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Adios, Spain. Hej, Sweden and Norway.
Those are the words from European phrasebooks that Netflix (Nasdaq: NFLX ) is practicing today. The company had been rumored to look at southern Europe for its next international expansion push, but the real target turns out to be Scandinavia instead.
Being Swedish by birth and dual citizenship, I have to say my curiosity is beyond piqued.
By the end of 2012, Netflix will roll out streaming video services in Sweden, Norway, Finland, and Denmark. Iceland is left in the cold, and the company doesn't seem concerned with lesser Scandinavian satellites such as the Faroe Islands or Greenland -- hardly worth the trouble because of low populations and remote geographic locations.
The bull case
So what makes Scandinavia proper a suitable expansion target, then? The company isn't saying much about its motivations, but here's what we know about the target countries:
- This push will cover some 25 million fresh consumers, which is less than Canada's 35 million but still a respectable chunk of change.
- All of these nations are known for high standards of living and high income per capita. You won't find this combination of personal wealth and high population counts anywhere else, so it makes sense to introduce an entertainment service with monthly fees to all of this disposable income.
- They're also among the most broadband-friendly nations in the world. According to the latest World Economic Forum rankings of technological readiness, these countries are all among the seven most wired nations on the planet and far ahead of the U.S. in the 18th slot. At least 87% of each population was classified as active Internet users in 2010, versus 79% stateside (and 0.2% in East Timor, rounding out the rankings). The infrastructure is clearly ready for Netflix's digital video services.
Those are the factors weighing in favor of entering the Scandinavian markets, and I'd say they make a strong case. But it's not all polka dancing under the midnight sun with blue-eyed Vikings by your side, because these markets also pose some unique challenges.
What's the problem?
For one, there's some established competition around these parts. Amazon.com (Nasdaq: AMZN ) has already introduced its Lovefilm service in Sweden, Norway, and Denmark. And that's not all.
Local service Voddler has distribution deals with Hollywood powerhouses Walt Disney, Warner Bros, and Viacom subsidiary Paramount, among many others. In fact, that service boasts content from Warner's HBO Home Video unit, and it'll be a hot day in Svalbard before Netflix will match that deal. Voddler has snagged "over 1 million users" across Scandinavia and -- of all places -- Spain so far, and cannot be ignored.
A spokesman for Voddler told Svenska Dagbladet that he's not worried about having Netflix march in, though: "It's just great for the video on demand market as a whole. The largest competition still comes from dirty downloads, and the more players that help develop the VOD market, the better."
Which brings us to the second unique consideration: dirty downloads.
Talk dirty to me
The Voddler rep is referring to illegal movie downloads, which happens to be a big thing in Scandinavia. The Pirate Bay, that infamous downloading portal, is a Swedish product. The Pirate Party is not a shindig with eye patches and peg legs, but a Swedish political party with an agenda to reform patents and abolish copyrights. In a move that's totally unthinkable in the U.S., members of parliament have even lobbied to decriminalize file sharing here.
In short, it's pretty obvious that Netflix has real competition in local piracy.
So this expansion will be a litmus test of the theory that most pirates would abandon the dark side if they had convenient access to large content libraries at reasonable prices. Netflix brings along a marketing budget that privately held Voddler cannot match and that Amazon doesn't seem too keen on matching. Together, they take a stand against a vast sea of scallywags.
Disney treats piracy as a legitimate form of competition, best fought with the tools of doing business in a free market. In this market, Netflix must do the same.
Fetch me some popcorn and rum, will you? I'm gonna love this show.
Netflix is either brilliant or boneheaded to go after this market, and only time will tell which one. To get a firmer grasp on this complex and often self-contradictory stock, you should pick up our brand-new premium report on Netflix. It's a living document that includes access to a full year of updated analysis, making sure that you're never ambushed by the next abrupt twist in the Netflix story. Get started now!