Netflix is spending big on global expansion, especially in Asia, but the strategy is unlikely to boost the dire performance of the streaming giant's international unit anytime soon.
Having entered its first Asian market—Japan—only last month, Netflix has already announced plans to roll out services in Singapore, Hong Kong and Taiwan by early next year. China and India could also be on the radar. Last month, reports emerged that Netflix may form a strategic partnership with mainland conglomerate Dalian Wanda Group, the world's largest cinema chain operator, while the Times of India wrote in July that Netflix would enter Indian markets in 2016.
Netflix streaming is currently available throughout the Americas, as well as Australia, New Zealand, the United Kingdom, Sweden, Germany, France, Finland, Ireland and the Netherlands.
But Tuesday's third-quarter earnings report revealed just how much these existing international operations were hurting the firm: outside of the U.S., losses more than doubled to about $68 million from $31 million a year ago, and Netflix expects the unit to be $117 million in the red by the close of the fourth quarter.
"They are rolling out throughout Asia and investing in new markets and that does eat into international profitability, making those losses bigger and holding back overall profits," explained Rick Munarriz, senior analyst for media and tech at The Motley Fool.
Total third-quarter revenue came in at $1.74 billion, a tad below estimates of $1.75 billion.
Moreover, current international losses don't include technology or general and administrative (G&A) spending, which were up by $100 million combined on-year, noted Michael Pachter, senior analyst and MD of equity research at Wedbush Securities.
"They are spending literally $300 million a year on costs that they don't count when calculating contribution profit so they are not even remotely close to being profitable internationally," he warned.
Aside from English-speaking countries such as the U.K. and Scandinavia, Pachter doesn't believe Netflix is profitable in its international markets due to small user bases. But he does anticipate that Singapore will be a profitable market.
"If you look at their international footprint, it's about 25 million customers, with about three million in Canada, three million in Brazil and four million in the U.K. The other 15 million are in 65 countries, meaning there are only a couple 100,000 subscriptions in each of those countries."
Add the cost of further expansion to the mix and the outlook for revenues looks bleak, Pachter says, adding that "investors who dream the dream are going to be disappointed."
But ambitious expansion could pay off in the long term.
"Once all the international markets are in place, profits are going to explode by 2017 as long as investors get through what will be a very a choppy 2016, by the company's own admissions, on the bottom line," explained Munarriz.
He points out that while the international sector has had difficulties, there are bright spots.
Tuesday's earnings report revealed international net additions rose to a stronger-than-expected 2.7 million, up from 2.3 million in the previous quarter and surpassing the U.S. market's 880,000 new members. It was the sixth straight quarter of an international beat.
Munarriz believes the bulk of Netflix's future growth will be in global markets as original movies, such as next year's highly anticipated sequel of Hidden Tiger, Crouching Dragon, become the company's principal revenue driver.