- Dearth of local shows, payment systems complicate expansion
- Company lacks worldwide rights to ‘House of Cards,’ other fare
Germans and Singaporeans can’t watch the latest season of “House of Cards” on Netflix. For subscribers in Japan, it’s hard to find programs in their native tongue. Indians and Filipinos can’t find much of anything to watch.
As big as Netflix Inc. is, with 34.5 million subscribers outside the U.S., it’s still seeking a foothold in many markets. On Monday, the video-streaming company stunned investors by forecasting second-quarter international subscriber growth that was far below analysts’ estimates of 3.45 million. The company expects to add 2 million new accounts outside the U.S., the fewest since mid-2014, when it was available in less than half as many countries.
The disappointing outlook brought home to analysts and investors that Netflix won’t quickly replicate its U.S. success on the world stage. In many newer markets, few people speak English and credit cards aren’t common. Netflix has reported bigger and bigger numbers outside the U.S. by expanding geographically every few months. Now, after launching in 130 countries in January, it’s mostly run out of new places and must work to become more popular where it already operates.
“Netflix will now need to improve the product offering and perhaps localize in some areas to drive acceleration,” Benjamin Swinburne, a Morgan Stanley analyst, said in a note. He expects those improvements to begin in the second half of the year.
While original programs including “House of Cards” and “Daredevil” have catalyzed growth thus far, Netflix has begun producing shows in markets like Spain, Brazil, Japan and France to build its global audience. The slate of programs in native tongues includes the French political drama “Marseille,” which debuts May 5, and the Japanese series “Hibana,” coming in June.
The company picks projects it thinks will succeed beyond a single market -- “Marseille” is meant to appeal not just to people in France but to francophones around the world, Chief Financial Officer David Wells said on a conference call Monday. About two million people in the U.S. watch French language programming, Chief Content Officer Ted Sarandos added.
Still, those local programming efforts and improvements in payment processing may take a couple years to show results, Chief Executive Officer Reed Hastings said on the same call.
Netflix strives to offer the same mix of licensed and original programs around the world, so viewers from Hong Kong to Bogota can access the same library. Currently, some original Netflix shows, like “House of Cards” and “Orange Is the New Black,” which have helped attract almost 47 million domestic customers, aren’t available to subscribers outside the U.S. The producers licensed those programs to foreign TV networks before Netflix got ambitious about expanding to more countries.
The company is making progress by renegotiating rights in some instances or obtaining global rights from the outset. In Singapore, Netflix couldn’t initially offer “Breaking Bad” or “Sense8.” Both series are now available in their entirety. And Netflix originals like “Unbreakable Kimmy Schmidt,” “Love,” “Jessica Jones” and “Daredevil” came out at the same time as in the U.S. in their entirety.
One growing challenge for Netflix is competition. As the streaming-video market has matured, it’s gotten harder to catch incumbents by surprise. In Europe, for example, Sky Plc has been spending more on original programs and has its own streaming service, Now TV. Vivendi SA formed an alliance with Silvio Berlusconi’s Mediaset SpA to boost its presence in Italy and Spain.
“Netflix blindsided a lot of local companies and had a bit of a headstart in some of the newer territories, but in Europe we have seen pay-TV operators own services becoming increasingly strong and well-programmed,” said Richard Broughton, research director with Ampere Analysis, a London-based media and technology think tank.
Netflix, based in Los Gatos, California, sees itself as a peer of technology companies like Facebook Inc., which have been able to draw users around the world with a single model. Latin America has served as a template for newer markets in Asia and the Middle East. The company struggled there at first due to cultural challenges like different payment systems, yet Brazil and Mexico are now two of its six biggest markets, according to analysts.
“We have a big opportunity in front of us,” CFO Wells said on the call. “Many of our Internet peers have a dramatically larger business outside of the U.S. versus inside the U.S. So we’re pretty excited about that opportunity.”
Acquiring or developing local content will play a big role in determining how well Netflix exploits that opportunity. The company is spending $5 billion on programming this year, for library content and originals, part of $12.3 billion earmarked for the next few years. More than 80 percent of its budget goes toward licensed content -- films and TV shows that aired first somewhere else.
Yoshiharu Ryu, a 45-year-old doctor in Tokyo, signed up for Netflix’s one-month free trial and liked the programs available, almost giving up sleep to binge-watch “Spartacus.” But he dropped the service for Amazon.com Inc.’s Prime, settling for what he said was a smaller library because he liked the early package delivery and music streaming.
More home-grown programming might have tipped his decision the other way.
“Unless you are really keen on learning English, most Japanese will prefer watching content in their native Japanese language,” he said.