Netflix Faces Barriers to European Expansion

Netflix (NASDAQ:NFLX) may find itself boxed out of the most coveted content as it enters Europe’s $76 billion pay TV market.

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A deal with British broadcaster ITV probably won’t include the most recent episodes of such successful shows as “Downton Abbey,” a person with knowledge of the matter said.

An agreement this week with the British Broadcasting Corporation allows Netflix to offer shows such as “Top Gear,” but only six months after their original broadcast dates.

Netflix will have to wrest digital rights away from a host of powerful broadcasters who own most of the popular content in Europe and have their own streaming services.

“Broadcasters are controlling a lot of the premium, online, video-on-demand business in the U.K.,” said Rio Caraeff, chief executive officer of Vevo Llc, a video-streaming company backed by Vivendi’s (NYSE:VIV)’s Universal Music and Sony Corp. (NYSE:SNE). “They’re able to protect their television business by packaging it with their online business.”

Netflix plans to begin its U.K. service in “early” 2012. Local consumers can already choose from video-streaming services by Amazon’s (NASDAQ:AMZN) Lovefilm, Channel 4, the BBC, British Sky Broadcasting, and ITV, the country’s biggest commercial broadcaster.

As with the BBC deal, Netflix may only be able to offer some of ITV’s archived content, said an anonymous source. ITV declined to comment. The BBC and Netflix named eight shows in their December 20 statement, and declined to name any other programs that might be part of the deal.

Amazon’s Lovefilm said on December 21 that it had signed an exclusive deal with Sony Pictures (NYSE:SNE) to offer their titles in the U.K. Lovefilm announced a deal last month to offer Warner Bros. (NYSE:TWX) films in the U.K.

BSkyB, the U.K.’s biggest pay-TV provider, has exclusive first rights to play releases from major Hollywood studios, which the Competition Commission said in August gives the company too much market control. The watchdog said its investigation into BSkyB may not be completed until early 2012.

Still, Netflix was able to sign deals with Lions Gate (NYSE:LGF) and Metro-Goldwyn-Mayer Studios to be their exclusive streaming partner in the U.K. and Ireland. Netflix will also stream Miramax films.

Netflix was also in talks with Antena 3 de Television SA in Spain, as well as other local media companies throughout Europe this year, but never effected an agreement, and decided instead to focus on the U.K. and Ireland.

However, Mediaset Espana Comunicacion SA would be open to a deal with Netflix “as both parties are interested in collaborating with each other,” said Cristina Ocana, a spokeswoman for the Madrid-based company.

Netflix is “a company that really needs to try and sustain a growth trajectory,” said Tony Wible, an analyst at Janney Montgomery Scott LLC, Philadelphia, who advises selling the shares. “In the U.S, you’re starting to see some concern about growth.”

Netflix lost 800,000 subscribers in the U.S. during the third quarter after alienating some customers with price changes. The stock has lost 58 percent this year, the value of the company now $4.1 billion. And in February, Netflix will lose access to Liberty Media’s (NASDAQ:LSTZA) Starz pay-TV business after the company refused to charge customers a premium for Starz. Time Warner’s (NYSE:TWX) Turner Broadcasting System has also refused Netflix the digital rights to its content.

Netflix began selling subscriptions in Latin America in September, boosting the number of countries where the service operates to 43.

“Netflix’s strong cash flow means they have money to burn and buy great content,” said Adrian Drury, who leads the media team at consulting firm Ovum. “But in Europe, Netflix will go head to head with high-profile incumbents.”

RTL Group, Europe’s biggest broadcaster, told investors in May that it won’t license content to companies like Netflix unless it is allowed to sell ads.

“The big challenge in Europe is to intimately understand consumers and to buy and offer the right content in each market,” Drury said. “The execution risk is high and the industry will be eagerly watching if they get it right.”

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