ENTERTAINMENT: Netflix Skips China in Global Expansion

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Bottom line: The delay in Netflix’s plans to enter China this year may be due to lobbying from domestic online video companies, and it could be several more years before it gets permission to form a China venture.

China absent in major Netflix expansion

Shareholders of US entertainment giant Netflix (Nasdaq: NFLX) will be disappointed to learn that China wasn’t included on the company’s global road map, as it announced a major expansion for its signature online video service. Many believed that an entry to China could come as early as this year, after media reported last spring that Netflix was in talks to set up a Chinese online video joint venture with Wasu Media (Shenzhen: 000156), which is backed by e-commerce giant Alibaba (NYSE: BABA).

But the road into China was never going to be easy for any foreign online video company, due to Beijing’s heavy censorship of the Internet and also its inherent bias against big foreign companies. All that said, Netflix isn’t exactly writing off China completely either, but is simply saying its road into the market may take longer than it previously hoped.

Netflix unveiled its new global expansion and also discussed its longer-term China plans at CES, the world’s biggest consumer electronics show happening this week in Las Vegas. The company announced the expansion would make its signature video service available in 130 countries and regions as of this week, more than double the previous 60 where it was already available. (English article)

Major new countries in Netflix’s global footprint included India, Nigeria, Russia and Saudi Arabia. But the company added that its hopes of launching a service in China this year could be delayed, though it didn’t provide any reason. To show it wasn’t giving up on the market, Netflix said it has added simplified Chinese to the 17 languages it already supports on its various services.

The announcement was a disappointment for many  who had expected that Netflix could make a major breakthrough this year in China, one of the world’s largest online video markets. Last year unnamed sources had said that Wasu Media was one of several partners Netflix was talking to about a China joint venture, and Netflix had gone on the record saying that China was too large a market to ignore.

Foreign Failures

Netflix certainly isn’t the first foreign online video company to get sidelined in China. US-based Hulu had also set up an office in Beijing, most likely with an eye to eventually launching its own rival video service in the country. (previous post) Leading US video site YouTube has also remained absent from China, where its site is currently blocked because it includes video on topics that Beijing considers politically sensitive.

Netflix hasn’t detailed the problems it’s facing in Beijing. Censorship doesn’t seem like a major issue, since Netflix offers mostly third-party movies and TV shows and doesn’t host user-generated content like YouTube. Instead, I suspect China may be rebuffing the company out of concerns Netflix could threaten a large field of vibrant but mostly money-losing homegrown rivals.

Those rivals include LeTV (Shenzhen: 300104), one of China’s oldest players, which somewhat ironically is preparing a US launch for its own video service. (previous post) Another major rival is Youku Tudou (NYSE: YOKU), which was recently bought by Alibaba. Then there are other major players like Baidu’s (Nasdaq: BIDU) iQiyi, and Suning’s (Shenzhen: 002024) PPTV, and Tencent’s (HKEx: 700) own video service.

All of these companies have strong relationships with Beijing’s TV and film regulator, and I doubt that any would be too excited to see Netflix enter the market. One past supporter might have been Alibaba, which previously didn’t have any major video assets. But Alibaba’s purchase of Youku Tudou late last year might have removed one Netflix’s last major allies to lobby for it in Beijing. A one year delay looks quite understandable against that backdrop, and I suspect it could be much longer before the company finally gets permission to enter the market.

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