Just two months ago, streaming video leader Netflix (NFLX -3.92%) embarked on a major expansion in Europe. Netflix started service in six new markets there: France, Germany, Belgium, Austria, Switzerland, and Luxembourg. This move added more than 60 million broadband households to Netflix's addressable market.
Netflix is already plotting its next move. On Tuesday, the company announced plans to launch in Australia and New Zealand next March. This will be part of what Netflix CFO David Wells described as another "sizable expansion" coming in 2015.
European expansion could be tough
Netflix's recent expansion into Europe could take some time to gain traction. Netflix posted a $31 million contribution loss in its international segment last quarter even though all of the markets it entered in 2013 and earlier were collectively profitable. (In other words, it lost more than $31 million in the six new markets because of launch costs.)
Netflix's new European markets could take 5-10 years to become profitable.
Furthermore, Netflix projected that the international contribution loss will rise to $95 million in Q4 as the company absorbs a full quarter of costs in its new markets.
Netflix CEO Reed Hastings has admitted that it will be challenging to reach profitability in Europe. There are significant language barriers in many of Netflix's new markets and local streaming video competitors may have better access to local content. As a result, Hastings projected that it could take as long as 5-10 years to turn profitable there.
Australia and New Zealand are easier markets
By contrast, Australia and New Zealand should be much easier to penetrate. Consider that Netflix entered Canada (a primarily English-speaking country) in late 2010, turned its first quarterly profit there in Q3 2011, and was sustainably profitable by Q2 2012.
In other words, it took about a year and a half for Canada to become reliably profitable for Netflix. This is faster than the 2- to 3-year average Netflix achieved for the international markets it entered in the 2010-2013 period, and much faster than the 5- to 10-year average it is expecting in Europe. Additionally, Canada now produces roughly the same contribution margin as the U.S.
Australia and New Zealand may not be quite as easy to penetrate as Canada. Netflix was virtually alone in the streaming video world in 2010. By contrast, it will face competition (albeit, not heavily entrenched competition) from companies like Quickflix in Australia and New Zealand.
Many people in Australia use the U.S. Netflix service through VPNs.
That said, Australia and New Zealand should still be easier to penetrate than the average Netflix territory given there is no language barrier. Indeed, there are already about 200,000 people in Australia who subscribe to Netflix by using U.S. credit cards and virtual private networks to access U.S.-only content, according to The Hollywood Reporter.
An obvious opportunity
Netflix's move into Australia and New Zealand makes perfect sense in light of its long-term ambitions to be a more or less global streaming video company. While the addressable market is relatively small -- the combined population of Australia and New Zealand is less than 30 million -- it's still worth Netflix's effort.
Netflix should be able to reach profitability in Australia and New Zealand within two years or so, based upon its success in other English-speaking markets. The profit from these countries will help offset losses in some of Netflix's other territories, where the road to profitability will be longer.
