12 Comments

Summary:

Rapidly expanding economies, the growth of broadband connectivity and a wide-open market for low-priced entertainment could be a winning combination as Netflix looks to expand its offering outside the U.S. All of which is why Latin America represents huge potential growth for the company.

Those days of watching hours of Netflix together may soon end.

Netflix announced plans to go truly global Tuesday, with the news it would introduce its streaming video subscription service in 43 countries throughout Latin America and the Caribbean. While many expected Netflix to launch in one or maybe two new countries this year, the news that it’s aggressively launching throughout Latin America has significant implications for the company’s growth over the next several years.

There are about 600 million residents between Mexico, Latin America and the Caribbean, which makes the addressable market about twice the size of the U.S. That by itself offers a lot of opportunity for growth. But rapidly expanding economies, the growth of broadband connectivity and a wide-open market for low-priced entertainment could be a winning combination as Netflix looks to expand its offering outside the U.S.

Rapidly expanding economies

Many economies in the area are still developing, but many are poised to see dramatic growth over the next several decades. Mexico and Brazil, in particular, are expected to boom, as Goldman Sachs has forecast that those two countries will join the top 15 global economies by 2030, and both could be in the top five by 2050. But growth isn’t just limited to those two countries, and economic growth should drive opportunity throughout the region.

Jumping into the mix for media and entertainment in these emerging economies could be one way for Netflix to stake a claim before those markets develop. By doing so, Netflix may be getting in relatively cheap, compared to entrants that come later. By trying to tackle the entire market at once, Netflix also should benefit from the type of economies of scale that it wouldn’t see if it were just going after France, the U.K. or Germany.

Increasing access to broadband

While economies throughout Latin America and the Caribbean are growing, so is access to broadband throughout the region. Broadband access may be a limiting factor to Netflix growth in Latin America, at least in the short term, as Internet connectivity and available broadband speeds tend to be lower in most markets than in most areas of the U.S. But that, too is rapidly changing.

Dan Rayburn does a good job of breaking out what broadband penetration rates are like in six of the largest Latin America markets: Brazil, for instance, had a 37.8-percent Internet penetration rate with 75 million users and average broadband speed of 4.46Mbps, while Mexico had a 27-percent Internet penetration rate with 30.6 million users and an average broadband speed of 3.54Mbps. In both cases, we expect those numbers to increase dramatically as infrastructure improves and the economy expands.

Citi’s Latin American telco analyst James Rivett estimates there are approximately 45 million broadband subscribers in Latin America and the Caribbean, with 36 million of those in Brazil, Mexico, Chile, and Argentina. In a research note this morning, Citi estimated Netflix could achieve 8-percent penetration among broadband subscribers in the region, based on its 8-percent penetration of broadband households in Canada within seven months of launch there.

Going global, staying local

Netflix has done an excellent job of attracting subscribers in the U.S. and Canada, but expanding into new markets isn’t easy. With this expansion, it may have benefited by taking a region-wide approach rather than picking one country or another to launch in. It’s likely Netflix was able to secure rights for Hollywood content for much of the Latin American region, rather than bargaining country-to-country. That’s possibly one reason why it’s tackling Latin America and not Western Europe, where the media landscape is much more segregated.

By launching region-wide, Netflix shows it’s taking its global expansion very seriously. But it’s also going local: Rather than just source content from the Hollywood studios, Netflix also plans to ramp-up content from local programmers. This two-pronged approach could allow it to offer a combination of content with broad appeal while also ensuring it has content relevant to subscribers in different counties.

Challenges ahead

All that said, it won’t be easy. Any time a company attempts to tackle an entire region, there are bound to be local nuances attached to reaching customers in each individual market. While the Latin American region is more homogenous than, say, Western Europe, such an aggressive launch will require Netflix to have a local presence in multiple countries rather than a rollout into a single market.

And it’s not clear if Netflix’s particular brand of subscription service will be popular in those markets. A lot depends on the content mix, and if local consumers believe the company provides value to them. Much will depend on the price of the offering, as well, which Netflix hasn’t yet disclosed.

But the opportunity likely outweighs the risks. The good news for Netflix is that it’s getting in on the ground floor in a region where there’s mostly upside to be had.

  1. The quest for subscriber growth is blinding them. Canada will not be profitable for a year or two. Latin America won’t be profitable for at least that. Cost to roll out in all those markets are huge.

