A Theoretical Model to Optimize Netflix’s Global Market Strategy

by Noa Ortiz-Langleben, Andrew Orner, Dan Bi Han, and Rupa Palanki, University of Pennsylvania

1. INTRODUCTION

Netflix is the largest and most dominant online streaming service. Active in 190 countries with a worldwide streaming subscriber base of 182 million, the streaming giant reportedly held 90% of over-the-top (OTT) industry market share in 2014 (Clark, 2019). In 2018, Netflix hosted 19 out of the 20 most-streamed TV shows (Watson, 2019) and the company amassed $20.15 billion in revenue in 2019 (Iqbal, 2020).

However, being the top streaming service in the world comes with significant challenges for continued growth. Netflix’s two decades of domestic dominance have led to a highly saturated market, limiting Netflix’s ability to expand domestically. In 2018, Netflix spent $12 billion on content alone, and with the rise of competitors like Hulu, Amazon Prime, and Disney+, the streaming colossus faces pressure to optimize its strategy in an increasingly competitive market (Iqbal, 2020). The purpose of this paper is to explore how Netflix can leverage its current competitive advantage over other U.S. streaming services in global markets to expand profits internationally in the face of limited growth prospects domestically.

First, we look at Netflix’s business model and provide insight into the firm’s history, growth, and innovations. We also examine the market space in which Netflix operates, detailing the market shares possessed by Netflix and its competitors and mapping Netflix’s overall competitive landscape. Then, we discuss the factors that led to Netflix becoming the dominant streaming service. We argue that Netflix was able to become the world’s dominant streaming service by leveraging its first-mover advantage in the online streaming space, its role as a producer and licensee of content, and its targeted recommendation engine. For future growth, the factor Netflix will be able to leverage most effectively against its competitors is its global first-mover advantage. We define Netflix’s global first-mover advantage as its current status as the first and most successful major U.S. streaming service to expand significantly on an international level. No streaming services, domestic and international alike, have an international market presence and global reach that is as close to what Netflix has   achieved. The sole function that allowed Netflix to gain dominance in the first place that can still be deemed a competitive edge is its global first-mover status. Many other industry giants have caught up to Netflix in terms of its other former competitive advantages.

We argue that the ability to amass subscribers depends on how effectively  consumer’s preferences are represented in the service provided. To reflect the interaction between the firm and consumer, we developed a theoretical model that reflects the subscriber’s decision and the value added by the elements of Netflix’s strategy. Our goal is to identify which aspects of Netflix’s service bring the greatest value to customers and, by extension, which one the company should invest in as part of its strategy in a given country. The model reflects Netflix’s value to a consumer as the weighted sum of platform features that add consumer value. We apply our theoretical model to various different countries in order to intuitively reflect the investment decisions Netflix makes in order to maximize its profits internationally.

Our analysis offers an economically-oriented explanation of Netflix’s existing strategy in the international market as well as a theoretical model that Netflix may use to continue optimising its international expansion efforts. We argue that Netflix already possesses an advantage over its competitors with respect to involvement in the global streaming space, and that its existing strategy is effective.

Our simple model hopes to achieve three things. First, the model serves to describe the factors Netflix has leveraged thus far to grow internationally, and to what extent they have done so. Second, it offers an explanation for why Netflix’s current strategy has been so effective. Finally, our model provides a framework that Netflix might employ (with practical data and more rigorous methods) to further optimize its horizontal differentiation strategy based on national consumer preferences, thereby maximizing its potential to capture consumer preferences and subsequent profits.

2. DESCRIPTION OF FIRM AND INDUSTRY

Firm History

Netflix was founded as a DVD rental service in 1997 by Marc Randolph and Reed Hastings. The California entrepreneurs took advantage of advances in internet technology and the recent emergence of digital video discs as an alternative to video cassettes to compete against brick-and-mortar video stores like Blockbuster. Consumers could browse and order movies through Netflix’s website, and Netflix would mail the DVDs to their address. Within a year, Netflix switched to a subscriber-based model, where consumers would pay a fixed monthly rate and have access to unlimited rentals without due dates, late fees, or shipping fees. As DVD players became more affordable, Netflix’s model became more attractive and its subscriber count grew. In 2002, Netflix launched its initial public offering. It achieved 1 million domestic subscribers by 2003 and, year after year, has performed at the top of the S&P 500 index.

