As it grows beyond its roots in mail-order DVD rental, Netflix has a battle plan: today, Canada - tomorrow, the world.
But while the company has grown rapidly in the past few years - its stock value more than tripled in 2010 - Netflix will have to contend with a new set of challenges as it aims to appear on more and more of Canada's TV and computer screens.
The service launched here in September, offering movies and TV shows streamed over the Web for a monthly subscription fee of about $8. A similar model has made it a runaway success in the U.S., where subscribers now watch more than half of their video content over the Web compared with Netflix's traditional DVD rentals.
But so far, the company's Canadian library offers just a fraction of the content it has in the United States, and its customers deal with much tighter limits on the bandwidth they can use in their homes.
Video streaming eats up a lot of bandwidth. This isn't a problem for Netflix in the U.S., where one of the strictest plans is Comcast Corp.'s, which limits users to 250 gigabytes per month. That's still enough to watch eight hours of Netflix per day. In Canada, Internet providers have capped bandwidth use much more aggressively.
In the summer, two days after Netflix announced it would be coming to Canada, Rogers Communications Inc. changed the data limits on its "Lite" Internet service from 25 gigabytes per month to 15.
In Canada's more consolidated industry, many of those Web services own cable and satellite businesses that could be threatened by so-called over-the-top services like Netflix or Apple TV. Companies say data caps are not about reining in new competitors; they exist to contribute investment in new networks as bandwidth use increases.
"A bit is a bit is a bit. If you're a heavy user, regardless of what's causing the heavy use, you will pay more. That's the concept," said Mirko Bibic, Bell Canada's senior vice-president for regulatory affairs. "The caps we've established are well above our average users. If you're a super-super heavy user, you should pay more."
Companies that do offer looser data usage caps hit a regulatory roadblock last year. In May, the CRTC said Bell could charge usage-based prices to the many small Internet providers that rent space on the giant's network. In order to compete, a lot of these smaller companies offered unlimited bandwidth usage. The May ruling means it has become much more expensive for them to allow customers to use a lot of bandwidth.
That means consumers who want to watch video online must be prepared to pay for it. For example, a Credit Suisse report last week noted that a Netflix subscriber with a Rogers Lite account would be charged an extra $4 per hour for watching any more than roughly half an hour per day - unless the subscriber bought a higher-use package for $12 more per month.
"Netflix has done incredibly well in the States with its [by-mail]DVD approach because the pricing was very competitive. But if the pricing begins to creep up because of the bandwidth limits, that's going to be a big disincentive," said Brahm Eiley, a principal with Convergence Consulting Group Ltd.
While much was made of the Netflix launch in Canada, the streaming service's library is off to a slow start.
Every new territory Netflix expands to means a whole new set of content negotiations. So far, its video selection pales in comparison to the U.S., where Netflix streaming offers more than nine times as many movies and 11 times as many TV shows.
The studios that own TV and film content already have agreements with television networks that pay a premium for exclusive rights to show The Big Bang Theory, for example. Netflix has found a way around this by focusing on older content, putting more money in studios' pockets without threatening their legacy business relationships too much. In the U.S., the streaming service started out small but its TV and movie offerings ballooned to 10 times as many titles in the first year and a half, according to the report.
"We have added content over time in Canada to the streaming catalogue, mostly by writing big cheques and having great relationships with content providers," said Netflix spokesman Steve Swasey. While he wouldn't forecast whether the Canadian service would grow at the same rate, he said the company is working to expand all of its services.
The company's relatively thin library here "is a huge impediment," said Mr. Eiley. He believes they can get that content, based on what they've done in the States, which will help Netflix get a foothold in this market. But it will also have to figure out how to ask consumers to pay more for a service that could cost them more in Web usage penalties. "Netflix here is still wait-and-see."
With files from Iain Marlow