Netflix's European dilemma: Stick it out, expand, or go home?

Netflix takes another profit bullet for the UK and Ireland, as its international expansion does better than expected, but still lost money. Should it stay or should it go?
Written by Zack Whittaker, Contributor

Netflix is doing better than expected, according to its Q1 2012 earnings report, despite a strong competitive front to keep the company at bay in the television and movie streaming business.

It recorded a loss of $5 million on revenue of $870 million, whereas a year ago it reported a profit of $60 million on revenue of $719 million.

In a nutshell, its European expansion is not what it should have been, but all eyes and blame-pointing fingers are firmly in the direction of Latin America. Netflix said it will return to profitability in Q2 2012, but with already struggling international markets, it's hard to feel so confident about their upbeat tones.


Focus in on Europe, its newest market outside North and Latin America, and the figures show a struggle yet a firm determination to make the expansion work.

Netflix opened its doors to the UK and Ireland in January. Its first 90 days showed more subscribers than it saw in its Canada and Latin America rollout.

Netflix's international launch only contributed 3 million new subscribers, bringing its user base to 26 million. The figures were not broken down, but considering how poorly Netflix did in Latin America, an estimated two-thirds came from the UK and Ireland, or around 2 million.

While Netflix said it was the "highest net additions we’ve ever seen in the first 90 days of an international market launch," Netflix made a loss in the UK and Ireland, and knows it will be an uphill battle to compete with the already well-established television and movie streaming market.

Netflix expects it to take longer than 8 quarters to reach sustained profits as it builds up its network in Europe, and said it will target "an additional attractive European market in Q4 of this year." The company isn't shaken by its sluggish start in the region, and seems keen to push forward to the new, mysterious European market, wherever it may be.

But in October, Netflix said it would not branch out to further European destinations outside the UK and Ireland until profitability returns. Netflix made a loss, and yet is hedging its bets on another European market?

But growing into Europe will cause Netflix to lose even more money, particularly at a time when it cannot afford to. Its desire to expand and make its name a global brand stems from its home U.S. market, and it should first cater to its established audience before it generates enough to push outside the Americas.

Its bitter rivalry with Amazon-owned LoveFilm was mentioned, along with Sky, which commands a large proportion of the UK television market share. LoveFilm keeps nixing contracts Netflix wants, or encroaches on its territory by scoring the same contracts Netflix already has.

The company is also riding on factors outside of its control in order to expand fully. It notes:

"If the UK Competition Commission eventually forces Sky Movies to not control the Pay TV 1 output from all six major studios, that then may provide an opportunity for Netflix to bid earlier for major studio deals than otherwise would have been the case. It is premature to know how it will play out."

It's the game of "ifs" and "buts"; Netflix is hoping the UK competition regulator will allow a fairer market in the country. Netflix knows it's too early to tell, and appears to be looking for a British get-out clause already. Reading in between the lines: If the competition regulator keeps Sky going, then we can't compete.

Netflix is likely in it for the long haul, and will stick it out in a new, foreign market in order to make it work. A retreat at this stage would be damaging beyond belief for the company. If the UK and Ireland doesn't work, Netflix still has its other European market up its sleeve to power down on.

Despite the UK and Ireland being English-speaking countries, Netflix may have been better off targeting Germany first. Perhaps that's where they are heading to next? The rumour mill is grinding.

Image credit: Josh Kenzer/Flickr.


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