Netflix Inc. (NFLX) recently announced the launch of its streaming services in Brazil. Subscribers can immediately sign up for the one-month trial service for free. The newly launched Portuguese version service will be available on personal computers, game consoles and other Internet connected devices at a monthly rate of BR$14.99.
Apart from Brazil, Netflix is scheduled to launch its services in 43 other countries in the Latin American region from September 7 onwards. The company will also launch its services in the Caribbean region on September 12, 2011.
The company is also charging prices similar to its domestic service. A major part of Latin America and the Caribbean will pay $7.99 as subscription, whereas subscribers in Argentina will pay 39 pesos, Chile 3790 pesos and Colombia 14,000 pesos on a monthly basis.
Netflix, which currently boasts a customer base of more than 25 million, recently suffered a heavy blow after a license renewal negotiation with Starz Entertainment LLC fell through. The existing deal with Starz allows Netflix to stream new online movies from Walt Disney and the Sony library. However, the contract is set to expire in February next year, if not renewed.
Analysts expect Netflix to lose some of its subscribers going forward based on the failure of the license renegotiation with Starz and the lack of alternative arrangements. Moreover, Netflix’ recent decision to increase the DVD rental will likely make matters worse. Against this backdrop, an overseas expansion of services should boost the subscriber base in our view.
We believe that Internet Video Streaming will become hugely popular in these markets, as the company is partnering with local content providers for regional language programs. Netflix will launch the Spanish-language version of its streaming services in Argentina, Uruguay and Paraguay, while in the Caribbean region Netflix services will be available in both English and Spanish.
We believe Netflix will enjoy the early bird advantage in these markets going forward, as no other company comparable to Netflix has operations in this region.
According to Internet World Stats, Latin America’s total Internet users reached 212 million at the end of June 2011, with an Internet penetration rate of 36.7%, which is higher compared to 29.9% in the rest of the world. We believe the increasing penetration rate reflects the growth potential of the market and Netflix is well positioned to take advantage of this growth.
However, we also believe that overseas expansion may put margins under pressure due to content additions, cost escalation in the form of license and renewal fees, as well as necessary technology investments and regulation.
Recommendation
Netflix has been partnering with several big Hollywood production houses, such as Paramount Pictures, Twentieth Century Fox and Miramax studios, for new content. We believe that new content addition will enable Netflix to reduce its dependence on cable TV operators and also provide the necessary competitive edge over its peers in the emerging market of online video streaming.
However, Netflix will face incremental competitive pressures from Amazon.com Inc. (AMZN), Apple Inc. (AAPL) and Google Inc. (GOOG), as well as from cable operators. Additionally, Movie gallery Inc. and Red Box, the kiosk company owned by Coinstar Inc. (CSTR), are also offering stiff competition to Netflix.
Thus, we have a Neutral recommendation on Netflix in the long term. Currently, Netflix has a Zacks #3 Rank, which implies a Hold rating in the short term.
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