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Report: Netflix Foreign Expansion Faces Obstacles

7 Jan, 2011 By: Erik Gruenwedel

Netflix’s proliferate streaming business could be in for rough waters as it attempts to replicate the low-cost, “all-you-can-eat” service internationally.

Los Gatos, Calif.-based Netflix launched $8/monthly streaming-only services in Canada and the United States in 2010, and is reportedly eying similar expansion in the U.K. this year.

Analyst Spencer Wang with Credit Suisse in New York conducted a month-long test of Netflix Canada to see how the smorgasbord “over-the-top,” or OTT, service fared when faced with consumption-based pricing. Unlike the U.S., Canada and countries in Europe charge broadband users on a tiered basis for the amount of data consumed.

In the U.S., only telecommunication companies charge subscribers for incremental data usage plans. Cable and satellite operators have only begun to implement data caps, however generous. In Canada, many Netflix users get their Internet access through Rogers Cable.

“Not surprisingly, our case study finds that an OTT service like Netflix can lead to a material increase in broadband data usage — in this case roughly 20 gigabytes of data for the month or roughly 1 GB per hour of standard definition online viewing,” Wang wrote in a note. “Based on Rogers’ data pricing structure, this would have resulted in a $12 per month increase in broadband for our test home. To offset this, the household would need to trade down to a lower subscription video package, at the expense of fewer linear channels.”

As a result, the average Canadian Netflix streamer would have paid $20 per month for access to content inferior to most pay-TV channels, Redbox, Blockbuster Express and Blockbuster By Mail — not to mention Netflix’s 100,000-title disc service.

“Suddenly, $20 a month doesn't sound like such a sweet deal to stream from a limited library that is still painfully skimpy on new releases,” wrote Motley Fool analyst Rick Munarriz.

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