and France are tough to break into. In France, for instance, where around half of the TV-watching households have Internet-connected TV, a large population is not English speaking, which compels Netflix to provide local offerings. In Germany, subscribers are more open to English language content, but there is an intense competition with around 50 services in the market.

Therefore, it won’t be easy for Netflix to carve out U.S. like profits in such markets. There may be situations when the company needs to spend massive amounts to carry forward its plans, and that will come at the cost of lower margins.

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