Netflix (NFLX) Faces Latin American Heat

Since Netflix Inc. (NFLX) commenced its online streaming service in Latin America on September 5, 2011, the company has had to deal with the severe competition put up by peers such as Telefonica SA’s TerraTV and Net Servicos de Comunicacao SA.

Other players like Netmovies Entertainment and Net Servicos, which are operational in the Latin American countries, have also geared up with better content and service facilities to compete with Netflix.

Additionally, European telecom giant Telefonica is set to expand its video-on-demand service into Argentina this year and 17 other Latin American countries by the beginning of next year through Terra TV.

Further, Latin America’s lower income, limited broadband availability and limited use of credit cards act as challenges for Netflix’s business here. The latter is the biggest concern for Netflix, as the primary payment mode for subscriptions is credit cards.

However, amid these near-term negatives, Netflix can derive some solace from the fact that Internet users in Latin America are projected to more than double to 107.3 million in 2020 from 46.2 million at the end of 2011, according to SNL Kagan, a media consultant. Separately, PricewaterhouseCoopers LLC estimates the market for TV and video subscriptions to grow to $23 billion by 2015. Thus, in the long term, growth prospects in the Latin American region are immense, if Netflix can concentrate on brand building (it is still fairly unknown in the region).

Netflix, after its subscription pricing debacle and splitting of the company in two, has left investors confused and flustered. Over the last two months, the company has lost about $8 billion worth of market cap and about a million subscribers due to its recent initiatives.

Netflix also lost out on the Starz deal after talks between the parties fell through due to disagreement on licensing fees.

However, there are some positives to the aggressive measures taken by Netflix. The company expects this to ultimately increase its present content providers and facilitate the integration of its services with FaceBook. The strategic integration will enable Netflix to achieve its recently-set target of gaining popularity overseas. Netflix seems to have boarded the social networking bandwagon to create brand recognition through the rapidly increasing popularity of Facebook.

We believe that the increasing focus on the digital video service will be the key growth driver for Netflix over the long term. Higher adoption of mobile and tablet devices coupled with increasing broadband penetration will be the primary reason for this, in our view.

Content additions will enable Netflix to reduce its dependence on cable TV operators and provide it with the necessary competitive edge over its peers in the emerging market of online video streaming. Moreover, strategic partnerships will also be incrementally beneficial to expand its geographical foot print.

However, intensifying competition from large players such as Inc. (AMZN), Apple Inc. (AAPL) and Google Inc. (GOOG) in the online streaming market is a headwind, because it will further push up license fees and also affect subscriber additions.

We maintain our Neutral recommendation on Netflix over the long term (6-12 months). Currently, Netflix has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

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