Digital Media

Netflix invades Europe: Why expansion beyond the US is so critical

Although its US business is humming along just fine, international expansion will provide the real growth for the video-streaming company.

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Rolling out to Germany, France, Austria, Switzerland, Belgium and Luxembourg this week, Netflix has embarked on its biggest expansion yet. Getty

Netflix debuted on a grand new stage this week, but unless you pay for your Internet TV with euros, you'd be forgiven for never noticing.

On Friday, the streaming-video subscription service launched in Belgium and Luxembourg to cap a week of rollouts in six countries in mainland Europe this week. Combined with Germany, France, Austria, and Switzerland, it's the company's biggest expansion by number of potential subscribers ever. The rollout was largely invisible in the US, the UK and most other territories where Netflix operates, playing out in the local media in the new countries and through coy tweets by Netflix-owned Twitter accounts.

But the move into Europe's heart is crucial for the Los Gatos, California-based company. With its core US business hitting reliable but routine growth, international expansion is the fuel Netflix will pour onto its ambitions to become the globe's premier Internet television network in the next few years. The new countries not only represent the greatest opportunity Netflix has embarked upon, but also bring the highest stakes. They're also a stepping stone to the places Netflix is expected to enter next.

"We've received a very warm welcome throughout Europe," Chief Executive Reed Hastings said in a release on Friday. "We are delighted people are embracing Netflix in our newest territories and, particularly, the incredible viewer enthusiasm for our original series."

Why the European expansion matters

Netflix has already finished two major acts since it launched its subscription service in 1999, and it has entered a third. From DVD rentals by mail to the top online spot for all-you-can-eat streaming video by subscription, the company's push to create original programming such as "House of Cards" and "Orange Is the New Black" further morph Netflix into an Internet TV programmer aiming to join -- and beat -- traditional TV companies with reputations for quality such as HBO and AMC.

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Netflix's roots in DVDs by mail have given way to streaming and, most recently, original programming. James Martin/CNET

The latest change, the one that has brought us Frank Underwood and Crazy Eyes, isn't a shot at growth. Buzz and awards for originals might pull in new members, but Netflix's goal with original shows is keeping the subscribers it already has and bringing the expenses it pays for content -- its single biggest cost by far -- more under its own control.

The overall strategy appears to be working, judging from its core US market. In the last year and a half, Netflix's US subscriber base has grown steadily by about 25 percent every quarter.

Reliability is comforting but not inspirational for investors. For that kind of excitement, a company needs growth, and Netflix has made international expansion its route to achieve it, even at the expense of its bottom line. In the last three quarters, Netflix's number of international members has jumped by about 78 percent; in the three quarters before that, the subscriber rolls more than doubled. To hit those lofty numbers, it's heaping its profit elsewhere into widening its reach.

"We're choosing a business strategy which has us put essentially all of our domestic profits into international expansion. And we think that's the right move but it definitely takes a strong stomach on the part of investors," Hastings said last year during a presentation to discuss financial results.

Netflix's move into Europe -- especially Germany and France, with a combined population of 147 million -- pushes it into markets with the largest pool of potential subscribers outside the US. In the coming months, Netflix's traction getting members in those territories will be held up against the yardstick of its rollouts elsewhere in Europe.

But places like Germany and France introduce challenges Netflix hasn't faced to the same degree before.

Netflix's big European move

After launching its streaming-video offering in 2007, Netflix first moved beyond its US borders in September 2010 with a move into Canada. It embarked on a Latin American rollout the following year that essentially blanketed the continent, and though the geographical footprint it covered was huge, less broadband prevalence in those regions slowed adoption.

It turned its sights to Europe in 2012, launching in the UK and Ireland in January of that year and Denmark, Finland, Norway, and Sweden in October. After expanding to the Netherlands in September, this year's move into the six mainland European countries is the company's biggest debut yet -- the Organisation for Economic Co-operation and Development estimates 63 million broadband households in those six countries, compared with the 94 million broadband homes the Paris-based research body counts in the US. In the world, Germany and France have the greatest number of broadband homes outside the US and Japan.

Netflix's introduction in the UK -- the OECD pegs the country right after France in number of broadband households -- will be the closest proxy to compare its progress in the new countries because it too is an intensely competitive market. Places like the Nordics lack Netflix competitors beyond cable programming, but the UK already had a popular subscription rival in Amazon's Lovefilm, recently rebranded as Instant Video.

France and Germany present even stiffer competition. Germany already hosts US rival Prime Instant Video from Amazon, and major European media companies have their own offerings available: Watchever from media giant Vivendi, Maxdome from ProSieben, and Snap from 21st Century Fox's Sky Deutscheland. France has options in CanalPlay from Canal+ and Orangecast from Orange. The predecessors are priced competitively to Netflix: the US-based service's basic tier is €7.99 per month in the new European countries, the same as many of its competitors. (Netflix costs 11.90 Swiss francs in Switzerland.)

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The OECD estimates 63 million broadband households in Netflix's new European countries, its largest opportunity so far outside the 94 million homes in the US. CNET

Like many facets of Netflix's inner workings, the company doesn't disclose its international progress by market. However, it heralded a milestone of 1 million members in the UK in just less than nine months after it launched there. More recently, researcher Sandvine reported that Netflix was the second largest source of traffic during the peak evening hours in the UK and Ireland behind YouTube, as of the first half of this year, and based on current growth rates would become the leading source of network traffic within the next year. Investors and analysts will be watching Netflix for hints in the coming months that the company is on a similar trajectory in its new countries.

Investors have so far been skittish during the first splash of Netflix in the big new markets. Netflix shares dropped by 5.2 percent to $459.01 so far this week alongside the European launches, although the stock hit its highest level ever the week before.

Next on the roadmap

Netflix has launched in at least one new territory every year for the last four, so where will 2015 take Netflix? Analysts such as Michael Nathanson of MoffettNathanson Research presume Spain and Italy will join the rest of the Netflix's Europe base before the end of next year, bringing with them another 26 million broadband homes. Hastings has said Netflix is considering further expansion into Eastern and and Southern Europe next year, with the goal to be a global service in three to five years.

Netflix has also dropped breadcrumbs leading to the Asia Pacific region. Netflix has reportedly secured the exclusive streaming rights in Australia for new TV series , and film industry figures assume Netflix will debut Down Under in 2015.

But the biggest market in Asia -- China -- is still far beyond Netflix's horizon. Of the 730 million worldwide broadband homes estimated by researcher SNL Kagan, China accounts for about a fourth of them. The company's next big original series, "Marco Polo," chronicles the historic figure's exploration of China, but executives sidestep when asked about making a similar exploration of their own. "It's early," Chief Financial Officer David Wells said in July. "Look for the future in terms of an answer from us in China."

Netflix's hope, it seems, is to become a streaming-video steamroller in places like Europe before swinging the steering wheel to point at China. And its performance in markets with established competitors, like Germany and France, will likely come in handy. With newly minted US market darling Alibaba said to be angling to be China's Netflix, the company's groundwork in Europe may mean it arrives to find the Chinese landscape already leveled.