A Huge New Market for Netflix!

The Great White North may be an appropriate way to describe Netflix's (Nasdaq: NFLX  ) buoyant stock in recent years, but it's also where the company is heading. Netflix will be available in Canada later this year, exclusively as a streaming service.

Netflix won't be opening a handful of new regional distribution centers, nor will subscribers up north receive Canadian-red mailers with DVDs or Blu-ray discs inside. Instead, they'll enjoy a digital smorgasbord of whatever flicks the company is able to secure licensing rights for in Canada.

This bear is watching, on many different levels. Details beyond a fall launch have yet to be revealed, but the company's first international push should answer several big questions.

How much will plans cost?
There isn't a "streaming only" option stateside. Unmetered digital plays are simply included in all of the unlimited plans, starting with the $8.99-a-month offering that includes one DVD out at a time.

In other words, many of Netflix's 14 million subscribers may actually mistake streaming as a "free" offering, when it was simply tacked on as the mother of all retention bonuses at no additional cost.

However, millions of Netflix subscribers ignore the generous perk. Just 55% of Netflix users took advantage of streaming during the first three months of this year. That number continues to inch higher with every passing quarter, but it still means that more than 6 million Netflix users either don't see the value in the feature, or just aren't technologically able to get it going.

Either way, Netflix can't storm into Canada at anywhere near the $8.99 monthly price point without optical discs. Finally, Netflix will know the true value of its streaming service.

Will it go alone?
Netflix had indicated that it would be expanding into one new market this year, so this move isn't much of a surprise. Shares actually failed to beat the market during yesterday's meager advance. However, it's clear that Netflix will have to expand quickly throughout the planet if it sees any kind of promise in its streaming buffet outside of North America.

Rivals know this, and the same titans that have misread consumer appetite for digital video by offering only piecemeal rentals -- Amazon.com (Nasdaq: AMZN  ) , Apple (Nasdaq: AAPL  ) , and Blockbuster -- are unlikely to let Netflix have all of the unlimited fun in Canada.

The rival to watch here is Coinstar's (Nasdaq: CSTR  ) Redbox, whose DVD kiosks are already growing more quickly than Netflix's overall business. Now Redbox will be moving beyond its brisk $1-a-night rentals, revealing a highly anticipated digital strategy in three months.

Blockbuster has stores in Canada. Amazon and Apple have a strong overall retail presence in the country. Netflix and Redbox are on the outside looking in, but one can't dismiss Cointstar's fast-growing subsidiary.

If Redbox is lining up movie studios for a digital offering later this year, it may as well license for all of North America and take on Netflix while the latter's Canadian efforts are just getting started.

We don't know about Redbox's plan, but we did get a tease earlier this year. The chain began surveying customers, floating their perception of a monthly plan that includes unlimited streaming and four nightly rentals at a compelling price point of $3.95 a month.

Is Canada ready?
Netflix, paired with unlimited broadband plans, has created a cottage industry for home-theater appliances that stream flicks. TiVo (Nasdaq: TIVO  ) and Microsoft's (Nasdaq: MSFT  ) Xbox 360 led the way two years ago, giving Netflix the benefit of streaming through boxes that were already connected to televisions.

The revolution continues, and now even Google (Nasdaq: GOOG  ) is getting into the set-top box convergence niche with its Google TV initiative.

There hasn't been a pressing need for similar home theater streaming outside of the United States, in part because many countries -- particularly European ones -- are keeping growth in check with their metered bandwidth.

Canada is a good choice for Netflix's expansion, largely because of its proximity to the United States. Success will probably also hinge on how deep its streaming library is for Canadians. Will it match the roughly 20,000 titles already available domestically? Will it offer more new releases, in order to justify the premium stand-alone pricing?

The next few months will reveal plenty about Netflix's viability as an exporter -- and how its competitors will react to the opportunity if it's initially successful.

Digital streaming just got a little more interesting.

How do you think Netflix will fare in Canada? Share your thoughts and your potential suitor in the comment box below.

