Netflix, the US based on-demand TV-streaming provider, launched its services in Switzerland last Thursday as part of its European expansion plan. Earlier that week it had already launched in Germany, Austria, France, Belgium and Luxembourg. Will Netflix succeed in those counties or will this expansion rather turn into a "money-burning" machine?
Netflix was co-founded by Reed Hastings and Marc Randolph in 1997 as a DVD rental service. In 1999, Netflix introduced the monthly subscription fee and in 2007 they started turning into an online video on demand service. Netflix's business model proved to be a great success in the US and South America and they reported to have crossed the 50-million subscriber mark in the second quarter of 2014. However, since the recent expansion plans in Europe and the launch in the markets mentioned above, the Netflix stock has continuously lost value. Do investors not believe in the success in Europe?
In light of its latest launch in Switzerland, Reed Hastings said in an interview that he hopes that the European markets (excluding the UK, where Netflix already operates profitably) will become profitable within seven years. I see two main reasons though why the journey in Europe could be more difficult than initially assumed:
1) Local competition: Local providers had enough time to prepare for the Netflix launch. Large operators like Sky in Germany or CanalPlus in France are also offering a flat rate on demand subscription which works directly via the customers' TV boxes and both Sky and CanalPlus introduced mobile apps to receive their services everywhere. If these players match the prices of Netflix and keep increasing their content, it remains open whether the majority of customers will actually sign-up for Netflix as well.
2) Limited movie offer: Compared to its US service, Netflix's movies and series range is quite small in the European countries. Netflix announced that the range of movies and series would double in the first year, but it will take time to reach the level of the competition. Additionally, all those European countries have own languages and their US content cannot simply be replicated. Despite the fact that many people watch movies in English or are comfortable reading subtitles, I am convinced that the majority still prefers to watch movies and shows in their mother tongue. Lastly, some of Netflix's highly successful own productions in the US, like House of Cards, are already been licensed to TV channels in Europe and Netflix themselves won't be the first ones to actually stream the production.
Given the success and financial power from its US and South America operations, I think Netflix can potentially be successful in Europe in the long term. However, in the short term I have some doubts about the company's projections, and it seems that investors do as well. Perhaps Netflix faces a bumpier ride than what they are assuming on their expansion strategy papers back in the headquarters in Los Gatos.
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