In 2007, Netflix launched its internet video-on-demand service, “Watch Now,” which quickly outpaced revenues from DVD rentals. By 2010, Netflix was primarily known for its mass video streaming and the company gradually moved away from its original DVD business model. In recent years, the company has built upon its streaming success to further its stake in internet media content production and distribution. Netflix launched its first original content, the acclaimed series “House of Cards” in 2012, and, since then, has earned accolades from major media associations for its programming. As of 2020, Netflix is available for streaming in over 190 countries (McFadden, 2020).

Although Netflix was the first major streaming service, the video streaming industry has developed rapidly over the last decade. The market is valued at $59 billion with approximately 958.6 million users worldwide and growing, as consumers continue to shift away from traditional network television and move towards video on demand (Statista, 2020). Currently, Netflix dominates market share both domestically and globally. Today, Netflix is valued at $194 billion with 182 million users worldwide, $20.15 billion in annual revenue, 87% of the domestic online streaming market share (Iqbal, 2020), and is expected to capture 23% of the global streaming market share by 2024 (Watson, 2019). Looking ahead, successful international expansion will be crucial to sustain Netflix’s market dominance. Domestically, Netflix faces increased competition from companies like Amazon Prime and Hulu which are growing at faster rates in the U.S. market than Netflix is. This recent erosion in domestic subscriber growth indicates that Netflix must look overseas to increase revenues. However, there are regulatory issues Netflix must contend with if it is to develop as a major international player. Globally, Netflix’s biggest competitors are iQiyi, Tencent, and Youku (Iqbal, 2020). These China-based companies with a plethora of local media viewing options, have successfully penetrated strictly regulated Asian markets. Netflix, on the other hand, has experienced a bumpy rollout in many Asian countries in part due to carrying content deemed inappropriate or offensive by country ratings boards, failure to comply with strict foreign entry laws, as well as a limited selection of local TV shows and movies (Poulos, 2016). Most significantly, due to government censorship, Netflix is not available in China, the world’s second largest economy. Thus, a key challenge to Netflix’s international expansion endeavors will be navigating the tradeoff between its content’s regulatory compliance and cultural appeal with budgetary constraints (Roxborough, 2019).

Netflix’s Problem, Competitive Advantages, and Our Response

The two major problems Netflix faces are a) rapidly expanding competitors such as Hulu and Amazon Prime and b) a highly oversaturated domestic market. As Netflix attempts to increase its audience and profits, it faces domestic rivals that threaten its market share. Additionally, at 75% market penetration in the U.S., Netflix is essentially running out of audience (Iqbal, 2020). Given that Netflix has no control over its competitors, the only recourse is to confront the oversaturation issue.

To approach this problem, we examine the competitive advantages that gave Netflix its market dominance in the first place to determine which advantages are still relevant for the future, and identify an advantage which Netflix can capitalize on. Netflix was able to become the world’s dominant streaming service before its competitors began to pose a threat by leveraging several factors that emerged over the course of its history. First, its pioneering status as the first and for a time, the only major online streaming service. Second, its global first-mover advantage in the online streaming space, which we defined previously as Netflix’s status as the first and most successful major U.S. streaming service to expand internationally and draw significant audiences overseas. Third, its role as both producer and licensee of content. The ability to produce original content provided Netflix with a unique selling point and significant value-add for consumers – out of 2019’s Top 20 most-streamed shows, 19 were produced by Netflix (Feldman, 2019). Although this enabled Netflix to dominate initially, Amazon Prime Video and Hulu now produce as much, if not more, original content, rendering this former advantage obsolete. Finally, its targeted recommendation engine advantage is also likely to become obsolete as Netflix’s competitors continue to refine their own equally-targeted recommendation systems. Our analysis focuses on Netflix’s global first-mover advantage, so we will not explore the other three advantages in depth besides mentioning their role in Netflix’s rise to dominance and its impending obsolescence as competitors expand. We will consider several factors when deciding which competitive advantage Netflix should emphasize in its revitalization strategy to combat its oversaturation/market crowding/obsolete advantages problem. First, Netflix’s potential for gains in the U.S. is diminished as a result of oversaturation in the domestic market. Second, Netflix’s competitors are growing rapidly, further crowding the domestic market and presenting the consumer with high quality alternatives to Netflix and low switching costs. Third, the competitive advantages which allowed Netflix to establish dominance initially are increasingly rendered obsolete by the fact that other industry giants have the growing abilities to match Netflix’s mix of produced and licensed content and to create targeted recommendation engines as mentioned previously. In concert, the growing capacities of its domestic competitors nullify Netflix’s first-mover advantage, meaning that the only factor which it continues to hold over its competitors is its global first-mover status. Although Netflix faces international competition, none of its domestic competitors have made inroads into the international space as effectively as Netflix has. This is demonstrated by the fact that Netflix is predicted to hold 23% of global market share in 2024 compared to Amazon’s 13% and Disney+’s 8% (Watson, 2019). Some of Netflix’s major competitors, like Hulu, have no international presence and are not predicted to expand internationally. While Netflix’s expected global market share of 23%  gives them the upper hand over its domestic competitors, this figure also suggests that the global market is far from oversaturated. The low global market saturation and the fact that Netflix’s encroaching domestic competitors have much less of an international presence means that there is significant real estate in the global streaming space which Netflix can capitalize on. By extension, this means there is room to grow outside of the domestic market and significant opportunities to attract new consumers on a global scale. In this context, the best way for Netflix to continue expanding its audience, and, by extension, its profits, is for Netflix to capitalize on its global first-mover advantage. Netflix can achieve this by investing in an enhanced global strategy. Its global first-mover status is the strongest advantage that Netflix holds over its competitors, and the only advantage that other firms are unlikely to catch up with any time soon. Operating in over 190 countries indicates that Netflix has the

