• Netflix Expands to 43 Latin American Countries But Faces New Broadband Challenges

    A major piece of news from Netflix during this typically slow July 4th holiday week: the company posted on its blog this morning that it intends to expand its service to 43 countries in Mexico, Central America, South America and the Caribbean later this year.

    The 43 countries weren't specified nor was an exact timetable for rollout. And no mention was made of DVDs, so it appears that this will be a streaming-only offering. In another first, the service will be available in Spanish, Portuguese and English, the first time to my knowledge that Netflix will offer additional language options.

    Netflix observers have been eagerly awaiting news from the company on international expansion plans beyond Canada, which launched last September. By the end of Q1, Netflix said it had approximately 800K subscribers in Canada, but the service has been hindered a bit by extremely low data caps by broadband ISPs. The Canadian experience, along with other broadband-related factors, makes the choice of Latin America a bit surprising as Netflix's next move and introduces new challenges.

    While a populous and fast-growing part of the world, these aren't generally countries considered broadband leaders. For example, according to OECD data of per 100 inhabitant broadband penetration as of December, 2010, just 2 countries in the region - Mexico and Chile - fell into the top 34 in the world (#32 and #33 respectively), each with a 10.4% penetration rate per 100 inhabitants*.

    Other OECD data indicates that of these top 34 countries, Mexico and Chile also had the slowest average broadband download speed (approximately 3 mbps and 8 mbps, respectively). Last but not least, broadband isn't cheap - Mexico and Chile appear to have the highest per megabit entry price of any of the top 34 countries.

    Since Mexico and Chile are the only 2 countries out of the 43 Netflix is targeting to even register as broadband leaders by OECD suggests that Netflix's addressable audience in each individual country is likely to be just a sliver of those countries' populations. That's not to say there isn't opportunity in the aggregate in the Latin American region for Netflix, but it could take a very different marketing model to penetrate. This in turn raises the issue of how Netflix's acquisition cost/subscriber will compare with its U.S. and Canadian experience.

    The obvious question is why didn't Netflix target more well-developed broadband countries in western Europe or even Asia instead? The answer likely lies in content distribution rights. It's notoriously difficult to get rights in these countries to premium content and Netflix likely concluded it didn't have critical mass yet. Latin America was probably easier by comparison, and the flood of Spanish-language programming now being produced offered it many more options.

    With the Latin America expansion, Netflix continues moving further away from its core success formula - leveraging its DVD subscriber base and brand into new streaming subscribers. It will be interesting to see how well Netflix executes against these new challenges and in new environments.

    (*Note, I updated this post after originally publishing it to reflect accurate per inhabitant penetration.)
     
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