Netflix: foreign policy

In the latest series of House of Cards, the American president is challenged by his rivals abroad, threatening his domestic agenda and marriage. Netflix, the maker of the show, is also facing challenges overseas, as it seeks to expand to 200 countries by the end of next year (from 50). The US business is doing well, with 40m paying members, up a sixth from last year, who contribute most of group profits. The overseas expansion is lossmaking.

Netflix's long-term success will depend, however, on whether it can replicate its US success in international markets, which account for less than a third of streaming sales. The lofty share price - trading at more than 100 times 2016 earnings - seems to take international success for granted. But this is not guaranteed. Few countries in the world watch as much TV as Americans, or pay as much for it. Many big markets already have strong local leaders in video streaming. A Bernstein report found that in Germany, where Netflix launched in September, it is used less extensively than rival Amazon Prime . Other countries, such as Mexico, have limited broadband penetration.

And the expansion is costly. The company reported $300m in cash outflows over the past 12 months, and expects the negative free cash flow to continue for the next few quarters due to international growth. Netflix is still profitable, but as the pace and scale of international expansion grows, that too could come under threat. Content streaming obligations (money the company has agreed to pay for future content), which are growing due to licensing deals and content for new markets, stand at $9.8bn, up 40 per cent from a year ago. The company expects earnings per share to fall to 26c next quarter, a fifth of where they were a year ago. All this may be forgivable for those who think Netflix can be profitable outside the US - and have the patience to wait for that day. For everyone else, Netflix does not look like compelling viewing.

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