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Factors That Could Affect Netflix’s International Expansion

Shirley Pelts

Hollywood Ending? What to Expect from Netflix's Earnings Release

(Continued from Prior Part)

Adverse foreign exchange rate fluctuations

At the International Consumer Electronics Show in Las Vegas, Netflix (NFLX) announced that it had expanded into an additional 130 countries around the world. It is now present in 190 countries around the world. Let’s take a look at the factors that could hinder Netflix’s expansion further.

Even after incurring significant costs of content acquisition for international markets, Netflix has always maintained that it’s going to bring the price of its service overseas closer to its price in US markets. The price per month of Netflix’s streaming service in international markets ranges from $6 to $19 per month. In the United States, Netflix’s streaming service is priced at an average of $10 per month.

Adverse foreign exchange rate fluctuations (UUP) could impact Netflix’s revenues in its international streaming segment. In 3Q15, Netflix’s average monthly revenue for its international streaming segment was $7.56 per paid member, a decline of 10% from 3Q14. The decrease in average monthly revenue per user was impacted by exchange rate fluctuations and higher VAT (value added tax) rates in European markets.

The above chart shows the performance of the PowerShares DB US Dollar Bullish ETF. The chart follows the US dollar’s price movements over the last two years. As you can see, the dollar continued to rise in 2015, with occasional hiccups amid falling commodity prices, a slowing global economy, and the Fed’s first rate hike in almost a decade. These factors also impacted other technology companies, including IBM (IBM) and Microsoft (MSFT).

Other factors that could impact Netflix’s international expansion

Another issue that could affect revenues in the long term is video piracy. As Netflix contemplates an entry into China (FXI), video piracy is a potential problem in Chinese markets. Consumers of Netflix’s original content could stream it for free instead of paying for it.

Another factor is government censorship in different countries. Netflix’s original content could come under scrutiny and Netflix may be forced to partner up with a local player to offer content.

Netflix is also facing increasing competition internationally from both local and global players in the OTT (over-the-top) market. For example, Amazon (AMZN) entered the Japanese market last year. It remains to be seen how Netflix will cope with the increasing competition in overseas markets.

Netflix makes up 0.29% of the iShares Core S&P 500 ETF (IVV). For investors interested in getting exposure to the computer sector, IVV holds 3.9% in that space.

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