In its 2Q14 Earnings Release Netflix stated its plans for a major European expansion will begin in September 2014 – adding Germany, France, Switzerland, Austria, Belgium and Luxembourg to its list of available countries. By the end of 2014 – Netflix services will be available in 13 Western European countries, representing 76% of total broadband subscribers within this region. The only notable missing countries are Italy, Spain and Portugal. On a global basis, Netflix’s service is available to 39% of Fixed Broadband Subscribers Netflix has been steadily increasing its reach for its service since its initial international launch in Canada in November 2010, which coincided with the launch of its stand-alone streaming package. In the U.S. market, Netflix has nearly 36 million streaming customers (approximately 37% of fixed broadband subscribers) and has set a long-term goal of reaching 60 million to 90 million U.S. subscribers – giving it a penetration of greater than 80% – a lofty goal indeed.
The question is whether or not that is even possible. Yes, it has the best brand recognition of any streaming service available, but it definitely faces some strong competition from Amazon Prime as well as services such as Comcast’s Xfinity Streampix – which will be available to a large portion of customers – at little or no charge – if Comcast and Time Warner Cable do merge. And let us not forget the potential AT&T/DIRECTV merger – which will also likely result in offering a streaming services available to its subscribers.
From an international perspective, Netflix supports nearly 14 million subscribers and is expecting more than 100 million long term – a fairly challenging goal. Even if it hits 30% penetration in both its current and expansion markets – by 2018 – that is only around 55 million subs.
International Markets Have Different Challenges than U.S.
The biggest advantage Netflix has in the U.S. – is limited competition and strong brand recognition. However, from an international view – the challenges can vary significantly from region to region and even country to country.
Within the European continent – its biggest challenger is Amazon Prime, which is available in multiple countries. Although Netflix is viewed to have a better selection of content – Amazon Prime is beginning to secure some exclusive content on its own to boost up its catalog.
In France – the challenge is not necessarily competition, but content rights. In fact, Netflix has already sold the rights to its own in-house production – House of Cards – to Canal Plus. Additionally, French regulation prohibits the online release of films until at least three years after theatrical release and as a distributor they have to help pay for film production in France to comply with national rules.
In Germany, it faces competition from Sky Deutschland’s Snap service – a recent entry into the streaming content market as well as strong VOD content from T-Online.
In CALA, Netflix is facing increasing competition – not only from incumbent Pay-TV operators, but also the pending AT&T/DIRECTV merger – who will bundle a broadband service together with its own streaming service to attract subscribers – not to mention offering live sports – such as FIFA World Cup – which are higher in demand than other types of content.
So what is Netflix’s strategy?
When I think back about my own Netflix experience – it was all about the movies and being able to see first run as soon as it was released on DVD. However, when they introduced the streaming service – the content was substantially different. At that time, only about 10% of my queue was available for streaming.
Today – while 1st run movies are still available (albeit in a much later release window) – much of the streaming content is focused on television series, including an increasing library of originally developed content. This original content development will play a key role in Netflix’s international growth – as they will be able to develop content that has specific appeal within each country.
Additionally, Netflix plans to place more emphasis on exclusive content – with the “intent to expand the content library meaningfully” – investing $3.2 billion globally on content, with the content selections moving toward higher-rated and exclusive titles. However it will not include any live content or sporting events at this time – per CEO Reed Hasting at the recode Technology conference this week.
Another path Netflix is exploring is partnering with mobile operators to offer its services – as it recently has with Vodafone UK. As of July 2014, anyone signing up or upgrading to a Vodafone Red 4G plan can opt for Netflix as their entertainment pack of choice. The downside is that streaming Netflix will definitely count against the monthly data cap – using up most monthly data limits in record time. In this scenario – Wi-Fi remains a much better option than most mobile data plans.
But the reality is that in order to reach that 100 million subscriber mark outside the U.S. – it will likely have to make a move into the Asia Pacific market – most notably Japan (where Hulu is currently available and now owned by Nippon TV) and Korea where strong broadband penetration and fast speeds are the norm, and both countries have a proven appetite for streaming content. And with its recent announcement regarding 4K content – these may be the right markets to target. Most likely, Netflix will need to continue to form partnerships with Pay-TV operators in order to get its service in front of as many potential eyeballs as possible – whether cable, telco or satellite.
Will Netflix dominate the Pay-TV landscape?
It certainly has the potential to have the most paying subscribers of any Pay-TV provider and it has most definitely impacted the business models of nearly all of them. Consumers may no longer want their MTV, but they definitely want their Netflix.