Ni Hao, Netflix! How Entering China Is Harder Than Scaling the Great Wall
The streamer's stock soared past $600 a share on news of talks with a mainland media group owned by Jack Ma as Reed Hastings contends with rampant local piracy and byzantine regulation.
This story first appeared in the June 5 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.
In a lot of ways — the wrong ways, in Hollywood terms — Netflix already is in China. When House of Cards' third season debuted in the country, there were tens of thousands of illegal downloads. GlobalWebIndex estimates that more than 20 million Chinese people use so-called virtual private networks to access Netflix, even though it is not officially available there.
With China's online video market expected to nearly triple to $14.5 billion by 2018, there is good reason for Netflix to work out the whos and hows of gaining legitimate access to such a lucrative market. Chief content officer Ted Sarandos said May 15 at the Cannes Film Festival that CEO Reed Hastings wants to "try to figure out China and how to get there." But it has become clear the company needs a local partner to help penetrate the heavily regulated country and avoid the piracy that has devastated its traditional home video market. That partner must offer licenses for content on all devices, including mobile phones, computers and set-top boxes.
"It is a huge market that is developing fast. If they don't go in with the right Chinese partner, it might be more challenging," says analyst Steve Birenberg of Northlake Capital Management. "For example, Alibaba is not going to just let Netflix go unchallenged. Same for other big players over there in online entertainment." Those include Tencent, Youku Tudou, Baidu's iQiyi and Sohu.
China is the world's largest Internet market, with 649 million users and nearly two-thirds of the audience using smartphones and tablets to watch content. Pivotal Research Group's Jeffrey Wlodarczak has forecast 5 percent market penetration for Netflix in Chinese broadband households by 2021 — if it can get into the country.
The regulatory background is complicated, and Netflix must navigate the added barrier of state censorship. Since April 1, the State Administration of Press, Publication, Radio, Film and Television has required foreign TV dramas to present full seasons — with subtitles — for censorship before they can be broadcast. Content deemed violent or pornographic will be deleted. In addition, online video sites may act only as content providers and cannot set up dedicated content zones or channels on Internet TV platforms.
In some ways this might suit Netflix, which acts less as a "channel" and has pioneered full-season releases of such shows as Orange Is the New Black and Marco Polo that can be consumed on-demand. But in general, getting foreign dramas online in China is becoming harder, not easier.
Local media reports indicate the country's governing body has issued Internet TV licenses to seven companies: CNTV, the web-based broadcast arm of state-run channel CCTV; Wasu, in which Alibaba has a stake; Shanghai Media Group, which owns BesTV; Southern Media; Hunan TV; China Radio International; and China National Radio.
Of these, sources indicate the following are the most likely candidates to partner with Netflix:
This outlet is the most likely based on the fact it is the only one that publicly has acknowledged it is in talks with Netflix. The group is backed by Alibaba chief Jack Ma and based in Ma's hometown of Hangzhou.
Wasu, which operates cable and broadband networks in Hangzhou, has worked with Ma's company to produce set-top boxes since 2013. "Recently our business department and Netflix also had some communication regarding the Internet TV business. So far the two parties haven't reached any relevant agreement in terms of cooperation," said Wasu in a regulatory statement. And there the trail ends — so far.
SHANGHAI MEDIA GROUP/BESTV
Wasu also has been in talks with Shanghai Media Group's BesTV unit, a good fit for Netflix because a 2014 restructuring merged it into a giant Internet and TV company. SMG owns and operates 13 radio stations, 15 TV channels, 15 digital pay TV channels and eight publications. BesTV is comfortable working with overseas media groups as it has a production and distribution deal with The Walt Disney Co. and is a Chinese partner of Microsoft. It also has strong penetration in the wealthy eastern portion of the country.
This is an intriguing option. In some ways, this outlet is least likely to partner with Netflix because it signed a deal with Alibaba in July to provide shows and movies for a similar streaming service in China. But it has shown an appetite for U.S.-based deals: In March, Hunan TV signed a major cooperation agreement with Lionsgate.
Netflix also has met with Poly Group — a conglomerate formed from the business assets of China's military whose interests range from real estate and culture to explosives — as well as state-owned broadcaster China Radio International and LeTV, whose production unit LeVision recently joined with director Tsui Hark for a Silicon Valley venture. Says one local official of Netflix's challenge, "The key issue in China is getting people to pay for what they get for free right now."