Netflix: More Hurdles Overseas

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis) -- Netflix's ( NFLX) decision to separate its DVD-by-mail business hasn't gone down well with its U.S. customers, (Related Story: Netflix Abandons 'Qwikster' ), which will likely show in the form of higher subscriber churn rate. This coupled with increasing competition from Dish Network's ( DISH) Blockbuster, Amazon ( AMZN) and Hulu in the movie streaming space will continue to add pressure on Netflix's U.S. business. This makes it all the more important for Netflix to focus on its international operations by improving its movie catalog in number and quality.

After having launched its service in Canada last year, Netflix is expanding its streaming service to Latin America and Caribbean regions. But the journey isn't going to be easy as it has to deal with technical hurdles, piracy issues as well as lower broadband penetration in some of these markets.

Our complete analysis for Netflix's stock is here.

Netflix is on its way to reaching 1 million subscribers in Canada soon, and it launched its service in Brazil last month and is expanding to other Latin American countries like Bolivia, Chile, Colombia, Ecuador, Peru, and Venezuela as well as Mexico, Central America and Caribbean. Netflix's international expansion comes at a right time as competition in the U.S. is heating up, and the company faces subscriber backlash due to the price hikes and for splitting its DVD-by mail business.

Netflix does not have as much competition internationally as in the U.S. which also works in its favor. It's signing deals with leading media production companies to expand its international movie and TV catalog.

Netflix announced last month that it's expanding in 42 countries in Latin America and Caribbean regions. Although an aggressive and ambitious plan, this is also quite a daunting task. Unlike the U.S. and Canada, broadband Internet penetration in Latin American countries is pretty low. A MSNBC article sourcing Ibope Nielsen's report says that only 20% of Brazil's 42 million Internet users have a connection speed above 500 kbps while you need a minimum 800 kbps to stream movies. 2 Latin America is also plagued by rampant video piracy which will make it tougher for Netflix to see subscriber growth.

In May, Netflix also had to lower its video quality for Canadian subscribers given the bandwidth caps placed by Canadian telecom and cable operators. Besides these woes, Netflix's operating losses due to international expansion is also increasing. In its Q3 investor guidance, the company indicated an increase in operating losses from $70 million to $80 million for second half of 2011.

While we estimate Netflix's international streaming subscribers will increase from 4.3 million in 2012 to 21.7 million by the end of our forecast period, Trefis members expect an increase from 5 million to 22.3 million during the same period.

We currently have a Trefis price estimate of $195 for Netflix's stock, about 54% above the current market price.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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