Do Netflix Or Amazon Stand A Chance In Foreign Markets?

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Netflix, Inc. (NASDAQ:NFLX)  received a downgrade from analysts at Macquarie this week because they are skeptical that it can compete successfully in international markets in the near term. They’re also concerned about competition from, Inc. (AMZN) and especially local players in the foreign markets the streaming service provider is expanding into. But can either Netflix or Amazon stand up to those local players?

Macquarie also offered analysis around this question, and they’re highly bearish on both companies’ prospects in foreign TV markets because of incumbents. Their view stands in contrast to the views of most other firms, which see huge opportunities in international streaming markets, especially for Netflix.

Incumbents make expansion difficult for Netflix, Amazon

Macquarie analyst Tim Nollen and team said in their special report titled “Global SVOD: Netflix, Amazon & the rise of the locals” that viewership of streaming video is rising quickly in many markets. They predict that in the U.S. and Canada, streaming video on demand (SVOD) will contribute to the already-growing trend of cord-cutting as subscribers fleet expensive pay-TV plans.

Because of the rapid growth of streaming video and the cord-cutting trend, pay-TV operators have been swift to respond with their own products. Some, like HBO Go in the U.S., don’t really pose a threat to the likes of Netflix or Amazon. However, the Macquarie team believes that incumbent players in foreign markets will limit Netflix’s near-time streaming market penetration.

In order for Netflix and/ or Amazon to successfully penetrate international markets, they believe they will probably need to partner with local content providers or pay-TV networks. Other options they suggest are acquiring local content producers and producing local content on their own, which both companies are already doing.

Other barriers to success

The Macquarie team also lists some other potential problems that could limit Netflix’s and Amazon’s streaming success in some markets. For one thing, emerging markets still lack sufficient infrastructure and access to Internet, which makes for slow going. Consumers in some markets may also not be willing to pay for content, Nollen and team suggest. This factor will depend on the quality of the content on local free programming and the pricing of pay-TV services.

They also note that content availability, especially related to pirated content, could also be a headwind for growth. They believe this will especially be an issue in markets with limited legal protections or legal protections that are not very well enforced.

When looking at Netflix and Amazon and their prospects in other markets, the Macquarie team is extremely bearish on Netflix. They seem very positive on Amazon because it follows a unique strategy of using video to drive Prime subscriptions. Prime brings with it a growing list of benefits such as free shipping. Because of Amazon’s interest in India and India’s “insatiable appetite for video content,” they expect the company to expand its Prime video offerings into the country. However, they think pricing could be a problem for Netflix as it is up against Eros, which is cheap and holds the rights to many Bollywood films.

Signs point in opposite direction for Netflix

Macquarie’s views on the international possibilities for Netflix run counter to one of the most bullish arguments for the company. Much of Wall Street doesn’t think much can stop the company in international markets, although this year’s earnings reports have begun to give some pause. The streaming service provider has disappointed in subscriber counts, including in international markets. As a result, there is some evidence for the firm’s contrarian view on this topic.

And while Netflix is the cheap option for TV in the U.S. and some other developed markets, it will undoubtedly be the expensive option in some international markets. It seems unlikely that the company can set competitive prices in some parts of the world, but only time will reveal whether it can or not. Netflix will need to create compelling content people in those markets are both willing and able to pay for.

Otherwise it will have to rest on the hope that consumers are extremely interested in getting a lot of international content to go with a smaller amount of local content. Indeed, there are signs that Netflix is playing up this angle because it invests quite a lot of money in translating its original content into other languages and even ensuring that shows such as the profane comedy Chelsea is able to travel well.

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