Can Netflix Succeed In China?

  • Netflix is mulling an entry into China through a partnership with China's media conglomerate, Wanda Group.
  • This confirms past suspicions that Netflix would integrate China into its international expansion efforts which have so far been a resounding success.
  • What are the likely challenges Netflix will face in China, and can the video streaming giant overcome them?

Speculations have been rife that streaming video giant Netflix (NASDAQ:NFLX) would at some point consider an entry into China, a country with 20% of the world’s population. Netflix has been deriving a lot of its growth lately from international markets as stateside growth slows down. During its latest earnings, the company added 2.74 million international subscribers in a quarter compared to only 0.88 million in the U.S. Netflix has entered about 13 new markets during the last 12 months, its latest being Italy. It's very likely that international subscribers are going to drive Netflix's fortunes in 2016. Netflix now has 25.99 million international subscribers, even as it's begun expanding into markets like Japan, compared to 43.2 million stateside subscribers. Netflix now says that it wants to enter into 200 countries in the next two years, up from its earlier target of 50.

But perhaps Netflix’s international expansion efforts will not be considered complete until the company tries to conquer the Chinese market. And this might happen soon if recent developments are any indication. Netflix is reportedly in talks with China’s Wanda Group, China’s largest real estate developer and the company that owns AMC Entertainment and Wanda Cinemas, as it seeks to strike a partnership to enter the Chinese video streaming industry.

Cracking the Chinese Market

Many analysts and industry observers have rightly pointed out that Netflix would likely not have an easy time trying to crack the Chinese market. Companies like Tencent and Baidu (NASDAQ:BIDU) already have their own streaming video services, with Baidu’s popular streaming service iQiyi reportedly controlling 80% of the market. Meanwhile Alibaba (NYSE:BABA) has announced its intention to become the ‘‘Netflix of China.’’

Netflix has bid its time before pulling off such a move due to the complexity of the Chinese market. Chief executive Reed Hastings has said this in the past about China:

"For every country we know what we want to do, but in China we are still exploring our options,"

Hastings then went on to add that Netflix would likely start small in China using original content by saying:

"We'll learn a great deal if we can successfully operate a small service in China...That is our preference, for the next few years, if we are able to acquire the necessary permissions,"

For Netflix to succeed in China, it will have to adapt its business model to suit the local market with regards to accepting other forms of payments other than credit cards and monetizing its services via advertising instead of subscriptions. The use of credit card payments in online payments in China is nowhere near as prevalent as it is in the U.S. and other developed economies. The rivals that Netflix will be competing with in China rely heavily on ads since the average Chinese consumer does not expect to pay for online media. By partnering with a company that has a firm grasp of the how the Chinese market works, Netflix’s chances of success are greatly increased.

Another big reason why Netflix wants to partner with Wanda is due to the legal implications of operating in the country. Without a partner, Netflix would be forced to get a license to operate from the Beijing Government, something that would likely prove an uphill climb. China’s regulators have been protecting the local TV and film industry by imposing strict licensing quotas.

Then there is the nagging question of tailoring its content to meet local needs. What is popular in the U.S. might not necessarily cut it in China. SohuTV streams Netflix’s House of Cards in China. During the latest season, House of Cards garnered an average of 8.2 million streamed views per episode. Compare that to 29 million streamed views per episode for Sherlock by Alibaba’s Youku Tudou (NYSE:YOKU) and a whopping 181 million streamed views per episode for ‘‘My Love from the Star’’ for Baidu’s iQiyi.

Netflix will do well to partner with Wanda instead of trying to have a go at it alone in China. Wanda has ample experience in the Chinese entertainment industry and no doubt understands the Chinese consumer intimately. If Netflix is able to crack the China market, then its growth will be greatly accelerated, and possibly double its international subscriber numbers in a short space of time. I belong to the bullish camp that believe China is a potential a game-changer for Netflix.

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