September 12, 2014 / 3:28 PM / 3 years ago

Netflix takes on language challenge in next phase of European expansion

5 Min Read

The Netflix sign on is shown on an iPad in Encinitas, California, April 19,2013.Mike Blake

PARIS (Reuters) - When Netflix launches its video streaming service in France and Germany next week, it will have to contend with the locals' preference for watching content in their own languages as well as the presence of formidable pay-TV competitors.

The California-based company's growth and profitability hinges on the next chapter of its four-year old international expansion in which it is set to enter six European countries, including Switzerland, Austria, Belgium and Luxembourg.

The move would expand Netflix's potential market to 180 million homes -- double the number of homes with broadband connections in the United States where the service has 36 million customers and consumes up to a third of bandwidth on telecom networks at peak hours. [ID:nL4N0PW47V]

Chief Executive Reed Hastings must walk a tightrope when launching in new countries, said analyst Toby Syfret of Enders Analysis, because the group must absorb significant content and other investment costs to build up in each market before reaching profitability. [ID:nL4N0PX4EW]

But Netflix has gotten the formula right since 2012 launches in Britain, the Netherlands and Nordic countries, where viewers are also comfortable watching shows in English, and may break even there next year.

"I think Netflix will face a much stiffer test in France and Germany because of the language issue," said Syfret.

When French and Germans watch American movies and TV series, they tend to be dubbed and not sub-titled, a factor that could slow Netflix down.

"It will need to invest in localized content but the question remains how much and if it can afford it."

Crowded Field

Pay-television operators in France's Canal Plus, which is owned by Vivendi, and Germany's Sky Deutschland, have already launched streaming video services to blunt Neflix's arrival. They are betting their established brands and exclusive content, especially live sports, will keep customers loyal to their core pay-TV subscriptions, despite higher prices, even if some will try Netflix on the side.

Others such as France's leading telecoms operator Orange and German broadcaster ProSiebenSat.1 have also created similar offerings to Netflix. There are at least four streaming services in Germany already: Maxdome from ProSieben, Snap from Sky, Prime Instant Video from Amazon, and Watchever from Vivendi.

Both countries have a multitude of free-to-air channels that broadcast movies and series, and Germans especially are not in the habit of paying extra for TV, analysts said.

"They are not entering virgin territory where everything is for the taking," said Philippe Bailly, consultant for media companies at NPA Conseil in Paris.

In France, Netflix also has to contend with telecom companies who deliver TV services to almost half of households via set-top boxes. Netflix has not yet signed with Orange, SFR, Bouygues Telecom, Iliad or cable operator Numericable so that it would be accessible on people's televisions directly instead of only over the Internet.

Industry executives who declined to be named said Netflix was likely to eventually strike deals with broadband providers as it had in the United States and Britain. But Bailly said its absence from the distribution channel could slow its French roll-out and thinks it will take some 18 months to hit 1 million subscribers.

Home Grown

Nevertheless, taking a page from the playbook of its U.S. operation which created hits like prison comedy "Orange is the New Black", Netflix plans to produce an original series in France, called "Marseille", a political thriller set in the southern port city. It also bought the rights to a French kids cartoon called Wakfu created by an independent studio Ankama in northern France.

It's expected to take similar steps in Germany to produce content in partnership with local studios.

But tailoring Netflix to European tastes is not expected to come cheap. Some investors are already worried about the cost of Netflix's international ambitions, although Netflix shares have risen more than 30 percent this year, outperforming the Nasdaq Composite index, which is up 10 percent, and the Dow Jones Industrial, up 3.5 percent.

The company has said its international operations would lose about $42 million (32.45 million euro) in the third quarter, while its spending on content overall would hit nearly $3 billion this year.

(1 euro = 1.2942 US dollars)

Additional reporting by Kate Holton in London and Harro Ten Wolde in Frankfurt; Editing by Greg Mahlich

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