Netflix to Enter Sophisticated, Competitive Market With Scandinavia Launch

Netflix - Generic Image - 2010
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"Netflix is currently spreading itself too thin globally - into markets that have proven more difficult than initial projections," says one analyst.

Netflix early Wednesday confirmed that it will launch its streaming video service in another international territory by year's end.

But instead of Spain, which some had predicted would be the company's next target given that it launched in Latin America last year, Netflix has chosen to push into the Nordic countries - Sweden, Norway, Denmark and Finland.

Scandinavia, with its rich, educated and digitally savvy populace, is an attractive territory for Netflix, but the U.S. giant enters an already crowded market there.

STORY: Netflix to Launch Streaming Service in Nordic Countries by Year's End LoveFilm, which is a major Netflix competitor in the U.K., has a foothold in the Nordic territories, as does local startup Voddler, a Swedish-based VOD operation backed by such investors as cell phone giant Nokia, and MUBI, the online VOD site specializing in arthouse cinema, which launched in Norway in July as part of a planned Scandinavian roll-out.

Another potential future rival is Acetrax, the pan-European VOD operator that U.K. pay TV giant BSkyB, in which News Corp. owns a stake, acquired in May. Acetrax's footprint of seven European countries does not currently include Scandinavia, but the Nordic territories have been on its radar.

Anders Sjoman, VP of communications at Voddler, said the company wasn't worried Netflix would squeeze out local players in Scandinavia.

"Our biggest competitor is not the other VOD services, it's still piracy, so more competition, more legal VOD companies, is great news for the industry," Sjoman said, adding he didn't think the U.S. giant had much of an advantage over the smaller Nordic firms. "They might have some economies of scale when it comes to technology but when it comes to content, they have to go swimming in the same licensing pool as the rest of us and pay the same fees."

Rights to feature films and TV series are licensed on a territory-by-territory basis, meaning Netflix will have to negotiate with multiple partners to secure VOD rights across the five Nordic territories of Sweden, Denmark, Norway, Finland and Iceland.

Beyond competition, analysts have also cited the costs of rolling out the Netflix service internationally, which has hurt the company's profitability.

"We continue to believe increasing competition poses a risk to both domestic and international subscriber growth and profitability – and with an unwavering plan to ramp international spending, we believe overall risk is heightened and are reiterating our "sell" rating," B. Riley analyst Eric Wold said about Netflix's stock early Wednesday. "Our conviction levels (on both earnings and valuation outlook) will remain low until the risk of profitability headwinds pass."

Like some others on Wall Street, Wold remains doubtful about the pay-offs of Netflix's global expansion. "We continue to believe that Netflix is currently spreading itself too thin globally - into markets that have proven more difficult than initial projections - and committing itself to incrementally significant capital/content requirements just as the U.S. market is becoming increasingly competitive," he said.

Scandinavian consumers have been faster than the rest of Europe in adopting online media alternatives - as evidenced by the rapid growth of Swedish music streaming service Spotify - but competition from multiple services has so far prevented any one company from dominating the market.

Analyzing Netflix's household opportunities in Scandinavia, Wold highlighted that the U.S. and U.K. have 85.6 million and 20.4 million broadband homes, respectively. "These four new countries have 3.0 million (Sweden), 2.1 million (Denmark), 1.7 million (Norway) and 1.6 million (Finland) – or a total 8.4 million broadband households combined," the analyst said. "Therefore, even a significant penetration of this region over the next few years would be unlikely to generate any meaningful contribution."

Each of the major Scandinavian VOD operators has a distinct business model. Voddler is mainly a free, advertising-backed streaming service similar to Hulu with a la carte rental services added on.

LoveFilm is a subscription-based rental service, which also offers a mail-oder DVD rental program, a business that Netflix has put on the back-burner in the U.S.

Acetrax's strategy has been to bet on the future of smart TV, signing partnership deals with most of the major television manufacturers, including Samsung, Panasonic, Toshiba and LG, to embed its Acetrax VOD app on sets sold across Europe.

MUBI, in contrast, offers a more limited selection of films for a shorter period, but at a very low entry prize and with an "all you can watch" subscription model.

With the exception of the more niche-oriented MUBI, all them want to become Europe's primary VOD service. LoveFilm, which operates across the U.K. and Germany as well as Scandinavia, passed the 2 million subscriber mark this year. Voddler boasts some 1.3 million users in the Nordic territories and recently launched in Spain - still considered by analysts to be the next big international territory Netflix could eye in its international rollout.

Acetrax currently reaches 80 million broadband customers in seven European territories, and its forecast is to have 60 million embedded Smart TV apps across Europe by 2015.