Netflix has bright European future, but analysts sound caution about costs

Subscription video-on-demand provider Netflix (NASDAQ: NFLX) is on a roll in Europe, with plans to launch in six new countries on the continent by the end of 2014. It reportedly has reached 1 million subscribers in the Netherlands, and a new IHS study projects that within four years its European base will make up one-fifth of its total subscribers worldwide.

A recent survey by Telecompaper said that Q4 2013 penetration in the Netherlands was 4 percent and that the rate rose to 7 percent in the second quarter of 2014. NLTimes and other media outlets estimated the number of subscribers to be about 1 million, a figure Netflix has not released.

Whether it's a million subs or less than that, it's still a good penetration rate, and IHS' study predicts that growth rates for the SVOD provider in Europe will only accelerate.

"Between the expansion of Netflix and its growing popularity in markets such as the UK, Ireland, Netherlands and Scandinavia, we anticipate that the company will add a total of eight million new subscribers to its European tally by the end of 2018," said Richard Broughton, director of broadband analysis at IHS and author of the report.

Not only will Netflix see an 18 percent growth rate in that period, but its success will propel the overall online-video market in Europe to a 35 percent growth rate.

In terms of profits from that growth, Netflix faces some hurdles--particularly iregarding costs. Content acquisition, streaming and marketing already significantly affect its bottom line. Its international cost of revenue in the second quarter was $267 million, which by IHS' estimate means that $6.71 of each monthly subscription is sunk into those content, delivery and marketing costs.

"Individually, the new markets have a lower potential than the UK, in subscriber terms," Broughton said. "But in aggregate, due to their sheer combined size, we are likely to see another $80 million to $90 million in international costs in the first quarter post-launch. This addition will represent an increase of roughly one-third over the cost of the entire region."

Netflix subscribers in Europe 2014-2018

For more:
- IHS has this release
- NLTimes has this story

Related articles:
Netflix expands into the Netherlands
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Netflix revenue climbs to $1.34B, company reaches 50M subscriber mark globally

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