Pyramid Points - Netflix in Latin America? Not So Fast
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Netflix in Latin America? Not So Fast

July 30, 2012

Netflix’s international expansion was always going to be a challenging task, and the company’s just-released subscriber numbers reveal just how much work remains — particularly in Latin America, where Netflix operates in 43 countries.

Netflix reported 23.9m streaming subscribers in the US at the end of June 2012 and 3.6m outside of its domestic market — 11% below what it had originally predicted back in April 2012. Of these, 83% are paid subscriptions, and the remaining 17% are free. These results and company announcements about international growth sent the company’s stock into decline. Though the company does not break down subscriber data by country, based on statements the company has made, in addition to our own analysis, we believe that the breakdown by country is as follows:

  • Canada: 1.3m-1.4m
  • UK/Ireland: 1.0m-1.2m
  • Latin America: 1.1m-1.2m

The Latin America results, in particular, are disappointing. These subscriber numbers imply that 10 months after launch, Netflix has been able to penetrate a mere 0.75% of homes. This compares with roughly 6% of homes in Canada nine months after launch, and 4% of homes in the UK/Ireland six months after launch (see Exhibit). Though it is natural to expect lower penetration figures in Latin America given lower GDP per capita levels, lower credit card ownership and lower broadband penetration levels, we don’t believe that Netflix expected the difference to be a factor of eight. Slower adoption, combined with the need to invest in retooling the company’s strategy to address the challenges specific to Latin America, means that the company’s Latin America business will fail to break even after two years, which was the goal of the company’s original business plan. In Canada, by contrast, the company achieved profitability faster than expected.

Exhibit: Netflix online streaming penetration of households by international market, first eight quarters since launch

Sources: Netflix, Pyramid Research estimates

Netflix management readily concedes that penetrating the Latin American market has been a challenging task. Issues inherent to Latin America – such as sluggish Internet connections, low broadband Internet penetration levels (averaging 27% of households in 2011), and complexities surrounding the processing of payments through the Internet compared with its home North American markets – have proven bigger obstacles than the company anticipated.

As a result of these challenges, Netflix management has opted to put on hold further expansion into emerging markets to focus on Europe, where it plans to launch a third market in the fourth quarter of 2012. It is not giving up on Latin America, however, because it still sees tremendous potential in a market with 155m households. The company has modified its subscription process to accelerate the migration of users from free to paid subscriptions. It is also exploring new payment options in the region’s largest markets of Mexico and Brazil, as well as adding Spanish subtitles to all of its English-language content. The company hopes that the entry of new players into the video streaming market will help it in the short term, because one of the biggest challenges it has faced has been educating the market about the benefits of online streaming. Having more players in the market educating the Latin American audience through marketing promotions and communication should give a boost to all players in the market.

The changes to its strategy are starting to pay dividends. Netflix claims that new users in Mexico are demonstrating usage levels higher than what the company has seen in either its domestic or international markets. Further improvements in broadband penetration and connection speeds, as well as greater awareness of the service, should also contribute to an improved performance in the upcoming quarters. We expect online billing to remain a challenge for the content provider, and though it may prove helpful in the short term to have new players in the online streaming market, over the longer term we believe new entrants in the OTT space, particularly those that are backed by the region’s leading telcos, will make it difficult for Netflix to replicate in Latin America the success it has experienced elsewhere.

— Eulalia Marin-Sorribes, Senior Analyst

Research in Focus: IPTV helps leaders in the communications industry identify emerging opportunities in IPTV markets around the world. It offers analysis of IPTV subscription trends, as well as ARPS and revenue trends for the period 2006-2015. Market sizing estimates and forecasts are provided at the global, regional and country level, with more than 60 countries covered in our study. We also identify the top global IPTV service providers. The Research in Focus Report is delivered in PowerPoint format and accompanied by an Excel file that contains all the data underlying the report.

Operators Embrace Video on Demand to Overcome Regulations Stifling IPTV Market
Telecom Insider published November 2011
This report examines the main regulatory restrictions that operators in Latin America face when launching IPTV services in the region. We look at some of the strategies that have been adopted by some telcos to overcome these restrictions. Our analysis focuses on three countries — Argentina, Brazil and Mexico — where different regulatory hurdles have been penalizing incumbent operators and delaying the development of the IPTV segment. Finally, we include two case studies to illustrate one of the strategies adopted by incumbent operators to enter the IPTV space: the launch of VoD services.


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