The Challenges Netflix Faces During Southern Europe Expansion (Analysis)

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Netflix CEO Reed Hastings

The streaming video giant has licensed ’House of Cards’ and ‘Orange Is the New Black’ to TV networks in Italy and Spain, but hopes to attract users in the piracy-heavy countries.

Over the weekend, Netflix unveiled plans to launch in Italy and Portugal in October, just days after saying it would bring its streaming service to Spain.

The push into Southern Europe is part of Netflix’s plan to operate in 200 countries by the end of 2016. Netflix is already in more than 50 countries, most recently launching its service in Australia and New Zealand. Its international expansion has been a drag on profits, but has continued to grow the company’s subscriber base. At the end of March, Netflix had 20.9 million international subscribers, compared with 41.4 million in the U.S.

The push into Southern Europe will bring Netflix into a part of the world that has been plagued by piracy and where lower broadband penetration and established competitors provide further challenges. The company has previously licensed its hit original shows House of Cards and Orange Is the New Black in those markets, but still hopes to make a splash with other originals and licensed fare.

With the push in the South, Netflix becomes a truly pan-European player that could benefit from a digital single market in the EU, which is in the planning stages. It could allow the company to buy pan-European content licenses and make it easier to coordinate its operations across Europe.

The new Southern European markets will include content subtitled or dubbed.

Cowen analyst John Blackledge recently raised his international subscriber forecast for Netflix to about 104 million in 2020, up from 62 million previously. Reiterating his “outperform” stock rating, he also raised his price target on the stock to $760 from $625.

“We expect Netflix to enter Japan, Italy, Spain and Portugal in the second half of 2015, and estimate ending 2015 international subs of 29.8 million,” he wrote in a report. “We estimate Netflix adds 13.4 million international subs in 2016, totaling 43 million international subs (versus 41 million prior).”

The pricing and other details of Netflix in the new Southern European markets have not yet been announced, but the price is expected to be in line with the 7.99 euros ($8.90) a month price in other European markets.

Here is a look at some of the market challenges and opportunities in Italy, Spain and Portugal as Netflix plans to launch in Southern Europe.

Italy

The lack of ample broadband infrastructure, low Internet speeds and new-generation TV sets have been cited as key reasons for delays in the arrival of Netflix in Italy. Around 71 percent of Italian homes have broadband, compared with 78 percent on average across the EU, according to Eurostat.

Internet speeds vary widely throughout the country, and prime minister Matteo Renzi announced recently he would like to upgrade the country's infrastructure to "ultra broadband" by 2020. High piracy rates are also a key issue in the market.

But the Netflix app is expected to be pre-installed on select smartphones and smart TVs in Italy, giving it a solid presence.

The online video market in the country is already crowded. Netflix will be competing with the premium content of Sky Italia, which has 4.75 million subscribers, and its Sky Go service and Mediaset Premium, which has 1.77 million subscribers, and is aiming for two million by the end of the year. Italy's telecommunications company TIM offers a wide selection of new and old releases for $5.60 (5 euros) a month through its platform TIM Vision. And Fastweb's Chili TV offers 48-hour on demand rentals of popular new content.

Italian consumers are familiar with Netflix original series, but they have aired on other networks. Orange Is the New Black airs on Mediaset, and House of Cards runs on Sky Italia. Yet consumers still have a huge preference for homegrown programs. Sky Italy’s own political drama 1992 premiered to 725,000 viewers in Italy, compared to 130,000 for House of Cards.

Netflix Italy has announced that it will launch with some of its other original series, including Marco Polo and Unbreakable Kimmy Schmidt

Sky’s popular mafia drama Gomorrah drew more than 1.2 million viewers an episode, crushing the audience size of larger international hits like Game of Thrones and True Detective.

However, in a positive for Netflix, Italy doesn’t have the strict types of windowing arrangements that France is known for, where films get a 36-month window before they can be streamed.

Netflix CEO Reed Hastings granted an exclusive interview in the country to Wired Italy, appearing on the cover of the magazine’s June issue and drawing wide media coverage, proving that the industry and consumers will closely watch the company’s launch.

Spain

Netflix has long been looking at Spain, according to industry sources. Its presence in Latin America has given it experience in Spanish-language markets. But analysts have cited rampant piracy as a concern.

On the plus side, the country’s consumers are used to spending time online. "I think Spain is going to be one of our most successful countries," Hastings said in a Spanish newspaper interview last week. "There is a very high penetration of broadband Internet, and people are used to e-commerce and have shown they are interested in our product." 

Plus, Netflix is already financing Spanish–language content, so the launch is a natural expansion for it.

Asked about piracy, Hastings said: “You could call it a problem, but it’s also true that it has created an audience that is used to watching content online. We offer an alternative that is much easier and immediate” than searching for torrents. He previously said that Netflix’s push to release all its originals day-and-date across its territories was a way of fighting and preventing piracy.

Netflix will face growing competition in the online video sector in Spain. Among the players are Telefonica’s Movistar TV, Japanese Internet and e-commerce giant Rakuten’s Wuaki.TV and Nubeox.

Upon hearing that Netflix would enter the Spanish market, Wuaki said: “At Wuaki.TV we welcome Netflix to Spain because we think competition is healthy for improving and will help so more people discover a way of consuming pay content online."

Wuaki, which boasts 1 million subscribers in Spain, the U.K. and France said it intends to maintain the top spot in Spain with its offer of $7.90 (6.99 euros) a month and offering content that is not available on Netflix in countries where Wuaki operates, such as House of Cards, Peaky Binders and The Game.

Portugal

In Portugal, only 63 percent of households have broadband access, according to Eurostat.

Netflix launched in another Portuguese-language market, Brazil, in 2011. Digital TV Research late last year estimated Netflix had 2.17 million subscribers in Brazil as of the end of September.

Hastings in a local interview said the country will also be the home of a service center. “Our management team visited Portugal several times to move forward with the creation of this support center to serve France, Italy, Spain and Portugal,” he said. “Our local agency will recruit dozens of people from different nationalities to work in the center.”

June 9, 9 a.m. Updated with correction on Wuaki.tv's price in euros, which was at first listed incorrectly.

 

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