Netflix Goes Full Stream Ahead With a Scandinavian Invasion

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NetFlix
Netflix (NFLX) has identified its next foreign market.

The popular video service revealed on Wednesday morning that it will roll out its premium streaming platform through Norway, Sweden, Denmark and Finland later this year.

There won't be any optical discs or distribution centers to open across Scandinavia. There won't be the option to rent movies on DVD or Blu-ray discs the way that stateside customers can. Holding to Netflix's strategy when it entered Canada two years ago, Latin America and the Caribbean last year, and Ireland and the U.K. earlier this year, this will be exclusively a digital streaming offering.

It's just as well. The optical disc continues to fade in popularity at Netflix, and now less than a third of its 30.1 million subscribers continue to pay for physical rentals.

Surprise Decision

"We've decided to open an additional attractive European market in Q4 of this year," Netflix wrote in last month's quarterly letter to shareholders. "We will have more to say about this market later in Q3."

Well, the company's talking now.

The Scandinavian push is somewhat surprising. After securing licensing rights for Spanish and Portuguese content last year for its streaming service in South America, Spain and Portugal seemed to be logical choices for its next markets. And given Europe's sovereign debt crisis, the relatively sturdy and financially stable Germany would've been a sound fiscal choice.

However, after running into fierce competition in the U.K. earlier this year with BSkyB and Amazon.com's (AMZN) LOVEFiLM offering similar platforms, Netflix is probably identifying expansion markets based on its likelihood of success.

The Problem With Red Ink

Expansion bears a price, and that's the one thing that shareholders aren't looking forward to as Netflix continues its global rollout.

Netflix braced investors earlier this summer for the probability of a quarterly loss during this year's fourth quarter as it expands in Europe. Netflix also posted a small loss when it introduced its service in Ireland and the U.K. earlier this year.

Some analysts believe that Asia is next on Netflix's attack strategy, and it remains to be seen when the company will be strong enough to sustain overall profitability as it absorbs international expansion costs.

Investors will also want to know if this will ultimately be worth it. Just 3.6 million of Netflix's 30.1 million subscribers are international accounts, and that segment isn't anywhere close to turning a profit.

The bullish counterargument is that the potential for growth is clearly larger overseas. Roughly a quarter of all U.S. homes are Netflix subscribers. After two years, the company's market penetration in Canada stands at 10%. That's impressive, but the upside is clearly there.

Netflix will continue on its world tour, and investors will just have to hope that it's eventually a rewarding experience for their battered shares.



Motley Fool contributor Rick Munarriz owns shares in Netflix. The Motley Fool owns shares of Netflix and Amazon.com. Motley Fool newsletter services have recommended buying shares of Netflix and Amazon.com.


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