(Updates with closing share price.)
Sept. 30 (Bloomberg) -- Netflix Inc., seeking growth in Latin America after a price increase angered its U.S. DVD and online customers, is confronting entrenched competitors and cultural hurdles in its drive south of the border.
The company, based in Los Gatos, California, began selling subscriptions in Latin America on Sept. 5 and now offers movie streaming in 43 countries, including the Caribbean. The price is 99 pesos ($7.24) a month in Mexico and $7.99 elsewhere.
Lower incomes, less broadband availability and competitors such as Telefonica SA’s TerraTV and Carlos Slim’s Net Servicos de Comunicacao SA will complicate the effort, Chief Executive Officer Reed Hastings said in July. Compared with the U.S., fewer Latin Americans have credit cards, the main Netflix payment tool, and fewer have Internet-ready game consoles.
“It will be slower because of payment methods and because of video-game consoles,” Hastings said.
The number of Internet users in Latin America is projected to more than double to 107.3 million in 2020 from 46.2 million at the end of 2011, according to SNL Kagan, a media consultant. The market for TV and video subscriptions will grow to $23 billion by 2015, according to PricewaterhouseCoopers LLC.
Netflix, which had almost 26 million users as of June 30, will double its foreign subscribers to 3.5 million in 2012, according to Michael Olson, an analyst at Piper Jaffray Cos. in Minneapolis who recommends the stock. That includes Canada, where 1 million people joined Netflix in its first year there.
Competition and cultural barriers will keep Netflix at less than the 10 percent market share it needs to break even in Latin America, estimates John Blackledge, a Credit Suisse analyst in New York, who also recommends the shares.
Tony Wible, an analyst with Janney Montgomery Scott LLC and a long-time Netflix skeptic, predicts the company will have to drop its Latin America prices because consumers have lower incomes and pay less for cable TV than U.S. viewers.
“There is just not the incentive in Latin America for consumers to drop their cable service or to pay more to add Netflix,” said Wible. “They’re not as well known in that region than they were in Canada and there are regional monopolies in some of the countries.”
Netflix gained 8 cents to $113.27 at 4 p.m. New York time in Nasdaq Stock Market trading. It finished at the lowest close since August 2010 yesterday, following reports that Amazon.com Inc. and Microsoft Corp. plan products that may siphon users. The shares have declined 63 percent from an all-time intraday high of $304.79 on July 13.
Latin American Goals
To support its efforts, Netflix has agreements with Sony Corp., Walt Disney Co. and other Hollywood studios for access to movies and TV shows. The service also has signed on broadcasters such as Grupo Televisa SA and Comcast Corp.’s Telemundo for telenovelas and other popular Latin American TV programs and films.
Netflix intends to duplicate its Canadian experience, where the service has signed up 10 percent of the broadband households, a feat that took six years in the U.S., Ted Sarandos, chief content officer, said at a Sept. 14 conference.
Competitors say they are ready.
“We don’t see the arrival of Netflix as a concern,” said Fernando Madeira, CEO of Madrid-based Telefonica’s Terra. “We’ve had competitors before -- America Online, Yahoo.”
TerraTV offers free, advertising-supported video online to 12 million Internet users in 17 countries, including Brazil, the largest Latin American market, according to Madeira.
It started a subscription service in February that has 200,000 registered users who pay 14.90 reais ($8.10) a month. Madeira said the service plans to reach 1 million viewers throughout Latin America by the end of next year.
Ties That Bind
TerraTV’s big advantage may be Telefonica’s relationships throughout Latin America. Fixed line and wireless accounts in the region generated almost 46 percent of the parent company’s 30.9 billion euros in 2011 first-half revenue.
“It is very difficult for people to come into this market that are not known,” Madeira said. Consumers “don’t like giving out their credit card numbers.”
Net Servicos, owned by Slim’s America Movil SAB and the Brazilian media giant Globo Comunicacao e Participacoes SA, is that country’s largest cable carrier. It recently reached an agreement to provide its subscribers with access to the Muu online service owned by Globo.
NetMovies Entertainment, a Brazilian, Netflix-like service owned by hedge fund manager Tiger Global Management, announced on Sept. 26 an agreement with Disney for “a large array” of films. NetMovies, which offers DVDs by mail and streamed movies, also has signed deals to be featured on Web-connected TVs including those made by Samsung Electronics Co., Panasonic Corp. and LG Electronics Inc., the company said in a statement.
The online service doesn’t break out the numbers of its subscribers. Tiger Global and NetMovies didn’t respond to requests for comment.
“There’s a small brand halo effect in Canada that we don’t have in Latin America,” David Wells, chief financial officer of Netflix, said on the July conference call. “We’re building a brand that is largely unknown down in Latin America so there’s a little of an effect there in speed.”
Competition from illegal websites is also an issue.
In April, the U.S. Office of the Trade Representative put 11 Latin American countries on watch lists for intellectual property theft, including the region’s three largest media markets, Brazil, Mexico and Colombia.
The U.S. government says it has invited those on the lists to negotiate “a mutually agreed upon action plan” by which the countries would eliminate U.S. concerns over their enforcement of intellectual copyrights.
“We think there is a real pent-up demand from honest people who steal content because that’s the only way that they can get it,” said Sarandos.
--With assistance from Crayton Harrison in Mexico City. Editors: Rob Golum, Anthony Palazzo
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