Wall Street Too Bullish on Netflix's International Subscriber Potential, Analyst Says

Netflix's 'House of Cards'

Bernstein's Claudio Aspesi sees the online video giant reaching 70 million subs outside the U.S. and 7.2 million in Germany.

Netflix's international subscriber upside may be less than many Wall Street observers project, Sanford C. Bernstein analyst Claudio Aspesi said in a report on Tuesday.

"We believe that (under generous assumptions) Netflix could get to about 70 million international subscribers "in the fullness of time," he wrote. "We think these estimates are materially below [Wall Street] consensus." He cited other observers' view "that the international opportunity is vast and Netflix could reach 100 million or more international subscribers within five to 10 years."

Netflix ended 2014 with more than 39.1 million U.S. streaming subscribers and nearly 18.3 million international subscribers.

But the Bernstein analyst is less bullish. Explained Aspesi: "In developing markets, where fixed broadband infrastructure is poor and not improving, consensus overestimates [the] addressable market. In developed ones, it underestimates competitive intensity, which might lead to lower penetration versus the U.S. and early forays."

In his report, he summarized results of a consumer survey in Germany, the largest European market. Aspesi predicted that SVOD penetration in Germany would reach nearly 45 percent of all homes by 2023, meaning that around 18 million homes would then have some SVOD service.

"German consumers watch less TV and pay less for pay TV than either U.S. or U.K. consumer[s], suggesting demand for SVOD services among the households in the addressable market may be lower in Germany," he wrote.

Also, Netflix will face "significant" competition in Germany from well-established, well-funded players. These include Amazon Prime Instant Video (Amazon), Snap from pay TV giant Sky Deutschland, Vivendi's Watchever and Maxdome, operated by German commercial TV networks giant ProSiebenSat.1. "We expect this competition will be stronger than what Netflix first faced in the U.S. or the U.K.," Aspesi concluded.

Today, Amazon Prime Instant Video is used more extensively than Netflix in Germany. Based on a survey of 500 German online respondents carried out in early 2015, he concluded though that "Netflix has had a very strong start, but it is not the only significant market player in the still developing German market."

Despite being a relatively late entrant, "Netflix brings a compelling content offer to German consumers, superior to the incumbents' across a few dimensions," he said. "That said, Amazon, Snap and Maxdome will likely appeal to a large cohorts of German consumers, in part because of their different – and in some cases lower – pricing, in part because their content offers are close, on par, or probably for some user cohorts, better than Netflix's."

He added: "While Netflix has broader selection of "good" movies, Amazon is not far behind and Snap seems to have fewer but significantly better quality movies than Netflix, while Maxdome has more and better German content. Netflix has great TV content but others (especially the in-between pack of Prime, Maxdome, and Watchever) are not very far behind."

The analyst's conclusion: "As a result of its strong content offer and likely technology leadership, we expect Netflix to be the largest SVOD player in Germany despite stiff competition, with about 7.2 million subscribers by the end of 2023, or a 40 percent market share."

Bernstein has raised its target price on Netflix's stock from $260 to $290, but continues to rate it at "underperform."

Email: Georg.Szalai@THR.com
Twitter: @georgszalai