Netflix, founded in 1997, didn’t offer streaming until 2007.  But the company quickly shifted its focus from DVD-by-mail to streaming; during fiscal year 2018, 98% of revenue and 94% of profit was attributable to streaming.  Netflix organizes its streaming services into 2 divisions:

  1. Domestic streaming (U.S. subscribers)
  2. International streaming (Non-U.S. subscribers)

There has been significant variation in the performance of these two divisions.

Revenue Growth Comparison

Both domestic and international streaming have experienced significant growth, but the rate has been much faster for international streaming.

The number of domestic subscriptions nearly doubled from 2013 to 2018, going from 33 million to 58 million.  But international subscriptions increased more than sevenfold during that same time frame, going from just 11 million in 2013 to 80 million in 2018.

The number of international subscribers now exceeds the number of domestic subscribers

This explains why international streaming revenue topped domestic streaming revenue for the first time in 2018, despite the fact that average monthly revenue from international subscribers ($9.43) is lower than monthly revenue from domestic subscribers ($11.40).

International streaming has come a long way from 2013, when it accounted for just 21% of Netflix’s streaming revenue.

Profitability Comparison

Netflix’s domestic streaming has consistently been profitable, exhibiting robust year-over-year growth.

This isn’t to say things have been perfect, as I have discussed Netflix’s significant cash problems in another article which can be accessed here.

International streaming, on the other hand, did not become profitable until 2018.

International streaming lost money for years because the cost of licensing and producing content was much higher than for domestic streaming.  This cost, which is included in Netflix’s cost of revenue on its Income Statement, can be expressed as a percentage of revenue to give you a sense of its scale.

Cost of revenue as a percentage of revenue has come down for both international and domestic streaming over time, but it has been markedly higher for international streaming.  Cost of revenue actually exceeded international streaming revenue in 2013, then hovered around 90% of revenue before decreasing to 74% in 2018.  Cost of revenue is Netflix’s most substantial cost, so Netflix must find ways to keep this cost under control if international streaming is to enjoy more than one year of profitability.

Scalability Comparison

So far we’ve seen that international streaming has demonstrated better revenue growth while domestic streaming has shown better profitability.

But what about the future?

Cost of revenue consists primarily of fixed costs, so it’s important to consider domestic and international streaming’s ability to scale going forward.  In other words, we need to figure out whether Netflix can grow to have enough members to become cash flow positive before it runs out of money.

We can gain insight into this question by examining Netflix’s cost to acquire a customer.

The cost to acquire a customer is simply the amount of marketing dollars spent by Netflix to acquire new subscribers divided by the number of new subscribers obtained.  Unfortunately, Netflix only discloses net changes in the number of subscribers, so we can’t obtain a precise figure.  But I divided the number of marketing dollars spent on domestic and international streaming by the net increase in subscribers for each division and here is what I found.

The cost to acquire a domestic subscriber more than tripled between 2014 and 2018, while the cost to acquire an international subscriber remained fairly stable.

Why the significant difference in the cost to acquire a customer?

The domestic market is reaching a saturation point; 58 million people in the U.S. had a Netflix account in 2018, which is nearly 20% of the total population in the U.S.  Since Netflix offers membership plans in which multiple family members can be watching Netflix on different devices at the same time, Netflix will never be able to sign up the entire adult population of the U.S. even if it manages to dominate its competitors.  Thus, it is becoming very expensive to acquire new domestic subscribers, as all the low-hanging fruit has already been plucked.

In contrast, Netflix’s 80 million international subscribers represent just 1% of the global population.  Thus, Netflix can acquire customers more cheaply on the international level, which gives its international streaming much more scalability in the long run.  Netflix’s revenue and profitability will likely be dominated by international streaming ten or twenty years from now, if the company doesn’t run out of cash first.