Netflix, Inc. has been downgraded by analysts at Macquarie, who cited high content costs and growing competition from Amazon.com, Inc. . According to a report published in Market Watch, the analysts downgraded the online video streaming giant to underperform from neutral on Tuesday, sending the company’s shares down more than 3%.
It seems that analysts are skeptical about Netflix’s international expansion. The online streaming company expanded to more than more than 130 new countries including India early this year. At the end of the first quarter, Netflix had 34.5 million international subscribers and 47 million U.S. subscribers.
High Content Costs
Analysts believe that Netflix will have to spend a huge money to produce local content imperative to success in many global markets.
In a note to clients, Macquarie analysts, led by Tim Nollen, wrote that the company will continue to face high content costs in the near-term as it moves forward with its global expansion plans.
According to the analysts, in many countries, where Netflix, Inc. is investing, have been growing pay-TV markets and they have been growing with established operators that invested in subscription video-on-demand offerings. The other SVOD services have cheaper prices and offer more local content.
“We believe success will require partnering with local content providers and/or investing in more local content, or in content that will travel,” Nollen said the note. “This will be expensive—indeed, Netflix’s total content obligations have ballooned to $16 billion to $18 billion, including ‘unknown’ off-balance sheet commitments and could well rise further.”
The analyst expects that the company’s international subscribers to hit a below-consensus 73 million by 2019.
Over the last couple of years, Netflix has been rolling out its service in foreign markets. The company expects to add 400,000 new paid subscribers in the United States and 2.1 million internationally in the third quarter. A report from IHS Markit revealed that a majority of the video streaming company’s subscribers will be international in the next two years. By 2020, the company will have roughly 75 million international users, and its global revenues will exceed $13 billion in the same year. The U.S. streaming market will generate $6.2 billion in revenues, according to the report.
Netflix Facing Competition From Amazon
Macquarie expects that Netflix, Inc. is facing growing competition from Amazon, which offers Prime Video in the U.S.
Netflix has been facing a growing competition from Hulu, HBO Now, and Amazon Video. The streaming giant is worried about its subscriber growth in the US and is focusing on the Asian market. The company remains absent in China, the world’s most populous country.
The analysts believe that Amazon.com, Inc. will also expand to more countries too, putting more pressure on Netflix’s growth. However, the analysts, who seems bullish on Amazon, noted that the e-commerce giant is expected to face some of the same challenges as Netflix and the need to partner with local content providers.
“Amazon continues to be a favorite long-term idea in the internet space,” Nollen said in the note. “The flywheel effect of Prime combined with AWS should enable it to maintain its dominate position in two industries.”
Recently, Liberty Global CEO Mike Fries said that he thinks Netflix has lost its cool factor, and has stopped being a direct competitor or major threat to pay-TV companies.