    Payment processing is going to be a nightmare as well. That, coupled with foreign exchange volatility, will make this a very risky venture in the quest for subscriber growth.

    Over the last year:

    The Canadian Dollar has strengthened by 2.6%
    Brazilian Real has strengthened by 12.8%
    Mexican Pesos has strengthened by 1.34%
    Argentinian Pesos has weakened by 0.5%
    Chilean Pesos has has strengthened by 0.6%

    If you look at Canada today, the dollar trades at CAD1 = USD1.04. Netflix is getting USD8.30/subscriber/month for streaming only. Pretty good. Drop that fx rate to a more historical CAD1 = USD0.95 and they are only bringing in USD7.59 per month. Not so good. If you are betting that the US economy will pick up and/or the flight back to the USD “safe haven” currency will occur, a strengthening US Dollar does not bode well for Netflix’s foreign revenues.

    Add all the increased volatility in revenue from these foreign markets coupled with the added cost of marketing, support and streaming, along with the specter of potential of foreign government regulation of Netflix in their respective countries, this could be a challenge for even the mighty Netflix.

    -TK

    Share
    1. I invite you to visit Latin America one day. Sao Paulo, Buenos Aires, or even Mexico City will do just fine. You might be surprised that there are actually *gasp* buildings! People are wearing clothes! They even drive cars!

      Don’t think that all of latin america is just an endless wasteland of poverty and drug plantations.

      And just a reminder: the richest man right now is “some mexican guy” who does business in latin america. Have you thought that maybe, just maybe, latin america is what it is, just because every investor thinks like you, instead of taking the “risk” of doing business here? Nike is doing good. Coca Cola, Pepsi, McDonald’s, Burger King, Microsoft, Hewlett-Packard, Dell, Starbucks, Visa, Mastercard, American Express, Citibank, and hundreds of other american companies do business here JUST FINE.

      Share
      1. Hernan,
        I am an American citizen raised in Latin America. I also happen to work movie industry for Latin America. I agree with TimeKeeper, I do not believe Netflix will be successful in the region because most people don’t have smartphones, iPads or even laptops. On top of that, you have to remember that piracy is a huge issue. Why would someone want to pay Netflix $8-$10 a month when they can buy a very good quality pirated DVD for less than $1? Besides, the price of HBO in many countries is $10/month.

        As far as your comment on “the richest man in the world” is absurd. It is sad that in a region such as Latin America, less than 10% of the population is rich. An by the way, Netflix needs the masses not the “richest man right now”

        Deja el resentimiento.

        Share
  2. Hector Ponce Tuesday, July 5, 2011

    I wonder how iTunes is doing here in Mexico selling and renting movies. I do use the service and I would definitely use Nexflix when available but some of my friends and most of my relatives have no idea on how to rent a movie (from iTunes) and still think that it can only be played on the PC. There are a few devices ready for Netflix on sale (some LCDs, BR players, AppleTV and iOS devices for sure) but I guess a big campaign should be needed to make most people aware of the service and to educate them on how to use it.
    I’m also waiting for the reaction from ISPs when broadband consumption rises. They had a very hard time catching up when online gaming became available and for some time the service was terrible. Now is fine as far as know but most people only stream videos from YouTube and some low definition news clips and TV shows (directly from the two major TV networks).
    The last thing is that most people here do not not have credit card (only debit) and most of us are more comfortable with pre-paid services (mobile phones, paid TV and even electricity!) so Netflix will have to come out with a sort of pre-paid card or with a system for people to pay on a convenience store or directly on the ATM as all mobile phone companies do.

    Share
    1. I don’t think a pre paid service would be necessary, because netflix requires broadband, and that service is usually not available without a subscription. And if you can pay a broadband subscription, you’re likely to be able to pay for a netflix subscription.
      Also, most people are not “happy” with a pre-paid telephone card, they’re just forced to use it because of the smaller “up front” cost, compared to a monthly plan – which is always cheaper (by the minute, message sent, and MB of data transfered)

      Share
  3. Barring any technical obstacles, like network throughput mentioned in another post above, I think that people will eat this up. I would guess that it could get a higher market penetration than they have achieved in Canada. I grew up in Brazil in the 70s/80s and they invented(?) the idea of a monthly fee for a predetermined number of video rentals: all the video rental stores there operated on this principle (usually one video per day IIRC) instead of the pay per each rental system like they did in the US. They even did this for music CD rentals. So the point is, the concept and value proposition of Netflix will already be well familiar to most people, at least in Brazil. Unlimited rentals will be an even better deal than people expect. Things could have changed in the last 20 years, but I imagine not by that much that would make this idea very unusual there.

