Netflix's Streaming Service In Canada Could Have 40% Margins, But Market Size Small

(Updated 9/29: As some have pointed out, I originally listed Canada's population number as total Internet users which was not accurate. I have updated and corrected the numbers. Thanks for catching.)

Today, Netflix announced a streaming only subscription service for Canadian consumers with a monthly price of $7.80 in U.S. dollars. While many are discussing what content is or is not available for streaming, the real thing to look at are Netflix's costs for the service and the size of the market. As of December of 2009, Canada had a broadband penetration rate of 29.6%, with just over 33M 13M total Internet users. That means that the size of Netflix's total market opportunity in Canada is about 10M 4M potential subscribers.

While that's not a big number, Netflix's margins on the digital only offering should be pretty good and I estimate they should be around 40% once you factor in the "average" cost of content licensing and content delivery. Netflix is playing the law of averages with their digital offerings as some users might stream forty movies a month while someone else only streams five. So figuring out what the average user may consume is hard to do without data directly from Netflix on the subject. But based on some of the licensing deals I have seen and the cost to deliver content in Canada, I think it's very realistic that Netflix could make about $3 per "average" subscriber. Netflix's lowest DVD subscription price in the U.S. is $8.95 a month so Netflix is getting nearly their full DVD rental price in Canada, for a digital only offering.

It will be very interesting to watch how quickly the service takes hold in Canada come next year since Netflix is not initially supported on the Xbox 360, Roku, Vizio TVs and other devices. Support is expected to come by the end of this year for some of them, but it really looks to be Q1 of 2011 before the service is up and running at full speed.

Another thing to keep an eye on is the caps that are imposed by Canadian telcos. Some broadband packages by Rogers and others have a limit of as little as 2GB a month, which would only allow for users to stream one Netflix movie a month. Others have caps at 15GB and 60GB which are still quite small considering one Netflix movie can take up between 1.8GB - 2.9GB of total bandwidth. You also have to wonder if some of the ISPs want to keep Netflix from being successful and will put pressure on the service by keeping caps low. Someone like Bell Internet also has low caps because like cable, Bell potentially stands to lose TV revenue since they are a satellite TV provider, not to mention, they now own CTV so they have a clear stake in distributing and producing television content.

Will be very interesting to see what kind of success Netflix is having in Canada in 6-8 months time.

Update: Here is a link to Shaw's Internet packages and a link to Rogers so you can see the breakdown on costs and bandwidth caps.

Comments

[ac]

This is exactly why Rogers & Bell will fail in the future. 2GB caps. It's disgusting really, in this day and age. I have a 200GB High speed account with Teksavvy and pay half as much as any Rogers or Bell Package.

Also, I signed up for Netflix on the first day (sept. 23) and love it. It's user friendly, streams perfectly to my laptop, tv, ps3 and is all around perfect at this point except I;ll see in the future if the selection remains stagnant or not. At this point I've got a free one month membership and I've already watched about 8 documentaries - Well worth the 7.99$ (if I was to have to pay for it) and WAY cheaper than Rogers On Demand which would have cost me around 50-60 $ to watch those 8 documentaries only. Not to mention that Rogers is non-user friendly, never consistent in it's service and to loaded with ads and load times to simply get to the movies (or tv) i want to watch. I never used any Bell services so I can't comment on them.

So far, so good as long as the content keeps coming!

ac

[Riscario Insider]

Bandwidth caps are certainly a problem. We get 125 GB a month at 25 Mbps from Rogers. There is a penalty of $1.25 per additional GB.

It's too bad that the Internet providers are also content providers. That conflict makes customers suffer.

@ac: The Teksavvy service has a nicer cap (even an unlimited option) but the speed is only 5Mbps. Even cellular is faster at 21 Mbps (though with severe caps).

[Joe]

Bandwith caps are awful for us Canadians.

Here in Quebec, we have either Bell or Videotron. My internet with Videotron is capped to 30GB combined (upload + download).

The highest package gives you 170 GB download. And that is when you pay 150$+/month.

Charge of overconsumption is 7.95$ per additional GB.

http://www.videotron.com/service/internet-services/internet-access

Ridiculous.

This will be a problem for Netflix Canadian market.

[sudha k]

Agree with posts about the Caps and the big companies - how this can be legal in Canada is beyond me. I have Netflix selection needs be improved but service through my PS3 is wicked. Will check out Techsavvy - anyone have any other suggestions for services that have faster mpbs?

[satellite tv comparison]

Some broadband packages by Rogers and others have a limit of as little as 2GB a month

[AK]

Hahhaha, I have Telus Turbo 15 Megs down with Telus Optik TV with NO cap. All you can eat. LOVE TELUS.

Shaw and Rogers... suck it

[Mike]

@AK... agreed with Rogers, but Shaw, really? Shaw doesn't have any caps either... they are written on their website but they don't charge for overages. When you are way over your cap (I've been about 300GB one month), they send you an e-mail kindly reminding you to keep it down. I've never been charged a cent for going over and I usually go over every couple of months.

By the way, according to Telus's website for Telus Turbo: "100 GB/month download/upload usage " so you have a cap too, probably just a soft one like Shaw though

[timerider]

For anyone interested in the current SHAW CAP and GOUGE situation, I am leaving a link to a forum with the most up to date information. Speak your mind Canada, Down with the cap.

http://www.dslreports.com/forum/r24949041-Shaw-charging-for-extra-bandwidth.

[Deepak]

Hi,

Can you shed more light on the "average costs" of content licensing and delivery you talk about?