infrastructure in place to facilitate further global expansion. It can optimize the service it already offers by ensuring that its service captures the maximum amount of consumer preferences in a given country. A theoretical model can provide a framework for Netflix to guide its investment decisions to optimize its global presence.

Capturing Consumer Preference

Netflix can optimize its international presence by tailoring its product to the preferences of each country it approaches. The success of any streaming platform’s market entry is contingent upon its ability to amass and retain a consumer base with a high willingness to pay. Like any consumer product, streaming entertainment has a unique distribution of preferences. This differs from country-to-country – residents of one country will, in aggregate, have different preferences compared to residents in another country. Capturing variation in consumer preferences is especially crucial to streaming services because entertainment goods like Netflix tend to have a wider range of values than a staple good.  For instance, two people will express sharply divergent preferences between movies of different genres even if the movies were equally expensive to produce and received similar critical acclaim. In contrast, it would be strange if such sharply divergent preferences were observed toward nominally different types of apples of the same quality and price. Individual preference is thus a key determinant of value for streaming services; a product that can target a consumer’s unique preferences adds more value than a product that cannot. Since consumer value or a consumer’s willingness to pay directly affects the price that a company can charge that consumer, creating a product that matches consumer preferences is a path toward increasing profits. This insight is closely connected to the Long Tail Theory of Demand in which lower costs of product distribution for firms in internet markets enable them to offer more niche products.

If Netflix can create a product that is more tailored to the specific consumer preferences in a given country, it can increase the amount of preference variation it captures up to the marginally profitable level of specification. They can achieve the profitable level of country-level product specificity by implementing a horizontal differentiation strategy, which  involves different levels of investments in different aspects of the platform in different countries. The levels of investment would vary depending on a given country’s preferences. For example, if the average German viewer values a country-specific user interface (i.e. subtitles, titles, options, settings in German) but does not care so much about country-specific content (i.e. a romcom filmed in Germany, produced by German producers, with a German cast and German dialogue), Netflix can tailor the product it offers in Germany by investing more in the country-specific interface and less in the country-specific content. In short, Netflix can create a product that is tailored to the country’s preference distribution and thus maximizes value for customers in that country by investing more heavily in the aspects of the service that are considered more important or valuable by the country’s users.  By maximizing consumer value through a horizontal differentiation strategy informed by user preferences, Netflix can optimize its resource allocation and more efficiently expand its audience and profit-maximizing capacity. Our theoretical model in the following section is designed to demonstrate the importance of country-level subscriber preferences.

