By Jeffrey Towson
There are at least three ways Netflix (Nasdaq: NFLX) can win in China. And they are realistic options that have worked for others.
But first, a few points about the situation in Chinese online streaming.
Point 1: The China entertainment market is rocketing upwards, and it will soon be the largest in the world. This huge opportunity is fueling a major fight between China’s cash-rich Internet and media giants. This hyper-competition is also creating a window of opportunity for Netflix because it has valuable things to offer to these competitors as they slug it out.
Point 2: Online media in China is very political and likely no foreign company will have control of a license or broadcast rights. So Netflix needs to be realistic about what is possible.
Point 3: The other big issue is the strong local competition. If Netflix wants to win in online streaming in China, they need to be prepared to fight for a long time.
That said, I think there are at least three ways Netflix can win big 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. Chinese consumers absolutely love the NBA. Even the Chinese president says he watches the NBA in his spare time. And this is in a country that didn’t play, watch or care about basketball in 1985. How the NBA achieved this is important. Yao Ming certainly helped, but the strategy that was key for them was:
• A partnership for distribution initially with CCTV for TV – and later with Tencent (HKEx: 700) for online streaming.
• Free, mass dissemination. They didn’t charge. They made their money through advertisements and merchandise – and focused on building a following.
The goal is to capture Chinese consumers. If they like/love your content, you can be an advertising vehicle for all the Western and Chinese companies also trying to reach Chinese consumers.
#2 – The DreamWorks (NYSE: DWA) Option. Do a big production joint venture.
If you look at the financials of companies like Youku (NYSE: YOKU), you can see they are flooding money into original content. Buying and creating original content is critical to winning in the online entertainment market in China. But this is also the area where local companies have the least expertise.
Hence the recent joint ventures by DreamWorks Animation and now Warner Bros (NYSE: TWX) to create original content for China. Netflix has a big card to play here. It has already created top TV shows that Chinese consumers love. A Netflix Studios joint-venture could give a local partner the ability to produce top quality content.
#3 – The Yahoo-Alibaba Option. Go for minority ownership of a leading Chinese streaming company.
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 but you are also going to end up in a minority position.
So the best play here is to buy into or partner with one of the leading players and try to end up with the same situation Yahoo (Nasdaq: YHOO) had with Alibaba (NYSE: BABA). Recall in 2005, Chinese companies were fighting for leadership in search and portals. And Yahoo had technology and market share that helped Alibaba win. Taking advantage of that window is how they got their 40 percent of Alibaba.
Today, Netflix has content, production capabilities, technology and global distribution – all of which could help a Chinese company win in online streaming.
So I would move forward with Option 1 regardless. Capture Chinese consumers and good things will happen. But I would also open discussions around Option 1 and Option 2 and push for Option 3. And in each case, I would go big.
Jeffrey Towson is a private equity investor, professor, and author based in New York and Beijing. He researches Chinese consumers and competition, is author of the One Hour China Consumer Book, and invests in US-Asia healthcare and consumer product deals. Click here to visit his LinkedIn page.
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