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Netflix in the Nordics: What Can Other Countries Learn?
Without the burden of shiny disc delivery, Netflix's streaming-only approach is cannibalizing physical media content sales in countries where internet penetration and mobile device usage is way above average.

During a presentaton at last week’s Nordic Media Summit 2014 titled "OTT and Customer Value," Lars Gudbrandsson showed a slide visualizing the adoption of media devices and Internet connectivity across the Nordic countries.

Gudbrandsson, vice president, country head of customer channels for TeliaSonera in Denmark, noted that Denmark, Norway, and Sweden have almost universal penetration of television sets, ranging from 96% penetration in Denmark to 94% penetration in Sweden.

Yet less than half of those have personal video recorders (PVRs) for these televisions—41% for Denmark, 40% for Norway, and 39% for Sweden—and the number drops in half again for so-called smart TVs. In other words, around 1 in 5 have access to a smart TV across the Nordic countries.

By no means, though, does that mean that over-the-top customers are the minority in the Nordics, for two key reasons: internet availability and the rapid rise of mobile devices.

Internet adoption in these countries is very similar to television penetration, with Norway leading the way in both internet adoption (94% of all households) and mobile devices (79% have smartphones and 52% have tablets).

Sweden lags a bit on the tablet front (40% adoption) and in terms of internet connectivity (91%) but it comes on strong on the smartphone front, placing second with 74% adoption compared to Denmark’s 65% smartphone adoption.

So now that we’re settled on the fact that both television and internet penetration are very high in the Nordic countries, let’s take a look at the impact Netflix has had on the consumption of media.

To do so, we asked, Bill Niemeyer, senior analyst at The Diffusion Group, for a bit of insight into the Nordics when it comes to Netflix. Niemeyer was the author of a recent study on Netflix titled Netflix 2014: Domestic Dominance, International Escalation.

"Norway has set up for Netflix as a beneficial ‘perfect storm’ for market adoption,” said Niemeyer. “When Netflix entered the Nordic markets in 2012, they brought their first-class execution and the produced-in-Norway show Lilyhammer."

As Niemeyer mentions, Netflix launched its Nordic service almost two years ago. According to IHS Technology analyst Kamila Nigmatulina in an article written on October 18, 2012, just after the service launched, content available at the launch was both local to each of the countries as well as a select grouping of international content.

The international content wasn’t necessarily always the same as content available in the United States and the United Kingdom, the two Netflix strongholds prior to launching in the Nordics. More on the latter, a growing trend, in a future article.

Niemeyer says Netflix's gains are more than just about the locally produced content.

"Amazon pulling the rebranded Lovefilm out of the Nordic markets,” said Niemeyer, adding that one would assume the pull-out is temporary, “and HBO Nordic’s execution missteps, plus the much higher price for the domestic Norwegian OTT competitor, means Netflix’s strong success in Norway will likely continue for the near to mid term."

Pricing is indeed a consideration in how Netflix has positioned itself.

"The Swedish service is priced at KR79 ($12) per month, the Danish offer costs DKK79 ($13.8), and the Norwegian service NOK79 ($14)," wrote IHS's Nigmatulina. “As a part of the launch strategy, current premium subscribers of the Swedish streaming music provider Spotify are offered a free Netflix subscription for the rest of 2012.”

Fast forward to the middle of 2014, and IHS had another announcement, this time about the impact Netflix has had on the status quo, highest-quality media of choice: Blu-ray discs.

Writing for Home Media magazine, journalist Erik Gruenwedel covers the cautionary tale for the physical disc video market, pointing out that "with Netflix expanding service into several European countries later this year, the current trend in the Nordics is likely to be repeated across many developed markets over the next few years."

What exactly was that trend? According to Tony Gunnarsson, video analyst at IHS Technology, Norway experienced a rapid fall off in physical disc sales in 2013, which he attributes directly to Netflix entry into the Nordic market.

"Historically one of the worlds’ most advanced video markets relative to its size, Norway was the first Western market to experience a very steep decline in DVD and Blu-ray Disc in 2013," said Gunnarsson.

The number for 2013, according to IHS, was a decline of 38% of packaged video sales. In the first half of 2014, according to Gruenwedel—quoting Film & Kino, the Norwegian film institute—the numbers fell by 20% year-over-year, when the first half of 2013 and the first half of 2014 were compared.

This puts the total revenue drop from 2013 to 2014 at a projected 18% lower rate, meaning that we’ve seen a 38% decline in physical disc sales in one year, followed by a potential additional 18% drop in sales the following year.

It’s no wonder, then, that IHS is calling for physical disc sales to be cut in half by the end of 2014, relative to the consumption patterns it had recorded for the 2012 calendar year.

"In 2012, the average Norwegian TV household purchased seven DVDs and two BDs," writes Gruenwedel, citing IHS research. "In 2014 the average will be three DVDs and one BD."

What’s interesting about this trend is that it’s a much clearer picture of what may very well happen in every country it enters. Having learned a hard lesson in its home territory, where United States customers used to receiving shiny discs and streaming at one price vociferously objected to the concept of paying more for the option of both, Netflix approached international expansion in a way that allowed it more flexibility.

First, it was not forced to either undo the burden of a legacy solution—the shipping of discs, Blu-ray or traditional DVDs, by postal service—when it entered the Nordic countries. This meant that Netflix could compete by offering one service, avoiding the ongoing confusion that still results in the U.S. market where customers Google a Netflix offering, with results often showing both the DVD and streaming-only offerings intermingled.

Second, since it was only offering a single streaming service, this also made negotiations with US and international movie studios and premium content owners easier: rather than asking to own both the by-mail BD/DVD rights and a license to stream the same content, Netflix was asking to compete on a level playing field with shiny disc distributors, allowing premium content owners to baseline the impact of a pure-play OTT service.

It is certainly true that other OTT options exist in the Nordic countries, but this market offered one of the first glimpses into a market still heavily dependent on disc sales to drive consumption of Hollywood content.

Third, because it offered this streaming service as an over-the-top play, but had strong partnerships with OTT device manufacturers, Netflix was able to sidestep the issue of smart TV integration. From Apple TV to Roku to various Blu-ray Disc and DVD players with Netflix service already built in, the company had a low barrier to entry when it came to buying equipment necessary to view Netflix content.

"Netflix is the the world's leading internet television network with over 48 million members," the company wrote back in May, when it announced that it would be expanding its European footprint in late 2014 to include Austria, Belgium, France, Germany, Luxembourg, and Switzerland.

What Gudbrandsson showed should be contemplated by those in France, Germany, and a number of other European countries that have just been subjected to the official launch of Netflix in their country this past week.

The addition of these countries not only solidifies the Benelux market, but also provides a majority of French- and German-speaking countries in Europe. Each of these services have launched within the last two weeks, with Austria, for instance, seeing the typical €7,99 ($10.15) rate.

With launches in several European countries at once, it’s true that Netflix may face a few challenges. One thing is for certain, though: Netflix subscriber numbers will rise and the entrenched competition will look for ways to combat the uptick in OTT media consumption.

If the Nordics are any indication, though, not only will physical disc sales on retail shelves suffer, but it’s possible that the incumbent media broadcasters—many of which have their own OTT plays—should be rethinking their market strategies.

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