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(Updates with Spanish talks in 12th paragraph.)
Dec. 23 (Bloomberg) -- Netflix Inc., the video-streaming service so popular in the U.S. that it has been blamed for overwhelming the Web, may find itself boxed out of the most coveted content in Europe’s $76 billion pay TV market.
In the U.K., a deal with broadcaster ITV Plc probably won’t include the most recent episodes of successful shows such as “Downton Abbey,” a person with knowledge of the matter said, asking not to be named because the talks are confidential. An agreement with British Broadcasting Corporation this week allows Netflix to offer shows such as “Top Gear” but only six months after the broadcaster has aired them.
Netflix’s early entry in U.S. market helped the Los Gatos, California-based company to become the biggest video-streaming service, even spurring premium channels HBO and Showtime to offer shows online. In Europe, Netflix will have to wrest digital rights away from a cabal of powerful broadcasters who own most of the popular content 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 SA’s Universal Music and Sony Corp. “They’re able to protect their television business by packaging it with their online business.”
Netflix, whose biggest investors include Vanguard Group, JAT Capital Management and Morgan Stanley, plans to begin its U.K. service in “early” 2012. Local consumers can already choose from video-streaming services by Amazon.com Inc.’s Lovefilm unit, Channel 4, the BBC, British Sky Broadcasting Group Plc 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, the person said. ITV declined to comment. The BBC and Netflix named eight shows, including comedy series “Fawlty Towers” and “Little Britain” in their Dec. 20 statement and spokesmen for both companies declined to name other programs that might be part of the deal.
“The U.K. is a competitive market and we look forward to offering the people of the U.K. and Ireland a great service with fantastic content and ease of use,” said Joris Evers, a Netflix spokesman. The company this month reiterated that it currently doesn’t prepare to expand into European markets beyond the U.K. and Ireland.
Lovefilm said on Dec. 21 it signed an exclusive deal with Sony Pictures to offer titles such as “The Social Network” in the U.K. Last month, Lovefilm announced a deal to offer Warner Bros. films such as “Sex and the City 2” in the U.K.
BSkyB, the U.K.’s biggest pay-TV provider, has too much market control because of its exclusive first rights to play releases from major Hollywood studios, the Competition Commission said in August. The watchdog said an investigation may not be completed until early 2012.
Still, Netflix will offer some popular content in the U.K. The company has deals with Lions Gate Entertainment Corp. and Metro-Goldwyn-Mayer Studios Inc. to be the exclusive streaming provider in the U.K. and Ireland. The U.K. service will also stream Miramax films such as “Pulp Fiction.”
The subscription TV market in Europe, Africa and the Middle East, including pay-TV, video-on-demand, mobile and video- streaming services as well as license fees, will expand 24 percent to $95 billion in the next four years, according to PricewaterhouseCoopers LLP. Internet-streamed videos are forecast to be the fastest growing segment.
In Spain, talks between Netflix and Antena 3 de Television SA and other local media companies ended this year without a deal as Netflix decided to focus on the U.K. and Ireland, Francisco Sierra, a multimedia executive for the Spanish broadcaster, said in an interview.
Mediaset Espana Comunicacion SA, the Spanish unit of Italy’s Mediaset SpA, 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 U.S. subscribers in the third quarter after alienating some customers with changes in pricing and subscription terms. The stock has lost 58 percent this year, valuing the company at $4.1 billion. CEO Reed Hastings this month likened the fight among online video companies for content to an “arms race.”
Netflix will lose access in February to content from Liberty Media Corp.’s Starz pay-TV business after the company refused to charge customers a premium for Starz.
Phil Kent, CEO of Time Warner Inc.’s Turner Broadcasting System, said last month that he’s currently keeping digital rights away from services such as Netflix.
Netflix, founded in 1997, had $365.8 million in cash and short-term investments at the end of the third quarter, according to data compiled by Bloomberg. The company, with 23.8 million subscribers at Sept. 30, raised $400 million with the sale of stock and convertible notes last month.
In North America, online movies from Netflix and other video services have become the top source of peak Internet traffic, prompting AT&T Inc. this year to place a cap on the volume of data its customers can consume in a month. Netflix accounts for 25 percent of Internet traffic at peak times, network management firm Sandvine Corp. said in May.
‘Money to Burn’
In September, Netflix began selling subscriptions in Latin America, boosting the number of countries where it operates to 43, including the Caribbean.
“Netflix’s strong cash flow means they have money to burn and buy great content,” said Adrian Drury, who leads the media team at consultancy Ovum. “But in Europe, Netflix will go head to head with high-profile incumbents.”
RTL Group, Europe’s biggest broadcaster with 41 channels in 10 countries, told investors in May that it won’t license content to companies such as Netflix unless it is allowed to sell ads. RTL declined to comment.
“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. The race is on.”
--With assistance from Matthew Campbell in Paris, Ron Grover in Los Angeles and Jonathan Browning in London. Editors: Simon Thiel, Kenneth Wong.
To contact the reporters on this story: Amy Thomson in London firstname.lastname@example.org; Manuel Baigorri in Madrid at email@example.com
To contact the editor responsible for this story: Kenneth Wong at firstname.lastname@example.org