Netflix struggles to retain international subs | Media Analysis | Business | News | Rapid TV News
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Investors punished Netflix stock fairly severely in the wake of its Q3 earnings, which showed less-than-expected subscriber growth in the domestic market. But this could be the least of its worries: shrinking international retention could be a harbinger of deeper issues.

International expansion is the key strategic initiative for Netflix. However, “Investors pinning their hopes on profitability of the international segment should brace for a wild ride in the future,” said investment analyst Nitin Gulati, in a blog. His analysis “reveals a gloomy picture in Netflix's international business expansion effort,” he said, as the company is struggling to hook consumers.

He points to a “back-of-the-envelope” metric: the difference between the net subscriber additions and gross subscriber additions. If net subscriber additions are higher than gross subscriber additions, it reflects additional subscribers who continue to stay with the service. On the contrary, if net additions are lower than the gross additions, it reflects churn. And Netflix appears to be unable to preserve its existing subscriber base.

For the recently ended quarter, Netflix reported more than 2 million gross subs for its international segment. But the net addition to the international segment was only 1.48 million. That’s a deflection of 560,000 subscribers, who apparently tried the service and decided that they didn’t like it.

“The scary result from this analysis is the continued acceleration in subscriber defection in the international segment, making me more sceptical over the subscriber growth potential in these markets,” Gulati said.

If the trend persists for the next two quarters, investors will begin to reprice the international growth opportunity for Netflix, he added.

It’s not all bad news. On the upside, despite investors’ unhappiness with the subscriber numbers at home, “Netflix continues to maintain its subscriber momentum in its domestic market, validating the subscriber success created by original programming, hence more spending on original content,” Gulati noted.

And, there was notable improvement in the gross profits for the international segment. Analysts are expecting the international segment to be profitable sooner than expected, raising their expectations of margin expansion by the end of fiscal 2015. But it will be all for nothing if Netflix can’t attract interest overseas.

“Divergence between subscriber retention in domestic and international markets is indicative of the failure of US-based original programming to spur interest elsewhere,” Gulati said. “We are now entering into a seasonally favourable two quarters for the company globally. And if Netflix fails in reinvigorating subscriber retention in the international markets, investors will be left with no choice except for marking down their international growth estimates.”

He added, “Notwithstanding, investors will shortly recognise it's not the higher content or marketing expenses that will put the brakes on Netflix's expansion efforts, but the subscribers.”