The domestic market is huge and unsaturated, thus quality of original content which appeals to this market will attract more subscribers and can be a key driver for Netflix in the future.
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Increasing Competition In Online Streaming Space
We expect more than 85% of Netflix’s valuation to come from streaming subscriptions in the U.S. While the company continues to distribute its content via DVD to certain subscribers, subscriptions to its online streaming will be its primary source of revenue. Here, the company faces competition from players such as HBO, Dish, Sony in addition to Amazon and Hulu. This can impact its subscriber growth and put pressure on margins due to increases in content costs. Focus on good quality original content will differentiate players in this market and Netflix plans on tripling the number of hours of original content n 2015 compared to 2014.
International Market Is Growing But Domestic Margins Are High
A significant number of Netflix’s new subscribers came from international markets, where the total subscribers have increased from 1.9 million in 2011 to 23.3 million by the end of Q2 2015. The international segment does have a huge growth potential for the company, however it is yet to be profitable. On the other hand the domestic streaming contribution margin has increased from 14% in 2011 to nearly 30%. The international market also comes with challenges such as low Internet penetration, fewer viewing devices and lower disposable income.