Netflix… Buffering…

This week Netflix ($NFLX) reported their quarterly earnings. Things looked good. They added 6.7 million subscribers in the last three months and grew revenue by 24.5% over last year. They now have 81.5 million members. Terrific numbers! So their stock wnet… Down??? What happened?

Essentially, Netflix gave a weak forecast, weaker than analysts expected. And when you disappoint an analyst, you get punished.

Let’s look at the key numbers. Because Netflix’s growth in the US has matured, Wall Street has been looking for the company to grow internationally. The company has eased worries by pushing expansion into 130 countries, so they are definitely showing some good numbers.

Last year in the second quarter, (April to June), this expansion led to the sign-up of 2.4 million new international subscribers. With continued expansion, analysts were expecting around 3.5 million new international subscribers for the coming quarter. But Netflix has forecast only 2 million. That’s less than last year! Ouch!

Because this is such a key growth area, investors see trouble ahead and are selling the stock, which pushed the price lower by around 10% after the report. That’s a big hit.

So what is going on? It turns out that Netflix has a really weak international strategy: It’s essentially a US-lite strategy where they just roll out a slim version of their US site to other countries. It’s all in English, and it requires you to have an “international credit card”. So if you speak Hindi and have a credit card from a local Indian bank, Netflix makes no sense to you. So while their 130 country roll-out may sound impressive, it lacks the localization that customers crave.

In order for an international expansion to work, it needs to be localized in three major areas: language, content and compliance. By having the site in English, by not landing substantial local content and by locking out local credit cards, Netflix is severely limiting its ability to expand internationally. But proper localization takes focus, time, effort and money. Until Netflix establishes a proper localization program, their international expansion will fall flat.

Netflix is still focusing solidly on producing its own content, which should help to push subscriber growth in the US. But this is expensive. And the big win of international expansion needs work.

Netflix has made pivots successfully in the past. They successfully moved from a mail-order movie business to a streaming business a few years. So they have the experience to make big changes.

Look for Netflix to announce localization plans for their international expansion. Native language web sites would be a big first stip. Until then, growth could be a problem for Netflix. 

Team GoldBean

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