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ARK: 175m Netflix subs by 2020

Analysts at ARK Investment Management estimate that Netflix’s subscriber base will more than double in the next five years, growing to 175 million by 2020, up from 75 million in 2015. This growth will be fuelled by aggressive international expansion of its streaming service, increasing broadband penetration, and a growing library of content that caters to different audiences across the world.

In arriving at their forecast, analysts at the firm note that in January 2016, Netflix expanded its streaming service to cover 190 countries worldwide. With the exception of China, Netflix essentially covers the whole globe. According to ARK, Netflix’s addressable market is best measured by the number broadband connections. In 2014, there were 750 million fixed-line broadband subscribers globally. ARK estimates broadband subscribers could reach roughly 925 million by 2020. The primary drivers will be growth in China and other developing countries.

Given 926 million broadband connections worldwide, what level of penetration could Netflix achieve? The answer depends on two factors: the level of interest and the ability to pay for the service.

To assess interest in Netflix, we looked at worldwide Google Trends data for four popular pieces of content: House of Cards, Orange Is the New Black, Daredevil, and Finding Nemo. The firm used the first three to measure interest in Netflix’s current flagship content. It used Finding Nemo as a rough proxy for future Disney and Pixar films that fall under an exclusive licensing deal with Disney (such as the sequel Finding Dory) in the US. It also assumed that over time, Netflix would gain access to Disney’s content in international markets.

Google Trends data for the four shows are revealed some interesting insights, according to ARK. Australia topped the list, correlating with recent government survey data indicating rapid adoption of Netflix since its Australia launch. Interest was much higher in France than in Germany, reflecting Germany’s cultural aversion to pay TV. Finally, the results did not measure the interest based on Netflix availability – The Philippines and Poland stood out with strong interest despite not being currently served.

In terms of affordability, the interest data answers the question of who might want Netflix. To answer the second question – who has the means to pay for Netflix, ARK took GDP per capita for each country and normalised it to the United States, which has the highest per capita GDP. According to ARK, the results are not surprising – developed countries led the group while developing countries trailed.

To estimate Netflix’s long-term broadband subscriber penetration potential, ARK took the geometric mean of the interest data and GDP per capita data and normalised it to 70 per cent – management’s guidance for long-term US penetration.

According to ARK, the penetration model, though far from perfect, makes a few predictions that correspond well to empirical data. “With no manual adjustments or access to survey data, this model anticipates the United States will be the country with the highest penetration, which is true today and likely will remain so. It predicts Australia, Canada, and the UK will be the leading large countries outside the US, which fits well with the survey results. Finally, it predicts modest penetration for Japan and China, which aligns with the management guidance in earnings calls. That said, if Netflix successfully partners with a local Chinese operator, its penetration could increase substantially,” suggests the firm.

To estimate the company’s subscriber count in 2020, ARK multiplied the penetration estimates from the above process with the estimated broadband subscribers in 2020. ARK says the most striking data point here is the dominance of the United States, both today and in 2020. Even with a full international roll-out next year, the US is estimated to be the largest single contributor to subscriber growth, adding 28 million subscribers over the next five years.

China at #2 is a surprise. Management has stated that it plans to operate “a small service” in the country. While ARK’s estimate anticipates only 4 per cent penetration, China’s large broadband user base means it could still end up with a huge Netflix subscriber base with potentially 12 million subscribers. France, Germany, Italy, and Japan should be strong drivers of subscriber growth, given their relatively recent launch and strong interest and ability to pay.

For the Rest of World, comprising of more than 180 smaller countries, ARK has deliberately taken a conservative stance. It estimated the Netflix’s interest and GDP by discounting the global average by 50 per cent to account for the uncertainty in the quality, availability, and relevance of Netflix content for such a diverse set of countries. This assumption may be too conservative as there are a number of developed countries in the group such as Belgium, Sweden, Austria, and Norway that could provide substantial growth.

As this model draws its conclusions from some fairly abstract data, ARK suggests a few words of caution are warranted:

  • Assessing Netflix interest based on Google Trends data of popular content is at best an approximation. The data set is small, presented only in relative terms, and the use of English search queries likely under-represents other geographies.
  • GDP per capita as a measure of a country’s ability to pay ignores cultural and competitive dynamics. Certain countries may be wealthy but not willing pay for Netflix for other reasons.
  • GDP per capita measures average wealth and underestimates the purchasing power of broadband users. This means developing countries likely have a greater number of potential subscribers than their low per capita GDP numbers suggest.
  • The estimated adoption rate for 2020 is based on observed trends in Netflix’s initial international roll-out. Those countries generally had weak domestic offerings and/or favourable market conditions. Netflix’s adoption in upcoming countries could be slower.

ARK says that a large and growing broadband base in conjunction with the global interest in streaming content suggests that Netflix has a substantial opportunity ahead. In the US, after more than 10 years of operating history and intense competition, Netflix continues to gain subscribers. With the full international roll-out (minus China) complete ahead of schedule in 2016, Netflix has opened up a number of new markets, especially in Asia. In total, ARK’s model expects 63 per cent US penetration of broadband subscribers and 18 per cent international penetration, leading to an estimated 175 million total subscribers by 2020.

ARK acknowledges that this subscriber growth will not happen automatically. Netflix still has to demonstrate relevance in Asia and less developed markets. Navigating China’s stringent regulatory environment will be challenging. Content wise, it must continue to improve its offering, especially in the face of fierce and well-funded competitors such as HBO, Amazon, and various local operators. All that said, the road to 2020 may prove to be Netflix’s golden years, it concludes.

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