http://www.rapidtvnews.com/index.php/netflix-...ation.html
It is a good read for sure, using my phone and not sure if the link would work.
Netflix may have enjoyed several quarters of at times impressive homegrown growth, but some Wall Street analysts say that the gravy train is due to run out of track, forcing the company to rely on international market expansion to maintain its margins.
According to Michael Nielsen of M.P. Nielsen, Netflix domestic DVD subscribers (which account for 63% if Netflix’ revenue at present) will decline by 20% between 2014 and 2030. And, while domestic streaming subscribers will grow by 20% between 2014 and 2016, he expects a worrying 0% growth between 2016 and 2030.
International streaming subscribers though will grow at a rate of 41% between 2014 and 2015, 35% between 2015 and 2020, and 25% between 2020 and 2030—healthy expansion all the way around.
“Netflix is an incredibly complex company to analyse as an investment,” he said in an investment note, citing the dynamic nature of its business, the ever-changing competitive environment. However, betting that domestic subscribers will continue canceling their DVD-by-mail memberships at a similar rate to the last few years is a fairly safe estimation. And, when it comes to the domestic streaming logic, all one has to do is apply basic math.
“I have assigned a subscriber growth rate of 20% between 2014 and 2016 based on the recent growth of the domestic subscriber base,” Nielsen said. “In my opinion, since Netflix allows three people access to one account, I believe this limits the realistic amount of subscribers it can obtain in the long run. Of course the U.S. population also limits this number. I project that there will be around 43 million domestic streaming subscribers by the end of 2016. This would mean that roughly half of the households in the United States have at least one subscriber. Based on its marketing efforts, and its current popularity, I believe roughly 43 million subscribers will be the level where domestic subscriber growth ceases. Therefore I have assigned a subscriber growth rate of 0% between 2016 and 2030.”
Ouch. Too much success can be a bear, apparently. However, Netflix has room to flex its wings when it comes to international markets.
Over the last two years, the company’s international streaming subscriber base has risen at CAGR of 160%. The base grew 238% between 2011 and 2012 and 98% between 2012 and 2013—a decline of 58%. Extrapolating from there, it means that the subscriber base will grow by 41% between 2014 and 2015.
“I tend to agree with the company's view that over the next few decades across the world, Internet TV will replace linear TV and therefore I have assigned a substantial growth rate for the international streaming subscribers,” Nielsen said, though he admitted that there’s a small amount of historical data on international subscriber growth, leading to the need to make “a lot of assumptions” to come up with the projected growth rates.
But, he believes that between 2015 and 2020, the company will continue successfully expanding its international subscriber rate at a healthy rate of 35%. Between 2020 and 2030, that will wane to 25% per year as growth regions for expansion become scarce.
In all, his rough revenue projection for 2030 for the company is $106.6 billion.
“All I will say is that based on company statements, Netflix plans to have its international segment operate with a contribution margin comparable to its domestic streaming segment which was around 23% in 2013,” Nielsen said. “ Since contribution margin does not include ‘other expenses,’ fixed costs, or income taxes, the net profit margin of Netflix would have to be quite a bit less than 23% in 2030…To make a ballpark estimate, I will assume Netflix can operate with a 10% net profit margin in 2030.”
If that ends up being the case, Netflix in 2030 could be comparable to present-day Comcast, he noted, which had revenue of $64 billion and net profit margin of 10.5% in 2013.
For now, Netflix appears to be actively working on the global view. Earlier this year it formally acknowledged its plans to expand further into Europe, with a plan to raise $400 million in aggregate debt to use for the effort.
Netflix disclosed in its 2013 10-K it plans that it plans to “significantly increase our investments in international expansion, including substantial expansion in Europe in 2014, and in original content. As a result, and to take advantage of the current favorable interest rate environment, we plan to obtain approximately $400 million in long term debt in the first quarter of 2014.”
Part of the efforts will include the acquisition of in-language content and additional content rights: it said that it will spend nearly $3 billion on content in 2014, and $6.2 billion over the next 36 months. The company also said in its long-term view document that it plans to spend $500 million+ on marketing this year.
The debt offering will be in addition to the $500 million in 5.375% senior notes that it already had outstanding at the end of 2013.
“At $900 million of total long-term debt, we will have an extremely modest debt-to-equity ratio,” CEO Reed Hastings and CFO David Wells wrote in their Q4 letter to shareholders.
Interest on the new notes will accrue at 5.75% per year, payable beginning on 1 Sept., 2014, and will mature on 1 March, 2024. And Netflix is expected to generate 2014 revenue of $5.4 billion, an increase of 23% year over year. Overall, Netflix’s debt-to-equity ratio comes in at around 0.67 if calculated using long-term debt, and about 3.36 if using total liabilities — including $1.3 billion in non-current content liabilities as of the end of 2013.
In any event the investment could pay off in a big way: SNL Kagan expects the streaming video market in Western Europe to reach $1.1 billion in revenue in 2017, up two-thirds from last year.
Last week the Wall Street Journal reported that Netflix was in discussions with appropriate regional officials to expand its footprint to France and possibly Germany and other parts of Western Europe. The paper said that Netflix has been talking to various Big Media companies about expanding its international licensing rights in the region: so far, the company operates in the U.K., Ireland, the Netherlands and the Nordic region. Netflix is fairly far along in its discussions with the French government, the report said, to potentially launch before the end of the year.
France presents a challenge for any OTT operator thanks to its strict regulatory requirements: most notably, a film can’t be shown on an SVOD service for three years after its box office debut. Authenticated TV services though—TV Everywhere offerings and VOD from cable, satellite and IPTV providers—only require a four-month window. So, it’s likely that, barring a governmental concession, Netflix would be looking to partner with pay-TV operators, as it has done with Virgin Media in the U.K. and Com Hem in Sweden. However, there’s competition: France’s largest broadcaster, Canal Plus, already operates a popular service called CanalPlay in France.
In Germany, Netflix will also run into fairly steep competition in the region: German satellite operator Sky Deutschland has recently launched Snap. There’s also the Amazon-owned LOVEFiLM and Maxdome to contend with.
"We can still build a very successful business," Netflix Chief Executive Reed Hastings said of the regional competition, during its earnings Webcast. "I think the key is having unique content, a great reputation, a good value proposition."
For Q4 2013, Netflix added 2.33 million streaming subscribers in the U.S. to reach 33.4 million total domestic subs, and 1.7 million overseas subs to reach 10.9 million internationally.
In terms of Q1 2014 guidance, Netflix expects to add another 2.25 million domestic customers, setting up an about 11% year-over-year increase. But international expansion will be critical to Netflix in the long term as it faces running out of customer acquisition steam domestically; with 110 million total TV households in the US, it's rapidly approaching a 50% penetration rate, which is far more than any of its traditional pay-TV rivals.
Read more: Netflix must rely on international growth as it faces domestic stagnation | Rapid TV News http://www.rapidtvnews.com/index.php/netflix-...z2w5aHvPOL
