Netflix announced that it will bring its streaming TV and movie service to 6 new European countries later this year. What are the prospects for success? I estimate they could contribute 10% more revenue to the company within a year.
The six countries Netflix is entering – Germany, France, Belgium, Austria, Switzerland and Luxembourg – represent 175 million residents. Broadband penetration is healthy; 62 million homes have broadband subscriptions. The number of TV households is also large, 78 million. The countries are also among the most stable and wealthy of European nations. That said, they are far from equal.
Netflix’ success in Europe largely rises and falls in Germany and France. Germany’s population is 82M, there are 40M TV homes and 30 million with broadband. France’s population is 66M, with 27M TV and 25M broadband homes. If we consider Netflix’ core market TV homes with broadband, 85% of the new potential subscribers are in France and Germany.
Though government regulations may be tough to live with in France, the prospects for success there are better than in Germany. While the amount of television watched in both countries is about the same (around 3.5 hours a day), a German viewer’s appetite to pay to watch is much lower. Pay-TV penetration is barely above 50% in Germany, while France’s penetration is well above 70%. The amount paid for TV services is also very different. According to Ofcom, the average revenue per subscriber paid for pay-TV in France in 2009 was more than twice that paid in Germany ($47 a month versus $20.)
Netflix pricing policy is carefully selected to not force a potential customer to choose between pay-TV and a Netflix subscription. Reed Hastings positions the service as an augmentation to traditional TV, not a replacement. That means the monthly cost needs to be considerably lower than pay-TV in each market the company enters.
Pricing the service aggressively in Germany will be very difficult. And aggressive pricing in this market will be key, given the reluctance of the population to pay for TV services at all. The company typically launches in the price range of $8-$15 a month. This puts pricing on a par with pay-TV pricing in Germany. This is not so in France however, where a $10 price is less than 25% of the average pay-TV bill.
Prospects in Belgium and Austria look to be slightly more favorable than Germany, but considerably worse than France. Switzerland looks like a great market for Netflix, with as many broadband homes as pay-TV. With a population of just a half million, Luxembourg will contribute little to Netflix’ European success.
Where will Netflix be with all 6 countries after 1 year? The upper bound for success is probably set by Scandinavia, where conditions for service were almost ideal. The region jumped out to 17% penetration in under a year. The lower bound is likely the company’s performance in the ultra-competitive UK market. It took Netflix 2 years to struggle to a 6% of TV homes.*
I would expect Germany to have achieved a 3% share of TV homes and France 7% by the end of 2015. The average penetration for all 6 countries should be around 5%, or 4M homes. Assuming an €8 monthly cost ($11), the six countries will contribute approximately $125M in revenue in the fourth quarter after launch. Netflix earned $1.27B in Q1 of 2014.
Why it matters
Netflix continues its strong focus on International expansion with launches later this year in 6 new Northern Europe countries.
Germany and France dominate the region, though the prospects for success look better in France than Germany.
Overall, a 5% penetration of the countries after one year seems achievable.