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Original content key to Netflix growth in Europe

Local and foreign-language originals are becoming increasingly important to Netflix Inc.'s success as the company expands across Europe. Having amassed 100 million global subscribers this year, Netflix's push across the pond is a strong bet that Europe's free-to-air stronghold is ready to pay for high-end content.

As the U.S. streaming service increases its reach in Europe, it is also ramping up spending. Netflix, which plans to dish out as much as $8 billion on original and licensed content in 2018, recently announced 400 new jobs in the region as well as two new European TV series, "Dogs Of Berlin" in Germany and French series "Osmosis," which are planned for a launch in 2018 and 2019, respectively.

SNL ImageNetflix original production "The Crown"
Source: Netflix

This year, it also introduced its first series in Italian ("Suburra"), German ("Dark"), and Swedish ("Quicksand"), among others, as it revealed it had spent more than $1.75 billion in original and licensed European series.

A string of other European Netflix originals, such as U.K.-based Golden Globe winner "The Crown," French language original "Marseille" and Spain's first Netflix original series, "Las chicas del cable," are now in production for a second series.

Observers stressed that production of further local content will be key to upholding the rapid pace of its European expansion.

In producing more local content, Netflix is following the playbook of Europe's local studios who have scaled back their acquisition of international content in order to focus their efforts on producing local language content, according to Per Stenström, director at telecom consultancy firm Northstream.

"The core will still be English-based content … but it is a way for them to be more attractive as they go into these markets where the local language plays a major role," he said.

This would avoid the market being "overrun" by translations of "one-size-fits-all" Hollywood scripts, Stenström added.

Seeking growth beyond local audiences, Netflix's chief content officer, Ted Sarandos, revealed the scale of its global ambition for European originals during an Oct. 16 earnings call.

"'Suburra' is not just a show that you are going to see in Italy. It is a show that looks and feels very much like a 'Narcos,' like a 'House of Cards,' like a big global original, it just happens to be in Italian," he explained to analysts. "So we are producing at larger and larger scale outside the United States," he noted.

Meanwhile on the technical side, analysts said Netflix would do well to preserve its growing raft of carriage deals with Europe's broadcasters, including Vodafone Group Plc, Telecom Italia SpA, Liberty Global plc and Orange SA's Orange España.

SNL ImageNetflix original production "Las chicas del cable"
Source: Netflix

With the rate of converged consumer households on the rise, it will be increasingly difficult for Netflix to achieve growth as a stand-alone platform, Eduardo García Argüelles, an equity analyst at GVC Gaesco Beka, said in an interview.

This is especially true for Spain, where just 30.6% of households have pay TV, compared with direct fiber penetration rates of 83%.

Argüelles noted, however, that the case for convergence in some markets such as Germany is still relatively low.

As it expands, however, Netflix and other subscription video-on-demand, or SVOD, providers also face increased regulatory scrutiny in Europe, where policymakers are assessing plans to bring streaming platforms under the same regulatory framework that exists for tradition broadcasters.

New rules may require internet platforms to dedicate at least 20% or more of their library to European content, as well as honor obligations to invest in European productions or local culture funds.

Netflix has opposed any potential quotas. However, Florence Le Borgne, an analyst at think tank IDATE DigiWorld, stressed that the entertainment giant would only achieve mixed success unless it adhered to local tastes and standards.

She added that local content had gained in popularly in recent years, with local shows increasingly outperforming imported content.

"In France, Netflix needs to put more money into making their productions … fit the French needs. This is true for France and it is true for most European countries," Le Borgne explained.

Netflix reported a 56% year-over-year increase in international streaming revenue to $1.32 billion during its third-quarter earnings. International member additions for the quarter rose to 4.45 million, compared to guidance of 3.65 million, while paid international memberships hit 52 million, overtaking U.S. paid subscribers for the first time.

CCS Insight analyst Paolo Pescatore said Netflix has the potential to achieve far greater growth in international markets. He did caution that the recent price rises could pose a challenge in the next quarter, but noted that overall, this was "another good quarter for the company."

"Netflix has done a remarkable job of not only investing in original programming on a global scale, but also catering for local taste and is no doubt setting the benchmark for other video services," Pescatore said.