The World isn’t Flat: What Netflix (NFLX) can learn from Dell Computer (DELL)

 

In the 1990s, Dell Computer’s direct-made-to-order distribution model drove out of business scores of US computer retailers. Sales grew by leaps and bounds and profit margins soared, rewarding the company founders and the herd of investors who fell in love with the stock. But Dell Computer’s startling performance and stock run didn’t last forever, as the company failed to replicate its model beyond its home market the US overseas, due to diverse market conditions that require expensive localization of the company’s model.

In the last three years, Netflix’s direct movie distribution over the Internet drove out of business scores of movie rental outlets, including Blockbuster. Netflix sales and profit margins, and stock performance have followed similar partners. But as Netflix’s US subscriber base is approaching saturation, the company must look outside the US for growth, where it will have the same fate as Dell for several reasons:

  1. Internet infrastructure. Netflix’s model relies on fast and inexpensive access to the Internet. However, Internet speed is slower and costs are higher in most countries around the world, especially in counties where the “last mile” bandwidth has yet to be built, like Africa, Southeast Asia and parts of Latin America.
  2. Language and culture. Netflix’s contentment consists mostly of English language movies; and English isn’t the only language spoken around the world. Each country has its own movies. India, for instance, produces scores of movies daily that require separate licensing. The same is true for European countries like France and Germany that produce their own movies. And even if such market for English language movies does exist, Netflix’s pricing power will be quite limited.
  3. Intellectual property right protection. In most countries around the world, intellectual property rights are hard to enforce. The probability of getting caught and sanctioned is quite low. This is especially the case in the world’s two most populated countries, China and India, where intellectual property is considered a social good–why paying Netflix when you can download movies for free?
  4. Competing distribution channels. Each country has its own movie distribution channels. In countries like Greece, for instance, older movies are distributed for free by major newspapers—why someone will pay Netflix?

The bottom line: The world isn’t flat. Dell found about it the hard way. Would Netflix share the same fate?

 

Disclosure: I’m short on Netflix

 

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