3. THEORETICAL MODEL AND ANALYSIS

3.1 Primary Research Questions

To develop a model that Netflix can use to optimize its horizontal differentiation strategy, we sought to provide a framework to answer two primary questions:

1. Where should Netflix invest geographically?
2. What elements of its service should it invest in more heavily?

Our first question pertains to whether or not a certain country presents a viable expansion opportunity whereas the second question pertains to its horizontal differentiation strategy. In other words, the second question asks: “Where should Netflix allocate its resources with respect to the different levels of value each country ascribes to the different aspects of its service?”. When a product or service is introduced to an international market, its characteristics are no longer optimized for that particular country. After all, the cultural milieu in which a platform is created has profound effects on the content offered as well as its delivery. In order to render the platform more attractive to consumers in a new market, companies often willingly incur “localization” costs with the expectation that localizing will increase the platform’s value in the new market. Netflix, for instance, rapidly expanded the language options for its user interface to over 26 unique languages (Brandall 2018) to provide better localized services. Operating in over a hundred countries, Netflix has seriously engaged in a multi-year expansion plan relying upon investment in localization and culturally and linguistically relevant content. (“The Three Cs…”, 2020).

Consequently, the question arises, “How can Netflix maximize its profits as it expands internationally and takes localization costs into account?” “What other factors affect this decision?”. Clearly, if Netflix were to create 190 perfectly calibrated streaming platforms for each of the countries in which it operates , the country-specific investment costs will surely lead to bankruptcy. Instead, Netflix must weigh its international investment options carefully and consider numerous factors that impact their international expansion decision. There are three main elements of international expansion that Netflix must consider: (1) the country’s baseline value for the service, (2) distributions of preferences for content, and (3) cultural and/or linguistic differences. First, Netflix must recognize that every country has a different baseline value for streaming services. For example, countries with stable, widespread access to the Internet are more likely to value Netflix than developing countries without the infrastructure needed for a quality delivery of the service. This baseline value for streaming services is a critical component to consider in the market entry decision, as a low baseline value can prevent Netflix from operating in the country altogether. Once Netflix enters the international market, they must consider additional factors to decide on the degree of market expansion that they wish to pursue in that country. Namely, they must weigh the country-specific consumer willingness to pay against the country-specific costs. Given that no two countries share the same culture, education, religion, and ethnicity, we can reasonably claim that each country has a unique distribution of preferences for various content. In other words, because consumers in one country are likely to have a different willingness to pay than those in the United States. Netflix must take into account the question of whether they wish to produce country-specific content as a means of expansion. Is the cost of producing original content catered to that one country worth the investment? Similarly, the cultural and language differences call for further country-specific investment, including redeveloping the user interface. Here, Netflix must ask themselves, “Will adapting the user interface to suit the needs of this particular country lead to an increase in the consumer willingness to pay greater than the cost of investment?”. Our model internalizes these economic questions and utilizes marginal analysis to help Netflix make the optimal international market expansion decision.

3.2 Model Assumptions

The model makes our major assumptions. The first assumption simplifies the costs faced by Netflix. The second simplifies the consumer’s decision with respect to the price and value of a country-specific alternative streaming service. The third and fourth assumptions are particularly significant We can make clearer country-to-country comparisons by assuming consumers in each country have a uniform value. By assuming that the quantity of Netflix subscribers in a country is proportional to a country’s population, we are able to focus on how Netflix’s investment in features that enhance consumer value affects Netflix’s ability  to change the price of its product. Furthermore, through a proportionality constant indexed by country (α_i), we can account for any country-level effects that would affect the size of the proportion of a country’s population that would subscribe to Netflix. Such factors are likely very similar to those that influence country baseline values for Netflix including GDP per capita, average educational attainment, and percentage of a population with access to broadband internet.

Assumptions:

1. Netflix has a marginal cost of 0 for providing access to an additional subscriber and no fixed costs connected to a specific country.
2. The value and price of each country-specific alternative to Netflix for consumers is fixed at unique positive constant values.
3. Consumers in each country have a uniform value for Netflix.
4. The quantity of Netflix subscribers in a country is proportional to the population.

3.3 Model Variables

In our simplified model of Netflix’s international investment, there are over 1,000 parameters to be estimated as well as hundreds of choice-variables for Netflix. This breadth of variables is primarily a result of the fact that Netflix operates in approximately 190 countries. To reflect the uniqueness of each parameter and variable for each country, each within the model is indexed with respect to i = some country.

Variables:

VN,i = Value of Netflix to consumers in i = some country

VAlt,i = Value of Alternative streaming services to consumers in i = some country

vB,i = baseline value for having US Netflix in i = some country

vCont,i = Value of country-specific content in i = some country

vUI,i = Value of a localized Netflix user interface to consumers in i = some country

PN,i = Price of Netflix in i = some country

PAlt,i = Price of alternative streaming service in i = some country

CB,i = Cost of creating a country-specific user interface

CCont,i = Cost of producing one piece of country specific content.

