Netflix, Inc.'s Major European Expansion Is a Risky Move

Netflix, Inc. is taking on a lot of risk by launching service in 6 different European countries this fall.

May 25, 2014 at 1:30PM

Netflix,'s (NASDAQ:NFLX) plans for a major European expansion are now official. The company intends to launch service in 6 new European markets this fall. The "headliners" of the expansion are France and Germany, as has been widely rumored since late last year. Netflix will also enter Belgium, Luxembourg, Austria, and Switzerland.

In the past, I have highlighted the high short-term cost of Netflix's international expansion. While the existing Netflix international markets are likely to turn a profit by Q4, the 6 new markets could lose on the order of $100 million per quarter upon launch. This would cause earnings to decline temporarily, until Netflix offsets the increased costs with subscriber growth.


Netflix's new international expansion will be expensive, and it's also quite risky

However, that's just a short-term issue. The bigger concern for Netflix shareholders is execution risk. This is arguably Netflix's boldest international expansion ever, and if it doesn't live up to expectations, the cost of fixing it could be staggering.

A bold move
Netflix's recent international expansion projects have gone fairly smoothly. However, the last two expansions (the Netherlands in September, 2013 and the Nordic countries in the fall of 2012) were much smaller in scope. The countries Netflix will enter this fall are about 4 times as populous as the Netherlands and the Nordic countries combined!

Additionally, most of Netflix's international territories are either English-speaking (Canada, the U.K., and Ireland) or historically Anglophile (Netherlands and the Nordic countries). The only exceptions are the Latin American territories launched in late 2011.

The same can't be said for Netflix's newest markets. Whereas over 85% of the populations in Denmark, Norway, Sweden, and the Netherlands are fluent in English, just 56% of Germany's population is fluent in English. In France, that falls to just 39% of the population.

Overcoming the language barrier
Netflix will offer local language content in these countries in addition to American content. However, it still seems likely that Netflix will have to expend more effort to sign up subscribers in France, Germany, and some of its other new markets than was the case in its other recent launch markets.

Of all its international markets, Latin America has been by far the toughest for Netflix. Netflix's growth in Latin America has been plagued by a variety of issues, including broadband quality, low credit card usage, and a less-developed e-commerce landscape. However, the lack of an English-speaking population may also be a headwind to Netflix's growth there.


English-language content may have less appeal in some of Netflix's new markets

It's hard to tease out just how much the lower demand for English-language content might be affecting Netflix's performance in Latin America. In any case, between the lower proportion of English-speakers in France and Germany, the sheer size of this year's expansion, and regulatory issues related to financing local content in France and other markets, this year's expansion is far riskier than any of Netflix's other international launches since it entered Latin America.

Adding risk
European expansion is, without a doubt, a major opportunity for Netflix in the long run. That said, it's odd that after two years of very methodical expansion into "easy" markets with high English literacy, Netflix is suddenly pushing the pace with 6 new markets where only half of the population (on average) speaks English.

At a recent conference, CFO David Wells indicated that Netflix is willing to take big risks on new markets. For example, Netflix will enter new markets even if it can't get as much high-quality content as it would like. Netflix's management thinks that it can solve problems like that on the fly after entering the market.

My Foolish colleague Anders Bylund applauds that level of urgency. To me, it seems like an unnecessary level of risk. If Netflix wants to try its hand in a potentially tougher market like France, it would make more sense to launch that market alone, or in conjunction with small English-speaking markets like Australia and New Zealand.

That would minimize the cost of fixing any problems that arise. Instead, Netflix is entering 6 non-English speaking markets in Europe. Any setbacks could tie up management resources and cost hundreds of millions of dollars.

Bottom line
If Netflix's new international territories all reach breakeven within 2 years or so, its upcoming round of expansion will have been a smashing success. However, this is likely to be the toughest new market launch since the troubled Latin America launch from 2011. By undertaking such an ambitious expansion, Netflix's management is exposing shareholders to a lot of risk.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit from the rise of Internet TV? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it, but that won't last. And when cable falters, three companies are poised to benefit. Click here for their names. (Hint: Netflix isn't one of them!)


Adam Levine-Weinberg is short shares of Netflix. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information