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.