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Netflix Faces Global ARPU Headwinds

Jeff Baumgartner
6/24/2019

Netflix's international subscriber base surpassed its US tally in 2017, and the streaming giant continues to build up a massive global business. However, a big challenge ahead for Netflix is not just about keeping its international subscriber growth stoked, but also closing the average revenue per user (ARPU) gap with its US streaming business, a top industry analyst says.

A sizable and widening chasm between Netflix's domestic and international ARPU could threaten the global valuation of the subscription VoD company, MoffettNathanson Analyst Michael Nathanson concluded in a report that put Netflix's critical global operations under the microscope.

"Over the last year, there has been a widening gap between domestic and international APRU due to the advent of more aggressive pricing in the US offset by a wide range of factors in the international markets," he wrote.

The research firm forecasts that this US-international ARPU variance will widen to -25% by the end of 2019, "which we think is a meaningful divergence and double what it was in early 2019." MoffettNathanson noted that the gap was -13% in Q1 2019 and -20% in Q1 2019.

At $4.02, Netflix's ARPU in Turkey is the lowest among all countries studied by MoffettNathanson for this report. Pictured is a Turkish version of the Netflix UI.  
Image source: Netflix.
At $4.02, Netflix's ARPU in Turkey is the lowest among all countries studied by MoffettNathanson for this report. Pictured is a Turkish version of the Netflix UI.
Image source: Netflix.

The size of that gap is important because the international market is now central to Netflix's subscriber growth story -- in Q1 2019, Netflix added 9.6 million paid streaming subs, with just 1.74 million of that total coming from the US. Netflix ended Q1 with 148.86 million streaming subs, with 88.63 million of them from international markets. Global ARPU dropped 2% in Q1 versus the prior year period due to "currency headwinds," but improved 3% year-over-year when the effects of foreign exchange were excluded, Netflix said in April.

Netflix doesn't break out revenues by individual international markets or identify the foreign exchange impact by key region. To get a clearer picture, MoffettNathanson used a VPN to track Netflix's retail pricing strategies in 187 countries where Netflix has a presence and assumed that half of Netflix subs take its basic plan, while 40% take its standard plan, and 10% take its premium offering.

Following conversion to US dollars, about 92% of those international markets have an average ARPU of over $9, with 53% having an ARPU between $9 and $10, the study found.

Among individual non-US countries, Lichtenstein and Switzerland had the highest Netflix ARPU ($15.05), followed by Denmark, Faroe Islands and Greenland (13.93). On the other end, Turkey, driven by currency headwinds, had the lowest Netflix ARPU ($4.02), followed by Argentina ($5.22), Colombia ($6.66) and Brazil ($7.38). Mexico, meanwhile, was the only country in the bottom ten to see ARPU increase steadily over the past three years -- from $6.32 in 2017, to $8.07 in 2019.

As Netflix pursues lower-ARPU markets to maintain subscriber growth levels, the gap between domestic and international ARPU will only widen further, Nathanson predicted.

"While these concerns may not matter today, they should matter to investors using a ten (or more) year DCF [discounted cash flow] to value this stock," he wrote.

Per Nathanson's analysis, the market currently values Netflix's international business at $114 billion, or about 1.7x more than a "blue sky" domestic case valuation of $66.5 billion.

"Given the widening gap in APRU trajectories, we would argue this premium is simply too big for the non-U.S. markets, which offer lower unit economics due to greater regionalization of content spend," Nathanson concluded.

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— Jeff Baumgartner, Senior Editor, Light Reading

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