Why Latin America is Netflix’s next big market

Netflix (s NFLX) announced plans to go truly global Tuesday, with the news it would introduce its streaming video subscription service in 43 countries throughout Latin America and the Caribbean. While many expected Netflix to launch in one or maybe two new countries this year, the news that it’s aggressively launching throughout Latin America has significant implications for the company’s growth over the next several years.

There are about 600 million residents between Mexico, Latin America and the Caribbean, which makes the addressable market about twice the size of the U.S. That by itself offers a lot of opportunity for growth. But rapidly expanding economies, the growth of broadband connectivity and a wide-open market for low-priced entertainment could be a winning combination as Netflix looks to expand its offering outside the U.S.

Rapidly expanding economies

Many economies in the area are still developing, but many are poised to see dramatic growth over the next several decades. Mexico and Brazil, in particular, are expected to boom, as Goldman Sachs (s GS) has forecast that those two countries will join the top 15 global economies by 2030, and both could be in the top five by 2050. But growth isn’t just limited to those two countries, and economic growth should drive opportunity throughout the region.

Jumping into the mix for media and entertainment in these emerging economies could be one way for Netflix to stake a claim before those markets develop. By doing so, Netflix may be getting in relatively cheap, compared to entrants that come later. By trying to tackle the entire market at once, Netflix also should benefit from the type of economies of scale that it wouldn’t see if it were just going after France, the U.K. or Germany.

Increasing access to broadband

While economies throughout Latin America and the Caribbean are growing, so is access to broadband throughout the region. Broadband access may be a limiting factor to Netflix growth in Latin America, at least in the short term, as Internet connectivity and available broadband speeds tend to be lower in most markets than in most areas of the U.S. But that, too is rapidly changing.

Dan Rayburn does a good job of breaking out what broadband penetration rates are like in six of the largest Latin America markets: Brazil, for instance, had a 37.8-percent Internet penetration rate with 75 million users and average broadband speed of 4.46Mbps, while Mexico had a 27-percent Internet penetration rate with 30.6 million users and an average broadband speed of 3.54Mbps. In both cases, we expect those numbers to increase dramatically as infrastructure improves and the economy expands.

Citi’s (s C) Latin American telco analyst James Rivett estimates there are approximately 45 million broadband subscribers in Latin America and the Caribbean, with 36 million of those in Brazil, Mexico, Chile, and Argentina. In a research note this morning, Citi estimated Netflix could achieve 8-percent penetration among broadband subscribers in the region, based on its 8-percent penetration of broadband households in Canada within seven months of launch there.

Going global, staying local

Netflix has done an excellent job of attracting subscribers in the U.S. and Canada, but expanding into new markets isn’t easy. With this expansion, it may have benefited by taking a region-wide approach rather than picking one country or another to launch in. It’s likely Netflix was able to secure rights for Hollywood content for much of the Latin American region, rather than bargaining country-to-country. That’s possibly one reason why it’s tackling Latin America and not Western Europe, where the media landscape is much more segregated.

By launching region-wide, Netflix shows it’s taking its global expansion very seriously. But it’s also going local: Rather than just source content from the Hollywood studios, Netflix also plans to ramp-up content from local programmers. This two-pronged approach could allow it to offer a combination of content with broad appeal while also ensuring it has content relevant to subscribers in different counties.

Challenges ahead

All that said, it won’t be easy. Any time a company attempts to tackle an entire region, there are bound to be local nuances attached to reaching customers in each individual market. While the Latin American region is more homogenous than, say, Western Europe, such an aggressive launch will require Netflix to have a local presence in multiple countries rather than a rollout into a single market.

And it’s not clear if Netflix’s particular brand of subscription service will be popular in those markets. A lot depends on the content mix, and if local consumers believe the company provides value to them. Much will depend on the price of the offering, as well, which Netflix hasn’t yet disclosed.

But the opportunity likely outweighs the risks. The good news for Netflix is that it’s getting in on the ground floor in a region where there’s mostly upside to be had.