In my post about the Netflix Q3 results I concluded that the company had not made a particularly good start in Germany, France, Austria, Belgium and Switzerland. Having completed a more detailed analysis, it looks like the worst launch in the last 3 years.
To do this, I first looked at the number of International free subscribers to the service.* The number of non-paying subscribers likely contains those people in the first month free trial period plus any gift subscriptions the company hands out.^
If you look at the number of free subs in a quarter during which a new country launch occurred there was a concomitant spike in the number of free subscribers. For example, after the UK and Ireland launch in January 2012, Q1 numbers showed an increase of 245,000 free subscribers over the previous quarter. Denmark, Sweden, Finland and Norway launched in October 2012 and there was a spike of 607,000 in the quarter. The Netherlands launch caused an increase of 371,000. The spike in free subs in in the most recent quarter was 560,000, which we can largely attribute to the European launches.
On the face it, the recent Euro launch compares very favorably with the Nordic launch, and handily beats the previous launches. One might conclude that there was a large number of people in Europe that were primed and ready for Netflix and signed up as soon as it was available. However, this number is not a good indicator of pent-up demand. To understand that we must take into account the size of the addressable market, the number of broadband households in the region.
Compared to broadband households, the Nordics emerge as the biggest International success Netflix has ever had. A staggering 6.8% of broadband subs had a trial subscription to Netflix at the end of the first quarter of launch. This indicates that there was a huge pent-up demand for the service before the launch. Two years later, home penetration of Netflix in Denmark is an equally impressive 29%. The Netherlands also looks to be a big success for the company. 5.5% of broadband subs were trialing the service in the first quarter of release and one year later Netflix penetration is 7%.
The UK and Ireland launch was very weak by comparison, with just a 1% of broadband subs signing up for a free trial in the first quarter. It has taken two years to achieve a penetration of 10% of households.
Unfortunately, the 6 Euro country launch is the worst performance of all the regions analyzed. Just 0.9% of broadband households are trialing the service. This indicates very weak pent-up demand for Netflix in the region. Clearly, Netflix is going to have to invest more heavily in marketing and content in the region.
In the earnings call Mr. Hasting said it would take 3 to 5 years to reach profitability in any region. It looks like he is going to need every day of the 5 years in the just launched 6 European countries.
Why it matters
Netflix is upbeat about the opportunity in the 6 new European countries it has just launched in.
Careful analysis of Netflix quarterly results suggest, however, that this is the weakest launch the company has had in the last 3 years.
To compensate, the company will have to spend more on content and marketing, delaying profitability for many years.
* I subtracted the number of paying subscribers from the total number of subscribers to obtain the number of free subscribers.
^ For the purposes of this analysis I have assumed the number of gift subscriptions is small compared to trial subscriptions.