Netflix bets on international expansion to keep growing
Netflix is on a roll. It's launched high-profile and critically acclaimed shows, and the stock is up more than 140 percent in a year.
Where does it go from here? Abroad.
The on-demand Internet streaming service is about to launch one of its biggest international expansion campaigns yet.
"We plan later this year to embark on a substantial European expansion," Reed Hastings, CEO of Netflix, said in a letter to shareholders recently.
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"It's a very strategic part of their business model," said Tuna Amobi, a media and entertainment equity analyst at Standard & Poor's. "A lot of international markets are growing relatively fast and it presents more compelling opportunities."
Canada became the first foreign country to have live streaming on demand in 2010. Netflix entered the Dutch market in 2013; Latin and South America and the Caribbean in 2011; and the United Kingdom, Ireland and countries in Scandinavia in 2012. (It is now streaming in more than 40 countries.)
What's left? The rest of Europe, Asia, Africa and Oceania.
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Demand for Netflix outside U.S. borders is growing. During the third quarter of 2013, Netflix registered more international subscribers than domestic ones for the first time since its launch in the U.K. and Ireland in July 2012.
"There are only so many people in the United States," said Anthony Wible, media and entertainment analyst at Janney Montgomery Scott. "The rest of the world is far bigger and the addition of domestic subscribers will start to slow down at some point."
The company expects to add 1.6 million new international subscribers in the first quarter of 2014
"If you look at the territories where Netflix already is, the margins for those markets have been expanding," said Anthony DiClemente, an Internet and media analyst at Nomura. "There is an impact of investment in these new territories like the Nordics or the Netherlands."
Although every market is different, S&P's Amobi said that Netflix's successful expansion in the U.K. made the company very confident for a future launch in other parts of Europe.
"When they look at a market to launch, they look at the broadband penetration and how they can get subscribers," he said. "They look at four or five indicators before making their decision. In Korea, for example, the competition is strong. In China, they would have to overcome much more difficulties."
With expansion planned in countries like Germany or France, Netflix is targeting the fourth and sixth largest markets in the world, where "the broadband speed is fast enough to deliver the product," according to DiClemente.
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With more than 66 million inhabitants and very competitive broadband services, France could be a lucrative market. But with very strict laws regarding its cinema industry and a complicated Internet system, it's a tough environment.
"It has been two years since the first announcement of Netflix's launch in France," said Matthieu Soule, a strategic analyst at Atelier BNP Paribas. "It is now expected for next fall, but I would not be surprised if it were delayed by another six months."
First, Netflix would need to partner up with an Internet service provider, as French households are all equipped with a "box," providing cell and landline phone, television and Internet services at the same time.
"Right now, Orange would be the best bet for Netflix," said Soule. "It is the market leader with a market share of around 40 percent. Moreover, it has a European presence in countries like Poland or Spain."
Another issue: Netflix would have to pay taxes on French soil in order to finance French culture—a condition that cannot be circumvented, French Minister of Culture and Communications Aurelie Filippetti told weekly newspaper le Journal du Dimanche.
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Moreover, the country has very strict laws when it comes to its cinema. Netflix will most probably have to wait three years before being able to stream films released in France on its platform.
"I don't think the language is going to be a problem," said Soule. "But it could be complicated for Netflix to launch in France with only American content, because French people care about their French heritage. If you look at the French box office of these last 50 years, in the top 100 movies—45 are French."
"No one is expecting this expansion to be an overnight win," said Amobi. "It will take a year, maybe more for Netflix to become a competitive player and become viable in this market."
—By CNBC's Mathilde Hamel. Follow her on Twitter @mathildehamel