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Netflix Planning Euro Launch in 2012

18 Jul, 2011 By: Erik Gruenwedel

Aggressive expansion/price increase underscores company’s intent at “killing off” disc rental ASAP, analysts say.

Netflix is quietly laying the ground work for expansion into Spain and the United Kingdom by the first quarter of 2012, according to a report citing foreign film distributors.

Los Gatos, Calif.-based Netflix, which recently said it would launch streaming service to 43 Latin America countries, including Mexico and the Caribbean by the end of the year, has long intimated expansion of streaming service across the Atlantic, according to an investor letter in April and comments by CEO Reed Hastings at various fiscal presentations.

Expansion into Europe – once considered Netflix’s first foreign venture until it bowed service in Canada last summer – appeared cut off at the pass earlier this year after Amazon bought the remaining interest in Lovefilm – the United Kingdom’s largest by-mail rental disc and streaming service. Indeed, Lovefilm has reportedly increased staffing by 20% in its own expansion efforts into Germany, Norway, Sweden and Denmark, according to Variety, which first reported Netflix’s Euro invasion.

Such activity probably won’t deter Netflix, which has always considered Amazon (and less so Google) as its major competitor going forward due to the online retail behemoth’s strong physical and digital sellthrough business.

Meanwhile, launching streaming service in Spain is considered less of a challenge due to a dearth of competing services in the country and that Netflix’s establishment of a Spanish-language database and digital network in Latin America could easily be expanded into Western Europe’s largest geographical country.

Indeed, broadband connectivity in Spain lagged behind the European Union’s 51% average household penetration in 2007 – percentages that have undoubtedly increased in recent years. The country’s largest telecommunications company, Telefonica, controls most of Spain’s household Internet penetration – a situation that could parallel efforts by cable operators in Canada to cap subscriber broadband use, thereby limiting the amount of Netflix streaming as well.

A Netflix representative was not immediately available for comment, and the company as a rule does not comment on market speculation. Regardless, Frost & Sullivan analyst Dan Rayburn said scuttlebutt regarding European expansion is premature, considering the challenges Netflix faces in Latin America and increasingly domestically.

"They have not even launched in Latin America yet, so I'm not looking to what they will do after that," Rayburn said in an email. "First they have to show some traction in Latin America, or else they won't get to Europe and Spain."

Anders Byland with TheMotleyFool.com said Netflix is wise to be first mover with subscription VOD in Europe regardless of Amazon's presence and intentions in the U.K. He said that by acting first Netflix effectively preempts most competitors with the exception of those with deep pockets.

"For other tech giants to catch up, they'd need to make some drastic investments in basic technologies, networking infrastructure, and studio relationships, which is a rare combination in the wild today," Byland wrote in a July 18 post.

Meanwhile, last week's announced price increases by Netflix for its disc and disc/streaming hybrid subscription programs suggests the company is intent on expediting the end of its physical rental business, according to BTIG Research analyst Richard Greenfield.

The analyst believes that while Netflix may be paying lip service to the “long life that DVDs by Mail will have,” the service’s actual desire is aimed at “killing off the DVD business as fast as possible.”

Greenfield wonders whether average Netflix subscribers (who also still rent discs) will continue to pay the $6 monthly surcharge (compared with streaming only), despite the “freshness” of disc content compared to streaming fare.

He said the cost benefits to eliminating disc rentals would be proportionally incremental as Netflix reduced its expansive postage bill, disc distribution facilities and variable costs associated with physical license rights.

“The faster Netflix shifts to all-streaming and scales its streaming subscribers, the harder it will be for others to compete with Netflix (viral marketing benefits of scale and ability to outbid others for programming),” Greenfield wrote in a July 13 blog post. “The faster DVDs die, the more opportunity Netflix has to incorporate social aspects into its service as the physical DVD business is not well-suited to social media.”

Rayburn concurred, adding that Netflix is smart enough to know that it doesn't raise rates by 62% and then expect to retain a large portion of its subscribers for that particular service. More importantly, Rayburn said the price increases underscore Netflix's widening indifference toward the limitations of its current streaming service.

"If Netflix was trying to force all of us to streaming only plans and they had their entire DVD catalog available in streaming, fine, but we know that is not the case," Rayburn wrote. "Netflix has not increased the volume of their streaming content by much and having 25% or less of their entire DVD catalog in streaming is not going to cut it."


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