Netflix, Inc.'s Major European Expansion Is a Risky Move
Netflix,'s plans for a major European expansion are now official. The company intends to launch service in 6 new European markets this fall. The "headliners" of the expansion are France and Germany, as has been widely rumored since late last year. Netflix will also enter Belgium, Luxembourg, Austria, and Switzerland.
In the past, I have highlighted the high short-term cost of Netflix's international expansion. While the existing Netflix international markets are likely to turn a profit by Q4, the 6 new markets could lose on the order of $100 million per quarter upon launch. This would cause earnings to decline temporarily, until Netflix offsets the increased costs with subscriber growth.
Netflix's new international expansion will be expensive, and it's also quite risky
However, that's just a short-term issue. The bigger concern for Netflix shareholders is execution risk. This is arguably Netflix's boldest international expansion ever, and if it doesn't live up to expectations, the cost of fixing it could be staggering.
A bold move
Netflix's recent international expansion projects have gone fairly smoothly. However, the last two expansions (the Netherlands in September, 2013 and the Nordic countries in the fall of 2012) were much smaller in scope. The countries Netflix will enter this fall are about 4 times as populous as the Netherlands and the Nordic countries combined!
Additionally, most of Netflix's international territories are either English-speaking (Canada, the U.K., and Ireland) or historically Anglophile (Netherlands and the Nordic countries). The only exceptions are the Latin American territories launched in late 2011.
The same can't be said for Netflix's newest markets. Whereas over 85% of the populations in Denmark, Norway, Sweden, and the Netherlands are fluent in English, just 56% of Germany's population is fluent in English. In France, that falls to just 39% of the population.
Overcoming the language barrier
Netflix will offer local language content in these countries in addition to American content. However, it still seems likely that Netflix will have to expend more effort to sign up subscribers in France, Germany, and some of its other new markets than was the case in its other recent launch markets.
Of all its international markets, Latin America has been by far the toughest for Netflix. Netflix's growth in Latin America has been plagued by a variety of issues, including broadband quality, low credit card usage, and a less-developed e-commerce landscape. However, the lack of an English-speaking population may also be a headwind to Netflix's growth there.
It's hard to tease out just how much the lower demand for English-language content might be affecting Netflix's performance in Latin America. In any case, between the lower proportion of English-speakers in France and Germany, the sheer size of this year's expansion, and regulatory issues related to financing local content in France and other markets, this year's expansion is far riskier than any of Netflix's other international launches since it entered Latin America.
European expansion is, without a doubt, a major opportunity for Netflix in the long run. That said, it's odd that after two years of very methodical expansion into "easy" markets with high English literacy, Netflix is suddenly pushing the pace with 6 new markets where only half of the population (on average) speaks English.
At a recent conference, CFO David Wells indicated that Netflix is willing to take big risks on new markets. For example, Netflix will enter new markets even if it can't get as much high-quality content as it would like. Netflix's management thinks that it can solve problems like that on the fly after entering the market.
My Foolish colleague Anders Bylund applauds that level of urgency. To me, it seems like an unnecessary level of risk. If Netflix wants to try its hand in a potentially tougher market like France, it would make more sense to launch that market alone, or in conjunction with small English-speaking markets like Australia and New Zealand.
That would minimize the cost of fixing any problems that arise. Instead, Netflix is entering 6 non-English speaking markets in Europe. Any setbacks could tie up management resources and cost hundreds of millions of dollars.
If Netflix's new international territories all reach breakeven within 2 years or so, its upcoming round of expansion will have been a smashing success. However, this is likely to be the toughest new market launch since the troubled Latin America launch from 2011. By undertaking such an ambitious expansion, Netflix's management is exposing shareholders to a lot of risk.
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The article Netflix, Inc.'s Major European Expansion Is a Risky Move originally appeared on Fool.com.Adam Levine-Weinberg is short shares of Netflix. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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