Netflix Set to Expand in Europe - Analyst Blog

Streaming service provider Netflix Inc. NFLX recently announced that it plans to enter the markets of Germany, Austria, Switzerland, France, Belgium and Luxembourg by the end of 2014. To date, this will be Netflix's largest international expansion at one-go.

Netflix started its international operations by entering Canada in 2010 and then expanded to Latin America in 2011. The company further forayed in the U.K., Ireland, Finland, Denmark, Sweden and Norway in 2012 and in Netherlands in 2013.

Netflix has been striving to expand its European operations for sometime. The expansion in Germany and France is a prudent idea for Netflix, as households in both the countries have significant access to high-speed Internet.

Reuters quoted estimates from SNL Kagan, per which Germany ranks #1 among European countries in the number of broadband households, with 29.1 million in 2013. France is third with 24.7 million, behind Russia.

Nonetheless, there is no dearth of competition among video-on-demand service providers in the region. Amazon.com's AMZN Prime Instant Video in Germany and Canal Play Infinity from Vivendi's Canal Plus in France are the major competitors.

Moreover, per Reuters, Netflix may face regulatory hurdles in France regarding streaming of movies. Regulations do not allow monthly subscription video service providers such as Netflix to stream a film until it completes three years since its premiere in theaters.

However, the film may be rented through a set-top box four months after its premiere. This is where we believe that Netflix's partnership with the likes of TiVo TIVO will come in handy. The company can also enter into alliance with local cable operators to provide the service in the country.

International expansions are one of the key growth catalysts for Netflix. However, starting operations in a new country demands huge investments and considerably increases marketing and general and administrative expenses. Netflix, therefore, expects the international segment to continue to report loss for the rest of the 2014.

The company reported $35.0 million loss in the recently concluded first quarter, which was significantly better than loss of $77.0 million posted in the year-ago period. At the same time, international revenues (21.0% of revenues) soared 88.1% year over year and 20.6% quarter over quarter to $267.0 million, which is encouraging.

In such a scenario, Netflix's recent price increases (for both domestic and international new users) will help the company to offset the higher expenses. Additionally, its expanding content portfolio based on partnerships with the likes of Walt Disney DIS and focus on improving customer engagement will continue to boost subscriber base, going forward.

Currently, Netflix has a Zacks Rank #3 (Hold).