    Share
  4. Who says Latin America is more homogenous then western europe? They don’t all share languages, cultures, or growth rates. In fact I would argue that due to the EU and the shared experience of WWII destuction – western europe is as homogenized as 18 or so countries can get- which is to say: not very.

    Share
    1. What?
      In latin america you either speak Spanish or Portuguese. Most cable channels broadcast from Venezuela or Miami and they come with “Neutral” spanish or portuguese, or subtitles.
      Most latin american countries have been through the same abuse by US post-WWII foreign policy (the Brady plan, and many other “atrocities” http://en.wikipedia.org/wiki/Latin_America%E2%80%93United_States_relations ). Most have been under military government after US-backed coups to keep communism at bay.
      I don’t understand what’s your point about cultures though. Most relevant markets for Netflix have compatible cultures. And about the “growth rate”, I fail to see why that is such an important factor. Latin american countries have growth rates in almost double-digits, while most first-world economies have only fractions of a percent. That doesn’t keep investors away from them. Yes, it’s a silly comparison, but i mean that growth rate alone is irrelevant.
      The whole point is that you can treat Latin America as a bloc of countries (usually called LATAM), while you can’t do the same with, say, south east asia. In fact, that’s how it’s usually done with LATAM and it seems to work.

      Share
  5. Alex Linhares Tuesday, July 5, 2011

    “Mexico and Brazil, in particular, are expected to boom, as Goldman Sachs has forecast that those two countries will join the top 15 global economies by 2030″

    Are you trolling or just uneducated? Brazil alone has been in the biggest 15, for the LAST 50 YEARS!

    Share
  6. I live in a small city in Argentina, far from the capital Buenos Aires, and I can choose between two cable companies and the DSL telephone company. All go up to 6Mbps here, and more in Buenos Aires.

    Share
  7. @Fluctus: what do smartphones, iPads or laptops have to do with Netflix? You can watch netflix in your PC just fine. I don’t know about you, but I like to watch movies in a big screen TV. Not in a “mobile device”.

    Besides, your point about laptops is moot. Nowadays more laptops are sold than desktop computers, even in latin america.

    People buy pirated DVDs because there is no reasonable alternative. A “video club” wants to charge you about USD 3 per movie rental, which is just absurd. 2 movies a weekend is USD 24 and that’s something ridiculous to expect.

    And I don’t know where you have been, but I’ve heard people complaining about those pirated movies, the CAM releases, filmed from a movie screen. I can tell you, people will pay for good quality content rather than spending money on a bad pirate DVD.

    You need to understand that, for example, Cable TV in Argentina alone has a HUGE market. 78% penetration according to this: http://www.gacemail.com.ar/Detalle.asp?NotaID=16322

    I don’t know what parts of latin america you’ve been to.

    The movie industry has failed to catch up with reality: they just want laws to punish whoever “pirates” but they want to keep doing business like 20 years ago. Meanwhile in the US, Netflix blooms. Besides, stop for a moment and think. Streaming *is* the future. Physical media will disappear – it’s a trend that started with iTunes a decade ago, and the largest music retailers are starting to disappear. The same will happen with movies. Netflix is doing a smart move: it’s a good idea to establish yourself early. Why does it necessarily *have* to fail? Everyone thought Starbucks was going to fail miserably in Argentina. “Latin americans can’t afford expensive coffee”. Yeah, right. In a couple of years, Starbucks has opened over 25 locations: http://www.starbucks.com.ar/Nuestrastiendas.aspx

    Even local companies, cell phone operators, didn’t believe there was a market for smartphones. Guess again: Motorola sold out the Milestone (their top of the line smartphone last year). And they’re selling by the thousands every month.

    The point about Carlos Slim was that he made his money doing business in Latin America. I thought that was clear.

    In short: latin america has huge potential. And business is about taking risks. Sometimes you succeed, sometimes you fail – but if Netflix is expanding to LATAM it’s because they’ve done their homework and figured it’s a risk worth taking.

    One thing they should keep in mind: this is the globalized world. People know what Netflix is about. They know that it costs USD 8 for unlimited movies. If netflix gets funky, and wants to charge significantly more than that, or try a pay-per-view scheme, or limit their system in some way, they might as well not even try launching here. They will fail.

    Share
    1. +1

      Share

Comments have been disabled for this post