Netflix's Europe Problem

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Established competitors could thwart the company's overseas onslaught.

Netflix CEO Reed Hastings has bankrupted Blockbuster and outmaneuvered Apple and Google in the streaming video space, but if it is to expand beyond its 28 million North American subscribers -- and justify its $12.6 billion market cap -- it has to go global. After dipping its toe in the Canadian market, the company will launch in Latin America this year and has been quietly preparing for a bow in Spain and the U.K. in 2012. Although Netflix declines comment, sources confirm that the company has signed a multiyear exclusive output deal with Lionsgate U.K. and is talking to other content providers across the continent as well as in Asia.

But Europe still presents a particular challenge for Netflix.

"This is no slam dunk," says Simon Morris, chief marketing officer at LoveFilm, the U.K.'s leading VOD company and, with operations in Germany and Scandinavia, Netflix's main European competition. "You can't just take a U.S. business model and drop it into Europe."

Indeed, unlike North America when Netflix began streaming in 2007, Europe is jam-packed with VOD competitors. Though none has Netflix's size, many have the cash and clout to go toe-to-toe with the U.S. giant. Britain's News Corp.-controlled BSkyB and France's Canal Plus are pay-TV powerhouses with a regional stranglehold on film rights and a slavishly devoted subscriber base. LoveFilm, which boasts slightly less than 2 million subscribers, has the backing of deep-pocketed parent company Amazon.

Rights issues could bog down Netflix as it sets up a European beachhead. When Hulu tried to export its service to Europe, it found itself shut out by content owners, many of them local broadcasters.

"Netflix has a really good track record of building a very good service that works across loads and loads of devices. But it faces several structural difficulties," says Dan Cryan, senior analyst at media research operation Screen Digest.

One of the biggest difficulties is infrastructure. To ensure skip-free streaming of Netflix films, users need a high-speed Internet connection, but broadband penetration is spotty in Europe.

If Netflix can move fast, timing could be in its favor. Britain's competition commission ruled Aug. 19 that BSkyB's exclusive contracts with the six major studios were an unfair barrier to potential competitors, ordering the company to weaken its hold on Hollywood blockbusters and providing an opening for VOD suppliers. And in Spain, where online film piracy is widespread, the government is preparing a bill that will allow courts to shut down the other competition --illegal download sites.

But this fall, Swedish VOD group Voddler is launching in Spain, and LoveFilm claims it is planning to extend its European footprint. So if Hastings wants to continue his impressive winning streak, he needs to jump.

-- Benjamin Jones in Madrid contributed to this report.