Netflix Looks to the Old World for New Growth

It wants its international streaming revenue to surpass its U.S. business
From left, Natasha Lyonne and Taylor Schilling in Orange Is the New Black Photograph by JoJo Whilden/Netflix via Everett Collection

France, meet “Yeux Fous.” This month, Netflix, the world’s largest subscription streaming video service, will offer the original series Orange Is the New Black and other programming to six European nations, including Germany and France. It aims to reduce its reliance on the U.S. market and establish global dominance before Time Warner’s HBO Go and Amazon.com’s Prime Instant Video do.

The big question is whether Netflix can navigate rules that shield homegrown media companies and local culture. Shows that play well in one country may not in another, so Netflix will have to localize at least some content, a costly undertaking. “Europe is an attractive market for a subscription service,” says Richard Broughton, an analyst at researcher IHS. “People are willing to pay for TV subscriptions and are more willing to pay for media in general. [But] it is quite difficult for new entrants to compete.”

Netflix entered Canada in 2010 and has since taken its streaming service to countries in Latin America and Scandinavia, the U.K., and the Netherlands. Now it’s adding France, Germany, Austria, Switzerland, Belgium, and Luxembourg. The European countries that Netflix is in had more than 100 million broadband accounts at the end of 2013, vs. 91 million in the U.S., according to the International Telecommunication Union, a United Nations agency.

HBO and sister channel Cinemax have 127 million worldwide customers. The cable channel is expanding internationally with HBO Go, the mobile and streaming product that already competes with Netflix in Sweden, Finland, Denmark, and Norway. Amazon operates in the U.K. and Germany, where it offers Instant Video to subscribers of its Prime delivery service.

Almost three-quarters of Netflix’s 50 million customers are in the U.S. Analysts question whether Netflix can hit its target of 60 million to 90 million domestic subscribers. “Few paid services have been that successful getting past 30 to 40 percent penetration,” says Ross Gerber, co-founder and chief executive officer of Gerber Kawasaki Wealth & Investment Management, which invests in media companies. Europe has wide broadband penetration, a strong middle class, and efficient billing systems, and Netflix’s forays there have gone well so far. IHS projects the company will have more than 3 million subscribers in the U.K. by yearend. The company has high penetration rates—25 percent to 30 percent—in the Scandinavian countries, where the potential subscriber base is smaller. By next year, Europe will account for 20 percent of Netflix’s subscribers, IHS says.

Netflix has said it aims to generate as much as 80 percent of sales outside the U.S. In the past year, international revenue jumped 85 percent. “We really see this as an enormous moment in history,” CEO Reed Hastings said on a recent earnings call.

To protect movie theater owners and DVD sales, France requires streaming services to wait three years after a film’s release before offering it to customers. Video service is not a separate expense for many German consumers, but part of what they pay to rent their homes, so they’re not as willing to pay for additional video services. That, analysts say, has inhibited the growth in Germany of streaming services offered by European companies such as Vivendi and Sky Deutschland.

Netflix won’t enter either market with many new titles, as the distribution rights of many movies are held by local media companies such as Orange and Canal+ in France and Sky Deutschland and Amazon in Germany. Instead, Netflix will rely on U.S., Canadian, and some English TV series and its own original programming. It holds the rights to almost all its original shows, including Orange Is the New Black, Hemlock Grove, and Bojack Horseman. House of Cards is an exception, because Canal+ and Sky Deutschland distribute the series.

“You’re going to see and have seen more focus on original programming and high-quality scripted drama,” says Darren Throop, CEO of Entertainment One, a Canadian producer and distributor that sells shows to Netflix.

French government policy requires media companies operating in the country to invest in local production and TV channels to maintain a library of films and TV that’s at least 50 percent European and 40 percent French. Netflix has said it will sidestep those regulations by basing its European operations in the Netherlands. Even so, 20 percent of its titles in France will be French. The company is also developing a French original series called Marseille, a political drama set in the French port city.

“Every market has its nuances, and we work hard to understand those,” says Joris Evers, Netflix vice president and head of communications for Europe. “We want to launch a service that is respectful of them and to become a player that is a local player.”

To provide overseas customers with exclusive content, Netflix is buying worldwide rights to U.S. TV shows, including Fox’s Gotham and new episodes of Breaking Bad spinoff Better Call Saul. The rights aren’t cheap. Netflix lost $15 million on international streaming in the second quarter, in part because of these agreements, the company says. In its most recent earnings report, Netflix says the loss will almost triple this quarter as it expands its offerings.

By moving aggressively, Netflix is making it more expensive for Amazon and HBO to compete, says Anthony Wible, managing director for media and entertainment with Janney Montgomery Scott. The bet is that Netflix’s subscriber growth will justify the spending. New markets are becoming profitable faster than expected, but the company is putting that money into expansion, Wible says. “The faster they generate a profit, the faster they want to spend that newfound source of earnings,” he says.

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