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Netflix puts end to fumbling, penetrates Scandinavia

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For the first time in a while Netflix has said something that has not crashed its share price, and has lifted it instead: it plans to launch its online movie service in the fourth quarter in the four countries of Scandinavia – Sweden, Norway, Denmark and Finland. It confirmed that the cost of doing so will mean that it makes a small loss for the fourth quarter. Once again the offering will include both local and global content offerings.

The Scandinavian region has about 25 million people in about 11.3 million TV homes, and once it launches there, Netflix will find that much of the content it acquires can be recycled in the Baltics, and parts of central and Eastern Europe. This is because Scandinavian pay TV operators ViaSat and Telenor are also strong in those countries with Scandinavian content. Eventually such a launch will be able to reach the same kind of population as it reached with its UK and Ireland launch, which took in over 60 million people.

For the time being it is closer to half that, although things like pay TV penetration and broadband penetration in Scandinavia are more or less the same or better than the UK, so it should pick up customers at a similar rate. Netflix added 1 million customers in the UK in just six months, despite being up against the Amazon-owned LoveFiLM, which also offers online DVD rental in the UK where it is strongest, but offers online movie services in Scandinavia and Germany as well.

LoveFiLM has managed to go from 1.6 million customers when Amazon bought the company 18 months ago, and it has been slow to acquire more customers and is now generally understood to have added just 400,000 customers in that time, taking it to 2 million. The problem is that its churn is so high. In a third of that time Netflix – with its far simpler online-only offering – has added more than twice as many customers. So it is likely that LoveFiLM still has its PR nightmare to go through, if at some stage it copies Netflix and drops the DVD online rental service or at least separates it so that customers can buy just the online service. The blundering way this move was managed by Netflix last year almost halted its global progress.

If Netflix successfully adds 50 per cent more territory with the move into Scandinavia, it could easily overtake LoveFilM in another six months and certainly by the middle of 2013 – and that‘s without adding the 82 million inhabitants of Germany to its target market, something it is sure to attend to in the coming year or so.

There are other online movie services in Europe, as well as some online DVD rental services, notably in France, but none that have over 1 million remaining subscribers, and the biggest block to Netflix gains are TV Everywhere services from the pay TV community, which just reached 130 million homes in Europe

Netflix began streaming in the US over four years ago and has managed to acquire 24 million US streaming customers, with another 3.6 million in Canada, the UK and Latin America. We always thought that launching in Latin America before Europe was a mistake due to the lower penetration of fixed line broadband and the rampant counterfeit movie market there. Its strategy since arriving in Europe has been sound and more successful, and it is now being seen by financial analysts as chasing LoveFiLM from market to market in order to deliberately undermine it.

We have asked before and will ask again: why doesn't Amazon just simply buy Netflix, rather than compete with it, especially now that the Netflix share price makes it a snip, which it could win even in a proxy war for a tad over a $4bn premium on the $3.5bn valuation it has today. Netflix said at its results call in late July that the effort of a new international market would bring it a loss in the fourth quarter, due to what at the time was an unnamed territory launch in Europe.

Its run rate last quarter showed it acquiring over half a million international streaming customers a quarter, a rate that will go up, as well as a similar rate in the US, although this is known to be seasonal. That makes around 1 million new streaming customers each quarter... and rising.

Although this news will confirm that Netflix is going to continue spending all of its profits for the foreseeable future on original and new content, as well as international launches, the stock still managed to rise a few percent on the news, as it was upgraded by a number of US equity analysts, including Bank of America.

Copyright © 2012, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.

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