How Netflix Inc. Plans To Take Over The World

By Markets Fool.com

Despite spending the majority of my year traveling outside of the U.S. (I'm writing this from Singapore now), the world is so well-connected that I almost never miss the entertainment services I have while home in Denver. Except for one persistent thorn in my side: I can't use my Netflix account while abroad.

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Screenshot of Netflix.com while in Singapore.

To be fair, I can use my Netflix account through a VPN which lets me sneak around these country-to-country restrictions.

But from a consumer perspective, it's an issue that the company is still in less than a third of the world. And that translates into questions for investors. Why isn't Netflix everywhere yet? It's already growing well in the countries it has expanded into, so what's holding up further expansion?

Well, Netflix has a plan to address these challenges, and it involves taking over the world within two years. Read on to hear what investors (and international customers) can expect this year and next and to learn the challenges Netflix faces abroad.

Why has Netflix stuggled to get abroad faster?
One reason its difficult for Netflix to continue expanding abroad is licensing and regulatory issues. In the most recent quarterly conference call, Netflix'sChief Content OfficerTed Sarandosexplained that Netflix management has been figuring out the global licensing rights for the shows it streams that are owned by other companies. If Time Warner owns the rights to a show like "Gotham," it may have restrictions itself on which countries that show can be streamed in, so then if Netflix wishes to stream the show internationally, it would have to go country by country, show by show, working out the licensing structure.

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To counter this, Sarandossaid Netflix is working to provide the producers of the shows it streams an upfront sum of money for access to the show in any country worldwide. This new way of allowing for global licensing will make it easier for Netflix to expand abroad with all, or the majority, of its shows available everywhere.

Another challenge Netflix faces is internet availability, something that has been an issue even in the U.S. (think net neutrality issues here). Netflix wants to ensure it's rolling out its product in these other countries with service that pleases its new customers and helps establish a good reputation for the premium service. For that, Netflix continues to invest in technology and infrastructure that ensures customers can view their streamed content without glitches.

But Netflix will rule the world by 2016
The good news is that the work Netflix has done with its content licensing and global technology is going to pay off soon. While Netflix is now available in about 50 countries, management stated it's planning to be pretty much everywhere in the world by the end of 2016.

That will happen thanks to the $500 million the company plans to spend on technology development in 2015 and its continued commitment to expanding to new areas of the world, even though the costs associated with this expansion are causing Netflix to incur an international income loss. For the next quarter, expect more news about growth in Europe and the services launch in Australia and New Zealand. In the most recent earnings call, management said:

Our international segment is growing very nicely with net adds of 2.43 million members in Q4, compared to 1.74 million a year ago. [...] With all of the additional new original content set to premiere in 2015, it will be a big year for us in France, Germany and our other recently launched markets.

Yes, there will be competition, both from other U.S. companies like Amazon Prime and Hulu as well as from local options like Presto in Australia. And let's not rule out competition from piracy companies such as bit torrents and others that allow consumers to download content for free.

Still, Netflix owns the advantage in these markets by having its clout of licensing deals for in-demand shows, its own original content, and having the technology in place (or soon to be in place in certain countries) that allows for a better viewer experience than competitors or pirated films can offer.

What this means for investors
As of Q4 2014, international revenue is already nearly one third of total revenue for Netflix, up from about one fourth just one year ago. Remember, that's with service in only about a third of the world. Once Netflix has expanded to the rest of the world in 2016, expect international revenue to be a major part of Netflix's earnings.

It's true that the company is actually losing money right now by way of net income loss on its international operations. Because the company is spending so much on building and implementing its international technology and licensing structure, it's still not even profitable internationally.

The company expects this trend to change by 2017, meaning that once it's making profits on its international revenues, in addition to its domestic revenues, total income for the company has the potential for a massive increase in the coming few years.

But be warned, Netflix has guided that because of these continued international expansion efforts, full-year 2015 operating income will probably be lower than in 2014. And that's OK, because we know where the company is going. Watch as Netflix launches in Australia and New Zealand this quarter, and keep watching throughout 2015 as the company continues its global expansion. And once you're done with that, relax by watching some Netflix originals.

The article How Netflix Inc. Plans To Take Over The World originally appeared on Fool.com.

Bradley Seth McNew has no position in any stocks mentioned and is only on Season 2 of Game of Thrones since he didn't get his VPN until recently... so he's getting back to that as soon as he finishes writing this article. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.