CUI,i = Cost of creating a country-specific user interface. Bi = 1 if Netflix operates in a country; 0 otherwise Conti = quantity of country-specific content produced

UIi = 1 if Netflix creates a country-specific user interface, 0 otherwise

QN,i = Quantity of Netflix subscribers in i = some country

Popi = population of i = some country

αi = a country specific parameter for determining the quantity.

3.4 Equations

Reflecting the different values of parameters and variables in each country, our equations are constructed such that each has a unique country-specific solution. At  country-level, the model starts with a classical consumer choice problem: consumers will become subscribers of Netflix if their surplus from Netflix exceeds their surplus from subscribing to a rival streaming service operating in that country. By rearranging this consumer choice problem and applying the definitions for the consumer value of an alternative streaming service, the price for an alternative streaming service, and the consumer value for Netflix, the formula for the highest price that Netflix can charge given its country-specific investments can be derived. This price, along with the quantity demanded, and costs of each country-specific investment can be used to calculate and maximize profits in a country. Finally, country-level profits are aggregated across all  190 countries in which Netflix operates.

Equations:

For consumers in a country, if VN,i − PN,i ≥ VAlt,i − PAlt,i, they will choose Netflix over alternative streaming services where:

VN,i = vB,iBi + vCont,iConti + vUI,iUIi; VAlt,i = a, some constant positive value; PAlt,i = b, some constant positive value. Quantity Demanded: QN,i = αiPopi

In order to max πN,i, Netflix will charge PN,i = VN,i − VAlt,i + PAlt,i

Profit in a country πN,i = PN,iQN,i − (CB,i + CCont,i + CUI,i) Netflix will: Max πtotal = I:190 πN,i

3.5 Application

The vast amount of data required to accurately estimate all of the parameters and variables in this model is not necessary to gain initial intuitions through a sketch of some of the factors that might influence consumer value across countries and thereby alter Netflix’s optimal international investment strategy. First, let us roughly compare the prospects for investment in Canada and Brazil in the context of this model. With some basic key characteristics of each country, we can conjecture their relative consumer values. Canada has some characteristics that indicate that its consumers have a high baseline value for Netflix, such as its high GDP per Capita. However, as a culturally, linguistically (and geographically) proximate country to the U.S., Canadian consumers might be reasonably happy with a version of Netflix that is very similar to the U.S. version. Thus, the value parameters for country-specific content and a country-specific user interface in Canada are likely lower than those for many other countries. In aggregate, these characteristics suggest that equal investment in each component of consumer value in Canada would not be optimal. By comparison, Brazil has a significantly lower GDP per Capita than Canada indicating that its consumers have a lower baseline value for Netflix. At the same time, its comparatively unique culture and low rate of English speaking suggests that investment in country-specific content and a country-specific user interface would have a larger impact on consumer value. The differences in the relative sizes of the components of consumer value are important because they affect Netflix’s marginal returns from investments in product features corresponding to those components. If Netflix had to choose only between operating in Canada or Brazil (thereby incurring a baseline cost, C_B,i), our model suggests that operating in Canada would offer a larger return on investment. Conversely, if Netflix were forced to choose between developing a country-specific user interface or creating large quantities of country-specific content for Canada or Brazil, our model suggests that an investment in Brazil would result in larger return. Ultimately, this example bears out our premise that the relative values of the components of consumer value differ across countries in significant ways that necessitate the development of country-specific expansion strategies.

In addition to the intuition derived from applying the model conceptually to Canada and Brazil, there are some unique country cases that are worth considering. First, it is conceivable that there are some country-level markets where Netflix’s profit maximizing strategy will be to only offer a baseline version of Netflix. Countries that may fall into this category likely include small, poor Sub-Saharan African and Oceanic countries in which a native tongue is complemented by a lingua franca (often English or French). The cost of even one piece of country-specific content or a country-specific user interface might outway any increases in Netflix’s price in that country. While Netflix has already made the decision to operate in just about every country on Earth, it is also possible that even offering a baseline version of Netflix would not be profitable. Our model provides some indication for why this might be the case for China (one of only four territories in which Netflix is not available). In particular, the wide availability of free streaming content in China likely means that Chinese consumers’ willingness to pay for Netflix is very low because of their high surplus from consuming free content (Millward, 2016). There are also other factors contributing to this decision that fall outside of our model, such as onerous censorship standards and damage to its brand elsewhere from engaging censorship. For the other three territories in which Netflix does not operate (Syria, North Korea, and Crimea), the existence of U.S. economic sanctions prevents American companies from doing business there (“Where is Netflix…”, n.d.).

