MEDIA: Netflix Faces Tough Road Into China
Bottom line: Netflix may be in talks to enter China through a joint venture, but is unlikely to reach a deal for at least the next 1-2 years due to regulatory turbulence and tough restrictions in the rapidly changing market.
Investors are getting excited about reports that leading US video streaming site Netflix (Nasdaq: NFLX) is in talks to come to China, in what would be the first such move by a major foreign video operator. The prospect of such a move would indeed be exciting, especially since it could come in partnership with a company closely tied to Chinese e-commerce leader Alibaba (NYSE: BABA). But I would caution that this particular market is a very tricky one due to China’s strict censorship policies, and also recent resistance to private companies from traditional state-owned TV stations.
There’s a good reason why other global names like YouTube and Hulu have yet to open up China video shops despite the market’s huge potential. YouTube has been blocked in China for the last 5 years, partly because it’s owned by Google (Nasdaq: GOOG), which has a contentious relationship with Beijing due to China’s strict censorship policies. But Hulu has no such friction, yet it still hasn’t entered China despite signals back in 2011 that it might be preparing for such a move. (previous post)
The bottom line is that China is an extremely difficult market for privately owned video operators, mainly because Beijing insists that all programming must be approved by censors before it can be shown to Chinese viewers. The situation has become even tougher over the last 2 years, as the rise of a newer generation of Internet-based video service providers starts to steal eyeballs and ad revenues from traditional TV operators that are all state-owned and tightly tied to local governments.
Into that volatile mix we’re now getting word that Netflix is in talks for a possible China venture with video service operator Wasu Media (Shenzhen: 000156), which is backed by Alibaba. (English article) The reports cite unnamed sources saying that Wasu is actually just one of several sources that Netflix is talking to about a potential China venture. They also quote a Netflix official saying China is too large a market for the company to ignore.
It’s not completely clear from the reports if Wasu is Netflix’s preferred partner. It’s quite possible the information is biased because the source could be someone at Alibaba, whose founder Jack Ma was part of an investor group that purchased 20 percent of Wasu last spring. (previous post) Alibaba launched its own Internet-based video product later in the year, as it races to catch up with others like LeTV (Shenzhen: 300104) and Youku Tudou (NYSE: YOKU) that are crowding into the space.
What is clear is that US investors certainly like the Netflix China story, with Netflix shares jumping 4.5 percent to an all-time high after the latest report came out. In an interesting separate but related story, Youku Tudou, which is also partly owned by Alibaba, is reportedly in talks to merge with rival iQiyi. (previous post) If that deal was really happening, it could pave the way for Alibaba to sell its Youku Tudou stake and focus its future video hopes on Wasu and a potential new tie-up with Netflix.
All of this reflects the very real fact that China’s fragmented Internet sector has become a very fluid place over the last 2 years, with billions of dollars in mergers and other strategic tie-ups taking place over that time. Regulation has become equally fluid, as traditional industries complain that they are subject to far more government oversight than these newer companies.
At the end of the day I really wouldn’t hold too much hope for Netflix to reach a deal, at least not in the near-term. That’s because the market has huge regulatory complexities, which have kept out many others that would like to enter, including Facebook (Nasdaq: FB). That doesn’t mean Netflix will never enter China, but I wouldn’t expect to see any major new developments until the current regulatory and M&A turbulence start to settle down over the next year or two.
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