Les Netflix...c'est arrivé! Das Netflix kommt! However you want to say it, Netflix (NASDAQ:NFLX) is heading to France, Germany, and four other German- and French-speaking European countries (Belgium, Austria, Switzerland, and Luxembourg, in descending order of population ) later this year.
This impending rollout has a lot of analysts concerned. BMO Capital Markets analyst Edward Williams has already lowered his 2014 earnings estimate for the company "to reflect greater than previously expected marketing spending with the upcoming launches."
Analyst Michael Pachter of Wedbush Securities agrees, telling NPR that international expansion into new markets will be expensive. "Each country requires separate technology spending. Each country requires a separate content deal," he said.
In my opinion, this is very short-sighted. Long term, this has the potential to shake up the sector's status quo.
Shake, rattle, und rollen
The shakeup has already commenced in Germany, where the massive Deutsche Telekom (NASDAQOTH:DTEGY) already has a similar streaming service called "Entertain" and juggernaut Amazon (NASDAQ:AMZN) is operating its LoveFilm DVD rental service as well as its Amazon Instant Video.
Despite this, the German magazine Manager recently reported that Deutsche Telekom was in late-stage talks with Netflix about marketing collaboration, a move that would appear to undermine Entertain! Neither Netflix nor Deutsche Telekom are commenting, but still: what gives?
Well, for Netflix, it's easy to tell: Deutsche Telekom is by far the largest ISP in Germany, and a partnership would give Netflix access to Deutsche Telekom's 12.4 million broadband subscribers. That's close to Netflix's entire current non-U.S. subscriber base of about 13.8 million! Nabbing even a small percentage of Deutsche Telekom's base would give investors (who are already happy with a company that has seen its stock rise by more than 100% in the past year) even more to cheer about.
It would also help to satisfy investors who are wary of Netflix's international expansion efforts thus far. One of the dark spots in recent Netflix earnings reports has been the overseas division. The costs of getting up and running overseas (including the marketing spending mentioned earlier) are a continual drag on earnings. In the last quarter alone, the overseas streaming division reported a $15 million loss. The silver lining: that's less than half of the division's losses from the previous quarter ($35 million) and less than a quarter of the losses from a year prior.
A Freund in need
What about Deutsche Telekom, though? What does it stand to win? Well, it seems as though it's banking on Netflix to come out a winner over Amazon and other smaller local players, and wants to be along for the ride.
It has good reason. Netflix's recent rollout in the Netherlands garnered it more than half a million subscribers in the first six months alone. In a country of just 15 million people, that represents at least 3% of the population (more, if you consider that most subscriber households have more than one member.) Germany's population is more than five times the size of the Netherlands'. Clearly, there's plenty of opportunity to make a splash here.
There's also plenty of risk for Deutsche Telekom in not partnering with Netflix. When Netflix rolled out in the Netherlands, it stole an estimated 16,000 subscribers from Dutch cable provider Ziggo. Deutsche Telekom doesn't want to be next.
What it means for du
I'm betting that Netflix succeeds in Europe in the long run, but what about right now? While news of more costs or a potential delay in the European rollout could send the company's stock down, there's unlikely to be any news that could have a big upside for the stock. However, I believe that Netflix's proven overseas potential will yield juicy returns for investors who are willing to be patient.
And Amazon? If Netflix wins in Germany, won't Amazon lose? Hardly. The two services are coexisting and both thriving in the U.S., and there's no reason it would be different elsewhere. Besides, Amazon has a lot more going on than just streaming. Even an unlikely total loss in Germany wouldn't have much effect on the company's stock price or it's exciting long-term outlook.
How about Deutsche Telekom? A partnership with Netflix can hardly be a bad thing, particularly when it's demonstrated success in Europe so far. Deutsche Telekom's healthy dividend is a great plus as well while you wait for a potential Deutsche Telekom-Netflix partnership to truly bear fruit.
The Foolish bottom line is that exciting things are ahead for streaming as it goes international. Don't miss the party (or la fête or das Fest.)