Two of the big 2016 stories are China’s booming entertainment market and Netflix going global. So this raises the question “can Netflix succeed in China?”. Most are pessimistic.
I actually think Netflix can do quite well in China. And they have a window of opportunity to do so. I point to three approaches that have worked for others in China – which I detail below.
But first, a couple of points about the current situation in Chinese online streaming.
Point 1: The China entertainment market is rocketing upwards.
Chinese movie theater sales are up +40% in the past year. And China will soon be the largest movie market in the world (think 2017 or so). As mentioned, entertainment is one of the biggest China stories of 2016.
This opportunity is fueling a fight between China’s cash-rich internet and media giants (Alibaba, Tencent, SMG, etc.). Lots of China giants are investing big and rapidly building up their market positions and capabilities (technology, content libraries, production, etc.). There is a bit of a stampede going on right now.
And this hyper-competition is what is creating a window of opportunity for Netflix. Because it has valuable capabilities to offer to these competitors as they slug it out.
Point 2: Online media in China is, obviously, super-political.
It’s worth keeping in mind that almost for sure no foreign company will get control of a license or broadcast rights in China. It is similar to social media and search engines in this. So Netflix needs to be realistic about what is possible.
Point 3: Regulations and licensing are not the only daunting problems for Netflix in China.
Everyone worries about the government in China, but it is usually the local competitors that kill you. If Netflix wants to win in online streaming in China, they will need to be prepared to fight (and to write big checks) for a long time. They can ask Uber and Expedia about this experience. This will likely be a long fight.
Also, keep in mind, the winning players may not be a stand-alone streaming companies. They could very likely be combinations of streaming (a loss leader?), social media and e-commerce.
Ok, that said, I think there are at least three ways Netflix can succeed in China.
#1. The NBA Option: Go for free, mass dissemination of content and capture a big customer base.
The NBA is the gold standard for how to win over Chinese customers with foreign content. Disney has also had notable success, but Chinese consumers really love the NBA. Weekly viewing is about +20M and it can surge to 200-300M for the big games. Even the Chinese President says he watches the NBA in his spare time. And this is in a country that didn’t really play, watch or care much about basketball in 1985.
How the NBA achieved this is important. And before people start pointing to Yao Ming, keep in mind the NBA has been in China since 1988 (15 years before Yao) and is still growing years after he left. He certainly helped but the strategy that was key for their success was:
- A partnership for distribution – initially with CCTV for TV and later with Tencent for online streaming.
- Free, mass long-term dissemination. They didn’t charge. They made their money through advertising and merchandise. And they focused on building a following over decades. In contrast, the English Premier League tried to charge (with WinTV, then part of Guangdong Provincial Television) and it was a disaster.
The goal is to focus on capturing Chinese consumers with your content. If they like / love your content, you can then become an advertising vehicle for all the other Western and Chinese companies also trying to reach Chinese consumers (but without cool content). This is why there are Chinese ads at Houston basketball games.
And the good news is that Chinese consumers already like and watch Netflix shows. It is mostly a question of packaging certain content at the channel level. It also means partnering with a license holder and getting content approved (sports, nature and children’s shows are easier than political shows).
I would also start releasing Mandarin versions of Netflix’s top shows (if they don’t already). These will be widely viewed in China one way or another – and they will gain viewers. There are also lots of Mandarin speakers outside of China. I would try to lock them up ASAP. Build off this more reachable base.
Netflix CEO Reed Hastings might also want to call retired NBA Commissioner David Stern. From the NBA’s first China meeting in 1988 to 2014, he oversaw their tremendous success here.
#2. The DreamWorks Option: Do a production joint venture.
If you look at the financials of companies like Youku, you can see they are flooding money into original content. Buying and creating original content is critical to winning in the online streaming in China.
But this is also the area where local companies have the least expertise. None of the Chinese streaming players currently has enough expertise to create international quality shows (yet).
Hence the recent joint ventures by Dreamworks and Warner Brothers in China (both done with the same partner China Media Capital, which is kind of Shanghai Media Group). In both cases, a production joint venture was created to create original content for China and then to export it globally (a lesser factor). For Oriental DreamWorks (the name of the joint venture), they created a beautiful studio on the river in Shanghai that now has +250 Chinese staff doing Hollywood-quality computer animation.
Netflix has a big card to play here. It has already created top TV shows that Chinese consumers love. A Netflix Studios joint-venture in Shanghai would give a local partner the ability to produce top quality content, which is exactly what they need. This would also sync with the Shanghai government’s plans to attract entertainment companies.
So Reed Hastings might also want to call Li Ruigang at China Media Capital in Shanghai. He has been the architect for many / most of these deals.
Options 1 and 2 are really about content. But they could lead Netflix to Option 3, a position in China streaming, which is what they really want.
#3. The Yahoo-Alibaba Option. Go for minority ownership of a leading Chinese streaming company.
As mentioned, no foreign company is likely going to be in control of a China broadcaster, whether online or traditional. Not only do you need a local partner by regulation but you are also going to end up in a minority position (one way or another).
So the best play here is to buy into or partner with one of the leading players and try to end up with the situation Yahoo had with Alibaba. Recall in 2005, Chinese companies were fighting for leadership in search and portals. And Yahoo provided technology and market share that helped Alibaba win. Taking advantage of that window is how they got their 40% of Alibaba. You can also look at Expedia as another successful example of this “turn a short-term foreign advantage into a long-term minority position in China” approach (well, up until recently anyways).
Today, Netflix has content, production capabilities, technology and global distribution – all of which could help a Chinese company win in online streaming. And these companies are currently in a fight to the death, so Netflix has some real strength in a China deal today.
I would move forward with Option 1 regardless. Capture Chinese consumers and good things tend to happen. But I would also open discussions ASAP around Option 1 and Option 2 – and push hard for Option 3. And in each case, I would go big and do it right now.
Thanks for reading. – j