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February 05, 2014

Netflix Heads to Europe on the Back of Debt

Netflix has formally acknowledged its plans to expand further into Europe, with a plan to raise $400 million in aggregate debt to use for the effort.

Netflix disclosed in its 2013 10-K it plans that it plans to “significantly increase our investments in international expansion, including substantial expansion in Europe in 2014, and in original content. As a result, and to take advantage of the current favorable interest rate environment, we plan to obtain approximately $400 million in long term debt in the first quarter of 2014.”

Part of the efforts will include the acquisition of in-language content and additional content rights: it said that it will spend nearly $3 billion on content in 2014, and $6.2 billion over the next 36 months. The company also said in its long-term view document that it plans to spend $500 million+ on marketing this year.

The debt offering will be in addition to the $500 million in 5.375 percent senior notes that it already had outstanding at the end of 2013.

“At $900 million of total long-term debt, we will have an extremely modest debt-to-equity ratio,” CEO Reed Hastings and CFO David Wells wrote in their Q4 letter to shareholders.

Interest on the new notes will accrue at 5.75 percent per year, payable beginning on 1 Sept., 2014, and will mature on 1 March, 2024. And Netflix is expected to generate 2014 revenue of $5.4 billion, an increase of 23% year over year. Overall, Netflix’s debt-to-equity ratio comes in at around 0.67 if calculated using long-term debt, and about 3.36 if using total liabilities — including $1.3 billion in non-current content liabilities as of the end of 2013.

In any event the investment could pay off in a big way: SNL Kagan expects the streaming video market in Western Europe to reach $1.1 billion in revenue in 2017, up two-thirds from last year.

Last week the Wall Street Journal reported that Netflix was in discussions with appropriate regional officials to expand its footprint to France and possibly Germany and other parts of Western Europe. The paper said that Netflix has been talking to various Big Media companies about expanding its international licensing rights in the region: so far, the company operates in the U.K., Ireland, the Netherlands and the Nordic region. Netflix is fairly far along in its discussions with the French government, the report said, to potentially launch before the end of the year.

France presents a challenge for any OTT operator thanks to its strict regulatory requirements: most notably, a film can’t be shown on an SVOD service for three years after its box office debut. Authenticated TV services though—TV Everywhere offerings and VOD from cable, satellite and IPTV providers—only require a four-month window. So, it’s likely that, barring a governmental concession, Netflix would be looking to partner with pay-TV operators, as it has done with Virgin Media in the U.K. and Com Hem in Sweden. However, there’s competition: France’s largest broadcaster, Canal Plus, already operates a popular service called CanalPlay in France.

In Germany, Netflix will also run into fairly steep competition in the region: German satellite operator Sky Deutschland has recently launched Snap. There’s also the Amazon-owned LOVEFiLM and Maxdome to contend with.

"We can still build a very successful business," Netflix Chief Executive Reed Hastings said of the regional competition, during its earnings Webcast. "I think the key is having unique content, a great reputation, a good value proposition."

For Q4 2013, Netflix added 2.33 million streaming subscribers in the U.S. to reach 33.4 million total domestic subs, and 1.7 million overseas subs to reach 10.9 million internationally.

In terms of Q1 2014 guidance, Netflix expects to add another 2.25 million domestic customers, setting up an about 11 percent year-over-year increase. But international expansion will be critical to Netflix in the long term as it faces running out of customer acquisition steam domestically; with 110 million total TV households in the US, it's rapidly approaching a 50 percent penetration rate, which is far more than any of its traditional pay-TV rivals. 

Edited by Ryan Sartor

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