Netflix Europe
Jason Raish

An in-depth overview of how streaming competitors across the continent are girding for battle

As Napoleon found out at the turn of the 19th century, conquering all of Europe is easier said than done. But history may not dissuade Netflix from trying.

The streaming service will expand its footprint on the continent this year, as CEO Reed Hastings indicated in January. But which countries are on his list — and in what order of importance — is a mystery.

These next destinations for Netflix will differ from its first wave of European markets — the U.K., the Netherlands and Scandinavia — in one key regard: Incumbent pay-TV providers and pure-play streaming services from Russia to Spain have been anticipating the entry of the U.S. juggernaut, and have had ample time to counter with broadband-delivered VOD plays of their own. Nevertheless, a complex web of factors will make Netflix’s border crossing either breezy or brutal, depending on which nation is stamping its passport.

Any way you look at it, subscription VOD services all over Europe are bracing for impact.

“We can’t compete with Netflix in terms of volume of titles and rates, but we can stand out thanks to the quality of our editorial content,” said Bruno Delecour, president of FilmoTV, a French subscription VOD service. “That makes FilmoTV different from superstores like Netflix.”

Though Netflix declined comment for this story, Hastings knows Europe is expecting him. He conceded as much in the firm’s fourth-quarter earnings announcement in January, but expressed confidence the content-streaming company could take on its rivals across the Pond. “They are all doing good work,” he said upon unveiling vague plans to invade the continent. “I think what we have seen with our success in the U.K. is that there can be very strong players like the BBC iPlayer and Sky. And we can still build a very successful business.”

Its worldwide growth effort isn’t some ancillary experiment for Netflix. A more diverse subscriber base will go a long way toward recovering the $3 billion it spent on content in 2013, and improve its free cash flow, which has been in negative numbers over the past two years despite $112 million in net income last year. What’s more, the company recently announced its intent to raise $400 million in debt to help fund its international expansion and original programming, and that’s on top of $500 million in debt it’s already carrying.

Netflix closed out 2013 with 31.7 million paid subscribers in the U.S., and another 9.7 million abroad scattered across the 40 countries in which the company operates overseas. About a third of the latter figure is estimated to come from Netflix’s first international market, Canada, where it launched in 2010. Latin America came in 2011, followed by the U.K. and the Nordic countries in 2012. Netflix signaled from the start of 2013 that its expansion plans would have to decelerate for cost-control reasons, but still added one small market, the Netherlands, in 2013.

SEE ALSO: Netflix International Outlook in 2011

Netflix’s international business accounted for 21% of the company’s streaming revenue last year but registered a loss of $274.3 million. Profitability is not going to be reached as quickly as it was in Canada, which took two years. Hastings already has warned it will take longer than that to see black from Netflix’s European and Latin American forays, and there’s no reason to think the next markets will turn the trick any faster.

But Morgan Stanley is bullish on Netflix’s European growth prospects, projecting it will add 30 million international subs from 2014-18. Citi Research believes the U.K. in particular will be the primary driver of that growth (see chart at left, click to enlarge).

Now that Netflix is ready to regain its momentum in Europe, the only question is where. There have been plenty of rumblings about the larger markets like France and Germany but no clear indication of what’s next (see map below for a scouting report on key potential European markets).

What little indication of what’s to come beyond Hastings’ January declaration came from Netflix CFO David Wells at the March 3rd Morgan Stanley Technology, Media & Telecom conference, where he indicated any market expansions would occur in the second half of the year and would be “significant.” “Don’t take it’s equivalent to the Netherlands expansion that we had last year,” he cautioned.

Analysts generally believe the beachhead of the new expansion wave will be Germany. Amazon already seems to be girding for battle, announcing earlier this month it will increase its investment in exclusive content and original programming, and that its SVOD service Lovefilm, which is active in Germany and in the U.K., will be rebranded as Prime Instant Video.

Regardless of where Netflix goes, its content expenditures will be considerable, as acquiring rights must be done on a territory-by-territory basis. “Every time they launch in a new market, there are significant costs associated with that, which will be proportionately heavy in the beginning,” said Dan Cryan, an analyst with IHS. “The balancing act Netflix has to negotiate is in adding enough content to attract new customers, which allows them to fund new content; it’s like walking a tightrope.”

European pay-TV service have certainly had ample time to lock up as much content as possible in advance of Netflix’s arrival. But Wells indicated at the Morgan Stanley conference that’s easier said than done. “There is some truth in that in the sense that they have a lead time to license content, but the reality is Netflix has come along and established a value for digital rights,” he said. “So you can’t lock up everything for free.”

That’s great news for U.S. studios, which stand to gain the lion’s share of the $13.8 billion that Morgan Stanley projects SVOD services will be paying to fill their pipelines by 2021. Netflix undoubtedly will be bidding up the price of firstrun movie packages, in an effort to steal them away from pay-TV providers. On the television-content side, the company already has started securing exclusive titles, nabbing rights to air “Breaking Bad” spinoff “Better Call Saul” for Europe and Latin America just days after episodes air in the U.S. That’s why Netflix’s own expanding slate of original series, including “Orange Is the New Black,” is so important: The streaming service can premiere those shows across its global footprint.

Netflix has even begun licensing series expressly for international markets to the exception of the U.S., locking up overseas rights to the Robert Rodriguez serial adaptation of his film “From Dusk Til Dawn,” as the company announced earlier this month.

Because Netflix already has a sizable international footprint, having the ability to put a title in 40 million homes provides leverage at the negotiating table. But even gaining access to the best content in the world doesn’t help Netflix in markets with poor broadband infrastructure, which makes much of Southern and Eastern Europe a low priority for entry. As one Italo insider put it, “If 10 million Italians were to tune in to ‘House of Cards’ on Netflix, they would suck up too much bandwidth for the show to be able to come through on their screens.”

Markets that have a high incidence of piracy also can be tough to crack, with easily available free content difficult to compete against for even the best SVOD service. Dariusz Jablonski, a film director backing a new arthouse VOD service, Vodkin, in his native Poland, made this rueful observation: “If Netflix does not come to this country, it will be present anyway — but on pirate websites.”

Jablonski turns out to be statistically correct. Though Poland isn’t high on many lists of countries expected to get Netflix first in Europe, the nation has seen more piracy of the recently released season two of Netflix original series “House of Cards” than any other country besides the U.S., according to data provided by Germany-based piracy analytics firm Excipio (see chart, top). The most popular torrent of the second season’s 13 episodes saw more than twice the amount of illegal file-sharing in Poland than in the next non-Netflix country, France.

Netflix execs have publicly discussed studying piracy patterns to help guide their content-buying strategies. If that extends to international expansion as well, they should know that there are territories outside Europe — notably Australia, India and Israel — that are even hungrier for “Cards.”

Netflix’s arrival doesn’t necessarily represent a setback for European competitors; its presence in the market could actually raise awareness for its rivals.

Martin Moszkowicz, chairman of the executive board at German media group Constantin Film, welcomes the U.S. firm. “Any new service, especially with Netflix’s market power, business acumen and experience, is always great” he said, “as long as it improves competition and is making the marketplace more advanced and more profitable.”

Roll over map to view data

Go deeper on how seven key European markets are faring:
[France][Germany][Italy][Spain][Russia][Poland] [Austria]

Leo Barraclough, Elsa Keslassy and Nick Vivarelli contributed to this report.

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