The intuitive conclusion of our model is ratified by Netflix’s approach to expansion over the past 10 years. Even though it has expanded into approximately 190 countries, it only offers its user interface in 26 languages. Furthermore, the company has invested heavily in country-specific content, but has only done so in select markets. While its own approach  involves even more variables, Netflix’s expansion efforts thus far embody the intuition that country-specific strategies are geared toward matching unique consumer preferences to the extent that that is profitable.

One important observed element of Netflix’s international expansion strategy that is not captured by the model is the need to prioritize investment temporally to maximize profits. The model implicitly assumes that once Netflix identifies the optimal strategy within each country-level market, it can immediately implement that strategy without affecting the implementation of other country-level strategies. However, in reality, Netflix cannot implement all of its country-level strategies at the same time, as its investment resources are limited in each time period. These realities require Netflix’s strategy to be well attuned to capturing the “low hanging fruit” that promise the highest marginal returns first in order to maximize its profit over the long run. Considerations of this nature help explain why Netflix segmented its expansion efforts, first expanded into Canada, then parts of Latin America and Europe, before finally expanding to nearly every country on Earth (Brennan, 2018). In comparison to the rest of the world, the Canadian, Latin American and European markets likely have higher baseline values for Netflix and especially in the anglophone countries limited country-specific investments were required. Faced with limited time and resources, Netflix was able to maximize its aggregate profit across all periods by first making  high return investments before expanding into the rest of the world. Even without a temporal constraint, the intuitive conclusions of the model remain strong. By estimating consumer value in each country, Netflix can allocate resources effectively according to their maximum marginal effect on a consumer’s value for a subscription. The model highlights the importance of country-specific factors to consumer value, especially the presence of existing platforms, the wealth of the country, and its degree of cultural and linguistic difference from the United States. The model provides a basic framework for thinking about the thousands of complex investment decisions that Netflix needs to make with an eye toward profit maximization.

4. CONCLUSION

From our research on Netflix’s international expansion efforts over the past ten years, our analysis of Netflix’s optimal international market strategy closely mirrors the firm’s efforts. In that sense, our theoretical model stands as a justification for their strategy thus far and an endorsement for its continuation. Our model’s intuitive conclusion that Netflix can maximize its profits from international expansion through a thoughtful investment with an eye toward country-specific factors is robust in comparison to both the realities that Netflix has faced as well as broadly applicable to other streaming services looking to make international inroads. On a conceptual level, our model’s emphasis on understanding variance in consumer preference across countries is broadly applicable to other firms seeking to expand overseas, especially for other internet companies that have a similar emphasis on entertainment goods with more widely distributed consumer preferences. Our strongest recommendation for Netflix is for it to, if it has not already done so, formalize a model like ours for gauging its future expansion efforts. As time goes on, the most obviously profitable investment choices will be made and tighter and tighter marginal increases in profit will need to be considered. Therefore, careful modeling of Netflix consumers’ value across countries will be even more essential. Our model is useful for developing an intuitive understanding of the importance and variety of factors that will influence investment decisions. For practical applications of the model by Netflix or another firm, a more complex model with many more variables would be required. Some additional variables could be created through breaking down the three elements of consumer value used in our model, especially the baseline value. Among other variables, a per capita measure of country-level wealth and the proportion of the population with access to broadband internet would be particularly useful. In addition, variables measuring the same-side network effect of viewing the same entertainment as one’s peers could be added. Our model’s approach to estimating the quantity demanded in a country would also require refinement to allow for different willingness-to-pay levels within countries. Finally, other complicating factors such as how investments in one country can increase consumer value in other countries (as happened with country-specific content that receives popular viewership in other countries) would need to be taken into consideration. Incorporating all of these elements is a daunting task, even for a company with the resources and technical expertise of Netflix. However, as our model suggests, understanding its customers around the world is critical to Netflix’s effective international expansion and future profitability. To co-opt the wisdom of ancient Chinese strategist Sun Tzu, if Netflix knows its customers, it need not fear expansion into a thousand countries.

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