China vs. Netflix’s Global Takeover

2015 was a good year for Netflix. The DVD rental and streaming video provider experienced subscriber growth that exceeded expectations. In 2015, users streamed 42.5 billion hours of content– an all-time high- up substantially from 2014’s 29 billion hours. As of January 1, 2016, Netflix has 75 million users across the world. In the United States, Netflix continues to be a powerhouse but it has its sights set on global domination. The company has found success in most of its international ventures but the process is not without its roadblocks, obstacles and even complete impasses, most notably in China.

International Expansion

In 2014 and 2015, Netflix launched international operations in Western Europe, Australia and New Zealand. The company found success in these affluent, westernized areas of the world where English is widely spoken and similarities exist between local and US cultures. In January 2016, Netflix made much larger moves and expanded into 130 new countries and now has a presence in 190 countries across the globe. Although Netflix’s international operations are still failing to generate a profit, the company has invested heavily in establishing a strong subscriber base outside of the United States.

Netflix has worked particularly hard on targeting the Asia-Pacific market. This region of the world has enormous market potential with the possibility of 280 million households having the technology and internet access necessary for a subscription. Netflix chose Japan for its first Asian market in September of 2015. American popular culture and entertainment, especially film, is followed avidly by many in Japan so this entrance was met with a strong positive response. Netflix subsequently debuted in South Korea, Singapore, Hong Kong, Taiwan, and India in January 2016. The Asian country that didn’t make the cut? China.

Why Not China?

As one of the world’s most populous countries with over 250 million fixed broadband internet connections, entry into China seems like a no-brainer for a business like Netflix. Unfortunately for Netflix, breaking into China is a very complicated, many-layered process that is not likely to end in success for a myriad of reasons. Because of this, Netflix has chosen not to rush into China.

Government Regulation & Licensing

China has strict rules that determine what type of content can be distributed within the country. There is a strong effort to encourage Chinese content over foreign content and regulators can be especially harsh on foreign streaming services. The government requires domestic services in China to restrict the streaming of foreign content to only 30% of their total content to push Chinese-made content front and center. Regulators could ask Netflix to adhere to the same requirements which would severely limit what they are allowed to stream to Chinese users.

The government also gives special licenses to media companies. Those without a license cannot operate in the country. This process is made all the more difficult as only 7 media companies in China currently have a license and most are state-owned companies. Because Netflix needs government permission to operate, they may find more success partnering with an existing Chinese company.

Censorship

China’s State Administration of Press, Publication, Radio, Film, and Television has strict rules about what it deems appropriate content for public consumption. These rules also apply to foreign content and is often scrutinized even more carefully than Chinese content. Big no-nos include violence, nudity and sex and subjective judgements are made about whether content is “anti-authoritarian, anti-military, religious, hyper-superstitious or strongly political”. Much of Netflix’s content would be deemed inappropriate under these guidelines. In 2012, Chinese Internet video providers became required to review their own content and self-regulate. The government has cracked down in the last year and begun to intervene in the censoring process. Running individual shows by the Chinese censors is extremely time consuming for a company.

Competition

Netflix isn’t the only kid on the block when it comes to streaming services. China also has domestic streaming services like LeTV, Sohu, and Yoku Tudou. Many of those services are tied to the government or are even directly funded by the government, making it even more difficult for foreign companies to get a foot in. Competition has also increased between regional and local services as they are also looking to expand deeper into China and Southeast Asia.

Even Alibaba’s head, Jack Ma, is looking to get a stake of the media market in China. He now controls China Vision Media and renamed it Alibaba Pictures, owns stake in another studio, owns Youku Tudou, and also has personal investments in Wasu Media, a firm that Netflix is rumored to have talked to as it looks at China.

Another hurdle for Netflix to overcome is that most of its Chinese competitors offer their content for free, going against the current Netflix subscription model. China’s population also has access to pirated material that they can watch without having to pay. Netflix recently announced it will be blocking virtual private networks (VPNs) which many customers abroad use to be able to access American content not available in their country. This started a wave of unhappiness among subscribers who are dissatisfied with the content available to them. Many countries only offer a fraction of what is available in the United States. For example, as of January 2016, the United States is streaming 5,680 videos as opposed to South Korea’s 691 videos. Netflix’s competitors in

China also have the benefit of offering local content. Some audiences heavily favor content produced in their native language. The burden is on Netflix to prove that they can offer what customers want and justify its price.

Is There a Future for Netflix in China?

Netflix has been smart in realizing that they cannot approach the Chinese market as they did in other international ventures. They “will have to play by Chinese rules” if they want to succeed. This means exercising extreme patience and investing a lot of money while being prepared to concede to Chinese regulations. Netflix has the upper-hand in one area- original content. Their original shows and films are a huge draw for subscribers in the United States and abroad and has become a core of their business model. Chinese companies are looking to create their own and Netflix has mastered the creation of high quality original content. There is the option of partnering with a Chinese company and licensing its original content. Though it will be a costly and difficult fight to succeed in China, Netflix seems to have the staying power elsewhere to finance their battle. Predictions have subscribers reaching almost 115 billion by 2020 so Netflix should have nothing to complain about.

 

Carol O’Hea

MBA Candidate 2016