Netflix Invades Scandinavia

By Evan Buck - August 23, 2012 | Tickers: AMZN, NFLX, DIS | 0 Comments

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By the end of 2012, Netflix (NASDAQ: NFLX) is planning to open up its video services to select Scandinavian nations.  Netflix is jumping in to markets in Norway, Finland, Denmark, and Sweden.  This is an interesting business move, one that is going to prove quite lucrative for the internet movie company if the plan is executed well. 

Other Scandinavian markets, such as Greenland and the Faroe Islands (both dependencies of Denmark), are deemed to be hardly worth the effort to reach because of their low populations and remote locations.

So, why is Netflix interested in Norway, Denmark, Finland, and Sweden?  Well, the company isn’t revealing much of anything on its ambitions, but information about the countries in question reveal some insights.

All of the nations involved in the expansion are known for their high standards of living and very good average annual salaries (in economic speak, per capita income).  Finland has a $35,400 per capita income rate, Sweden boasts a $39,100 average salary, Denmark has a $36,600 per capita income, and Norway commands a rank of seventh in the world with a $54,600 per capita income rate. 

Scandinavia has a large concentration of high population counts and personal wealth, so it makes sense to appeal to this market.  Scandinavia has 25 million consumers – that’s a fairly large, respectable demographic to consider.

According to the latest World Economic Forum rankings of technological readiness, the Scandinavian nations are also among the most internet-friendly nations in the world; while the United States falls in the number 18 spot.

Let’s compare the “forgotten markets” of Greenland and the Faroe Islands with the larger Scandinavian markets.  Greenland is only one rank below its mother country, Denmark, with regards to per capita GDP (coming in at $36,500).  The Faroe Islands have a respectable $32,900 average.  That isn’t too shabby when compared to the larger Scandinavian markets.  The money that Faroe Islanders and Greenlanders make, though, doesn’t afford much wiggle room for extra spending money.  Increased costs of living and miscellaneous extra operating costs (due to the expenses associated with transporting goods to remote locations) make it tougher to form a discretionary spending slice of an average budgetary pie.

According to the latest statistics from Internet World Stats, Greenland has a 90.2% internet penetration rate, while the Faroe Islands has a 76.1% penetration rate.  Those sound like pretty impressive numbers, unless you look at the population numbers with relation to those percentages.  The Faroe Islands has a population of about 50,000 people, so their 76.1% internet penetration rate means that 37,500 people use the internet regularly.  Greenland’s population of 57,670 has a 90.2% internet penetration rate, thus Greenland has 52,000 regular internet users.  Although Greenland and the Faroe Islands have a combined land mass larger than all of the main Scandinavian countries put together (836,870.16 square miles vs. 469,726 square miles), these remote locations only have 89,500 regular internet users.  Compare that to Scandinavia proper’s 25 million consumers (about 279 times more users than Greenland and the Faroe Islands).

So, Netflix has made a wise business decision to forgo an escapade in these “icy” markets for now.  It should establish itself in mainland Scandinavia first, so that if the company ever wants to make a foray into the smaller Danish markets, Netflix will have (a) more cash on hand to do it, and (b) a successful business model in place in order to build upon success in the surrounding areas.

There are some possible issues with Netflix’s push into Scandinavia.  For one, there already are some fairly well established competitors, which might be viewed as better than Netflix.  Amazon Inc. (NASDAQ: AMZN) has introduced its “Lovefilm” service in Sweden, Norway, and Denmark.  Amazon's service has proven to be quite popular among Scandinavian users and is another aspect that demonstrates the rise in power of Amazon.  Amazon is a strong company that is flexing its muscles in the region, but Netflix is ready for the challenge.

But, Lovefilm is not Netflix’s only competition in Scandinavia. Voddler, Bonnier’s SF Anytime, Viasat’s Viaplay and SVT Player are amongst existing Swedish video on demand operators.  Also, Voddler has distribution deals with media powerhouses Walt Disney (NYSE: DIS), Warner Bros, and Viacom subsidiary Paramount, among others.  Voddler has reportedly gained over 1 million users across Scandinavia, and the Sweden-based company has a large following in that country. With big-ticket names like Disney backing up Vodder, Vodder has grown larger and will prove to be tough competition for Netflix.  The battle between Netflix and Voddler is bound to get particularly fierce. 

But, this competition isn’t the only issue Netflix and other companies face.  A potentially larger problem is that of internet piracy.

Illegal movie downloads and support for piracy is a pretty big deal in Scandinavia.  That infamous downloading portal known as “The Pirate Bay” is a Swedish product.  The Pirate Party is a Swedish political party with an agenda to reform patents and abolish copyrights.  Swedish members of parliament have even proposed the decriminalization of file sharing. 

We can see that Netflix might have some real competition in local piracy.  Disney treats piracy as a legitimate competitor in the market.  They believe that piracy is best fought with the free market process.  Netflix’s expansion will test this belief and the theory that pirates would abandon their illegal activities if given an easier, legal way to download the media they desire.

So, is Netflix’s business maneuver a wise one?  I believe the answer is "yes." By snagging a foothold in the Scandinavian marketplace, Netflix is not only marketing itself to 25 million consumers, but the company is bound to satisfy the desires of its consumers and improve its services as a whole.  Netflix is commencing its invasion of Scandinavia, and the show is about to get a whole lot more interesting.

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