Netflix (NFLX, Financial), the world’s No. 1 streaming video on demand (SVOD) provider, has been going full steam in international markets, adding millions of users every quarter. But the home market, the U.S., is still the bedrock for Netflix, providing the much-needed cash flow to keep expanding its product all over the world.
With $1.47 billion in quarterly revenues coming from the U.S. alone, that market is the backbone of Netflix. By the end of the first quarter, Netflix’s paid membership count in the U.S. reached 49.38 million, an addition of 3.67 million users compared to last year. As more users are added to the fold, the potential market for Netflix keeps shrinking, so how much more potential does Netflix have in its home market?
Netflix has three subscription tiers, starting from $8 and going up to $12 a month. Netflix has increased its prices before and might well do so in the future, but considering the state of the competition, the bandwidth for price increases is not that much. At best, Netflix can hope for small increases every few years, or it risks losing customers to the competition.
The best option for Netflix is to increase its user base as much as it can in the U.S. and use price increases every few years to pass on increasing costs. At the end of the first quarter of 2017, Netflix had 49.38 million paid users. In 2016, the U.S. had 125 million households, out of which approximately 102 million households have broadband internet connections. Netflix’s entire U.S. market potential, therefore, is those 100 million homes. And that’s what it needs to focus on.
With Amazon (AMZN, Financial), Hulu, YouTube and others each vying for a slice of that market, Netflix will not be able to capture the entire market, and its penetration is already around 50% of households with broadband internet. It's an uphill task for Netflix to keep moving up, but adding a couple of million users every few years in the U.S. is still within reach.
Every additional million users will add an estimated $100 million to Netflix’s annual revenue, and the company seems to be in a position to keep that number growing over the next 10 years.
The biggest advantage that Netflix has over most of its key competitors in SVOD is the fact that this is the only thing it does – create or license and stream content. Other companies have to worry about draining resources at the cost of other business units. This is what has helped Netflix stand out from the crowd, and it’s going to stay that way for the foreseeable future.
Netflix is already one of the biggest spenders in media production today, and that edge will help the company stay at the top and fend off the competition as it fights for even more market share in the U.S.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
