Local partnership, timing key to Netflix’s China expansion

Netflix Chief Executive Reed Hastings said on January 8 at the Digital Life Design conference in Munich, Germany, that the company looks “forward to a time, a decade or two decades from now, when the Chinese middle class will want and embrace the kind of content that we have.”Photo: Getty Images

Netflix, the leading US streaming video provider, announced its China expansion from last March. However, one year later the company is still trying to figure out a way to penetrate the world’s second-largest economy. The company’s CEO Reed Hastings said early this month Netflix was available in almost all countries around the world except a few countries including China and those under the American sanctions such as Crimea, Syria, and North Korea.

The company, which aims to have a footprint in almost all countries around the world, first began offering instant streaming service to the international market on September 22, 2010 from Canada. At the time, Canadians could subscribe to Netflix for $7.99 a month, a price that Hastings called “the lowest, most aggressive price,” according to an article in the star.com in 2010.

The company started its Asia expansion in February 2015 with entry into Japan, with a view to complete its global expansion by the end of 2016. However, with China still an unpredictable destination, will the company be able to fulfill its promise made years ago? It will not only depend on external factors like China’s policy and customers’ tastes, but also the company’s comprehension of China’s politics and culture.

Finding a local partner

Although Hastings said at the Digital Life Design conference in Munich, Germany recently that the negotiation with Chinese government was going well and he was optimistic, anxiety and uncertainty about future could still be felt in his words: “It may be soon that we have a license in China, or it may take a couple years, but we’re going to be very patient.”

First, getting a license is far more difficult than blowing the dust. For any company in China, the first step to get qualified to run a video website is to get a license authorized by China’s top watchdog, the State Administration of Press, Publication, Radio, Film and Television (SAPPRFT). Under the current Chinese law, only a state-owned company or at least a shareholding company controlled by state capital can get the license, or the Audio Video Service Permission (AVSP).

In May, 2015, Netflix revealed it was in talks with Jack Ma’s Wasu Media and other partners to enter China’s online video market, but it seems the company is abandoning that idea. Considering China’s current policy, it will be very risky to enter the market alone.

The only way for Netflix to get a license is perhaps to find a Chinese partner, even if it may risk losing some of its control over the company. Take MUBI, the London-based movie streaming firm, for example. It launched into China this month in a form of joint venture with Hong Kong-listed Huanxi Media Group, according to CNBC. While Huanxi will take 70 percent of the joint venture called MUBI China, MUBI will hold only 30 percent, which means MUBI will probably have less control over the company than on its own territory.

Besides getting a license, the other problem is censorship, which means if Netflix wants to enter the Chinese market, compromises in terms of its contents must be made with China’s top media watchdog. In China, everything has go through the censors before being shown on TV and website, so if Netflix wants its contents to be distributed in China, it has to take every Chinese factor into consideration from politics, law and social values to religion. In other words, it has to localize, which the vice president of Philips, Miao Hong, once said was very important for “a multinational company that wants to succeed in China. It must regard itself as a local company and understand China as a diversified market. It should not only innovate based on the local customers, but also abide by China’s law, policy and culture.”

“For the company’s strategy makers, they need to do as Romans do when in Rome. They have to know well about Chinese law and follow it, and that is the premise of business success,” Zhang Yonghua, a lawyer familiar with foreign capital in China, told the Sino-US.com.


Another thing that Netflix should keep in mind is the timing of entry into China, given the rise of its competitors. On June 15, Beijing Gehua CATV announced its joint venture with e-commerce giant Alibaba and two state-owned media companies including National Radio and TV Network to provide video streaming service across China, with an ambition to become China’s Netflix.

Just like what C. Custer wrote in Tech in Asia, “If Netflix doesn’t find some way into the Chinese market soon, there’s a good chance that it’s going to be effectively out of the running, forced to resign itself to a tiny sliver of market share. Competing with Alibaba is hard enough when you haven’t given Alibaba a long head start.” So being patient may not work for its China expansion.

In fact, it might be the best time for Netflix to take action right now. Besides the rising local video giants, Chinese audiences are becoming more willing to pay for good content than before.

According to a report on the Chinese Internet Film and Television Industry by EntGroup, a leading research center of Chinese entertainment industry, more than 20 million users in total paid for video contents on major websites such as iqiyi, youku tudou, LeTV, Tencent, as well as Sohu in 2015, which has increased by over 100% than the previous year. Traditional Chinese website profit model based on advertising is gradually transitioning to consumer-based model, the report reads. This is definitely good news for Netflix, a subscription service provider which was previously concerned about Chinese netizens’ attitude toward paid digital contents.

In addition, according to a research by Global Web lndex, there are over 20 million people in China accessing the Netflix service through a virtual private network or VPN, though the company said it would crack down on such VPN users. These VPN users could become the potential consumers of Netflix once it is officially available in China. Although the figure has not been verified by Netflix, it is not hard to predict that the service will have lots of Chinese users. “Over 20 million users should not be a problem,” the media information provider tmtpost.com once said.

In sum, if Netflix really wants to launch into China, it must hurry up and find a Chinese partner.

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