In the U.S. and Canada, Netflix (s NFLX) has largely positioned itself as a complement to existing pay TV services. With its great Latin American adventure, it may have the opportunity to not just supplement pay TV, but to replace it in that region. The combination of low pay TV adoption, as well as growing broadband penetration, means that Netflix could become the primary subscription video service that many Latin American consumers pay for.
In a research report issued Sunday, Goldman Sachs (s GS) noted that while low broadband penetration could be a limiting factor for adoption of its streaming video service, that factor is largely outweighed by a lack of competition in the region. That’s true not just for other streaming services, of which very few exist outside of Brazil’s NetMovies, but for subscription video services in general.
Take the table below, for instance. Less than a quarter of residents pay for cable or satellite TV services in Latin America, compared to about 90 percent in the U.S. In some markets — most notably Brazil and Argentina — broadband penetration is actually greater than pay TV adoption.
Unlike in the U.S. and Canada, where its streaming service emerged as a supplement to people’s existing pay TV subscriptions, Netflix has the opportunity to become the primary subscription video service for Latin America residents, according to Goldman Sachs:
“[C]ompetition from Pay TV providers (and TV Everywhere-like services) is weak if not non-existent in Latin America, as Pay TV penetration is still less than 25% in Latin America vs. more than 90% in the US. We believe that consumers without Pay TV subscriptions could potentially choose to subscribe to Netflix instead of Pay TV to supplement their free-to-air viewing.”
While there’s lack of true competition in Latin America, there’s some concern that Netflix adoption might be hampered by slow broadband speeds in the region. Goldman Sachs Latin America telecom analyst Lucio Aldworth estimates the average broadband speed in the region to be about 2 Mbps, compared to about 5-6 Mbps in the U.S. While that’s not enough to get full-screen HD quality to connected TVs, it’s good enough for Netflix’s “Good” streaming quality, which is set at about 700 kbps for video and audio.
There’s also the issue of broadband caps, which cropped up in Netflix’s Canadian rollout and could affect its adoption in Latin America as well. Some Brazilian ISPs have caps as low as 10 GB of data, which represents about 30 hours of content on Netflix’s lowest quality, or about 15-20 movies a month. But that’s assuming subscribers aren’t doing anything else with their broadband connections.
The good news for Netflix is that U.S. content is extremely popular in the region, and can be had relatively cheaply. Goldman Sachs reports that in conversations with the company, Netflix has claimed about 75 percent of movie viewership and half of TV viewership is produced in the U.S. Because Netflix is effectively creating a brand new revenue stream in a relatively untapped market (and helping to fight DVD piracy in the process), Goldman Sachs believes it was able to get good terms for catalog content in a region where studios weren’t able to monetize those assets.
Now, the only thing holding Netflix back is having a recognizable brand throughout. The streaming service was able to achieve 8 percent penetration of the broadband market in Canada in just six months. But unlike Canada, where it had some brand recognition due to proximity to the U.S., many potential users in Latin America likely have no idea what Netflix is. As a result, Goldman Sachs expects the adoption rate to be much slower, and the amount of time it takes to break even in Latin America to be about twice as long as the 12 months Netflix expects it to take its Canadian venture to break even.