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Netflix Set to Enter China

Mari Silbey
4/25/2017

Netflix is getting ready to expand into China via a licensing agreement with streaming service iQIYI. Variety was first to report that the company has signed a deal with iQIYI to distribute Netflix content. Light Reading has since confirmed the news.

Although Netflix Inc. (Nasdaq: NFLX) is unwilling to share any further details of its deal in China, Variety is reporting that, through the agreement, future Netflix original programming is expected to be delivered in the country at the same time as it's launched in other markets. If true, this would be a remarkable feat given Chinese media censors.

Regardless of the specific details, however, the iQIYI deal significantly expands Netflix's audience reach. The Wall Street Journal recently reported that iQIYI had 481 million active users as of last December, massively eclipsing Netflix's own subscriber numbers, which totaled not quite 98.8 million at the end of March. (See Netflix Nears Big Milestones.)

Netflix has an insatiable appetite for growth, part of which is tied to the fact that the company needs tremendous scale in order to balance out the amount of money it spends on programming each year. In 2017, the company has said it plans to invest more than $6 billion in content, up from $5 billion in 2016. Given the low cost of Netflix subscriptions, that money can only be recouped through massive and highly efficient content distribution.

Netflix presented its global strategy at CES 2016.
Netflix presented its global strategy at CES 2016.

Netflix began significant global expansion just over 15 months ago when it launched service in more than 130 new countries simultaneously. Unlike many service providers, Netflix can get around the difficult dilemma of negotiating global content rights because it owns many of the most valuable titles in its video library. That advantage is putting pressure on the traditional pay-TV industry which continues to be highly constrained by geography. (See Netflix: The Birth of a Global TV Network.)

To compete with the scale of Netflix and other OTT companies, pay-TV companies have been on a mergers-and-acquisitions spree, part of a consolidation trend that has spanned not only the service provider side of the television business, but also the programming side. While consolidation has largely happened within national territories -- at least on the North American side of the pond -- there have been some business moves of late that have crossed international boundaries including French company Altice 's acquisitions of Cablevision and Suddenlink, and Comcast Corp. (Nasdaq: CMCSA, CMCSK)'s expansion into Canada via technology licensing agreements with Rogers Communications Inc. (Toronto: RCI) and Shaw Communications Inc. (See Rogers Embraces 'Comcast North' Strategy.)

— Mari Silbey, Senior Editor, Cable/Video, Light Reading

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mhhf1ve
mhhf1ve
5/5/2017 | 1:37:31 PM
Re: licensing
I don't think the censors are going to be all that busy. Companies and citizens have a innate sense of what won't fly there, so you're not going to see documentaries of Tiananmen Square or anything like that. Most other stuff is okay.
kq4ym
kq4ym
5/5/2017 | 11:31:27 AM
Re: licensing
It will be interesting to see what programming is going to fly in Chine to avoid the censors. I would guess lots of adventure stuff that doesn't involve anything to do with China of the Chinese. I would think that lots of Netflix produced material would be set for production to not only be attractive to their previous audiences but the billions of potential folks in China.
mhhf1ve
mhhf1ve
5/1/2017 | 4:07:20 PM
Re: licensing
@joe - do you have any evidence that Netflix somehow created a lot of original content in Mandarin? That would be pretty surprising for them to do. I forget what the exact requirement is for native content... but several US companies haven't been able to get a foothold in China for video services. Apple was shut down, and so was Disney.

https://qz.com/811941/netflixs-nflx-new-brilliant-strategy-for-china-is-to-stay-the-hell-out-of-the-country/
Joe Stanganelli
Joe Stanganelli
5/1/2017 | 9:32:33 AM
Re: licensing
> I'm very surprised they're even being allowed to operate in China.

It was a long time coming.  Money talks at the end of the day -- and Netflix knows that it's had to get into this market sooner rather than later (especially lest its original content get pirated there before the company had the chance to offer it legitimately).
Michelle
Michelle
4/29/2017 | 8:46:54 PM
Re: licensing
@mhh Great point. I wonder if they'll suffer any losses trying to meet that obligation. I'm very surprised they're even being allowed to operate in China.
Joe Stanganelli
Joe Stanganelli
4/29/2017 | 6:56:18 PM
Re: iQiYI Subsciber numbers?
@fiber: True, but at the end of the day, money's money.  Since Netflix isn't PPV, does that distinction matter all that much?  Or what am I missing here?
Joe Stanganelli
Joe Stanganelli
4/29/2017 | 6:55:09 PM
Re: licensing
@mhh: I'm sure it's the latter -- especially since their stated goal is to be 50% original content anyway.  And, indeed, they're perhaps better off getting started on that goal in a brand new market.
fiber_dude
fiber_dude
4/26/2017 | 10:35:28 AM
iQiYI Subsciber numbers?
Subscriber and viewer numbers are not interchangeable.  The last subscriber numbers I have seen for iQIYI is 20 Million, much lower than the Netflix base.  See below for their June announcement:

http://variety.com/2016/digital/asia/iqiyi-reaches-20-million-subscribers-1201795179/
mhhf1ve
mhhf1ve
4/25/2017 | 4:23:08 PM
Re: licensing
How will Neflix get around the requirement for having a certain percentage of native Chinese content? I guess it's going to need to license a LOT of native Chinese content... or it's been secretly funding original programming in Mandarin for a few years?
Joe Stanganelli
Joe Stanganelli
4/25/2017 | 4:04:44 PM
licensing
> Netflix can get around the difficult dilemma of negotiating global content rights because it owns many of the most valuable titles in its video library.

No wonder Netflix's stated goal has been to get to 50% original content.  Moreover, there will constantly be demand for new original content as the company grows and expands globally -- especially in areas with strict regimes of censorship.

Of course, at the end of the day, people will still want to watch Game of Thrones.  ;)  So there's enough market share to go around, so it seems.
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