Microsoft is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers selection. Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google. Try any of our Foolish newsletter services, free for 30 days.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 20, 2010, at 11:39 AM, BioBat wrote:

    It's a new market but I wouldn't use the term 'huge' to describe it. Canada's population is a tenth of the USA. Of a population that hovers around 30 million (plus or minus a few million), approximately 20% of the population doesn't speak (much or any) English so there is no immediate bump from them. That translates into a market base of 24 million, and if Netflix is lucky to achieve a market penetrance of what it has in the US, that's only going to translate into 1-1.5 million new subscribers. It's good, but it's not something like jumping into a market like India or Japan where growth numbers could be staggering.

    So while I don't expect any huge uptick in subscriber numbers, I think it's a good and relatively safe jumping point. I imagine it's far easier to gain North American distribution rights than to try and jump into an entirely new market without a back catalog. Eventually when they do get Netflix French, if they can show that they can translate the English speaking success, they're going to be that much better off if and when they do go abroad.

  • Report this Comment On July 20, 2010, at 12:36 PM, Patricia013 wrote:

    I love Netflix - use their streaming videos constantly and even have a Roku box so I can stream them on my TV. I'm hoping that someday soon they will be able to stream everything instead of mailing. I think the future is bright for this company.

  • Report this Comment On July 20, 2010, at 12:48 PM, Shichman wrote:

    I also own a Roku box... Everyone I know has netflix, really everyone. Fantastic company.

  • Report this Comment On July 20, 2010, at 5:41 PM, TMFBreakerRick wrote:

    BioBat, you're right about Canada's population -- but the headline is actually referring to the "huge" market as being international expansion, in general.

    Canada should just be the first step.

  • Report this Comment On July 21, 2010, at 12:14 AM, teebeecan wrote:

    I don't think Netflix will do all that well in Canada. The pop. is away too widespread and thin. Outside of a couple of major centres like Toronto an Vancouver you will not find a lot of people who have the technology to stream video.

  • Report this Comment On July 21, 2010, at 1:02 AM, runswithbulls wrote:

    Mr. Hastings knows what he is doing! It is an excellent company and I project an explosive future. This should have an immediate effect on the stock price and probably will intensify takeover attempts.

    Runswithbulls

  • Report this Comment On July 22, 2010, at 7:59 AM, runswithbulls wrote:

    Let the Games begin! Mr. Hastings projects a calm demeanor in the few times I have listened to him, e.g., when he has been interviewed by TMF. I think of the various "projections" (i.e., wishful thinking) of takeovers by other "players". There are players (Redbox, et. al, and PLAYERS (Amazon, Apple, and a couple of other sophisticated players) who in the back of their minds see the value of bringing Netflix into "the fold" and might at any time make an offer to buyout. Mssrs. Bezos and Jobs are capable of "bringing something to the table" Which are the team players? I see the combination of Mr. Bezos and Mr. Hastings resulting in a synergism that could only benefit the stockholders. As for Redbox and kiosks, Mr. Bezos and Mr. Hastings realize that one must think outside the box.

    runswithbulls

  • Report this Comment On July 22, 2010, at 10:05 AM, rancwr wrote:

    @teebeecan I think you are severly misinformed on the technical abilities of Canadian households with regard to the ability to stream video (read broadband internet connection).

    Over 85% of Canadian households have internet access at home, and of those, about 90% is high speed/broadband. In surveys released on broadband penetration, Canada ranks about 10 to 15 places higher than the U.S. I know I've had broadband in my igloo for ages now. ;-)

    A spread out population isn't relevant to streaming video, but even if it was, that isn't the case either. 9 in 10 Canadians live within 100 miles of the US boarder and Canada, by in large, is mainly an urban country with approximately 80% living in cities or large towns vs only 20% in rural.

  • Report this Comment On July 22, 2010, at 4:26 PM, xuincherguixe wrote:

    BioBat.

    There's always French Movies. There's actually a pretty strong film industry in Quebec. Netflix could be a new distribution method for them. But I digress.

    Even if it's not big amongst the French elements, there's pretty good broadband access here. As Rancwr just pointed out.

    We're not evenly spread out over the country. It's in a few really dense clusters. That's why getting broadband is so easy. Not too many people live in tiny towns. For those that do access to services can be a significant problem.

    That being said, if it's marketed the right way it could be huge. I could honestly see it over taking traditional rental stores. That won't happen instantly, but it's a definite possibility.

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