Netflix is coming to China - What is at stake?

Netflix, the world's leading streaming media operator, has announced a licensing agreement with IQiyi, Baidu's Online video platform. This means that the American VOD company's long-planned project of entering the Chinese market has made a substantial progress.

Although the specific time and which popular American TV series will be put online are still waiting haven't been disclosed yet, the reaction has been very warm. For fans who like to follow their favorite TV series, it is obviously a good thing that they can catch up with famous series such as Black Mirror without privately crossing over the ‘great firewall’. However, for the major online video platforms, a strong competitor has finally arrived. The next thing they have to think about, is looking through their own toolbox and finding out what tools they can use to deal with this challenge.

Netflix's arrival is not only worrisome for video sites, but also for some industry giants. First, major e-commerce companies. They have to think about how to develop streaming media services, in order to increase the interactions with the consumers in scenario applications, to promote the upgrades of e-commerce business marketing. Second, giants who were rumored to ‘marrying’ Netflix such as Wanda, Alibaba etc are finally fighting hand to hand. And as for traditional television stations, they will have to compete with not only domestic video platforms, but also powerful competitors like Netflix. The pressure of transformation has suddenly increased.

Flash marriage and flash divorce, a distance of one word

The news that Netflix will enter the mainland market was announced by Robert Roy, its vice president who is in charge of streaming media business on a meeting held in Indonesia. The spokesman of IQiyi soon confirmed, the new seasons of Netflix's ‘Black Mirror’, ‘Stranger Things’ and other high-quality contents were expected to achieve an exclusive update on dual-platforms in China and the United States. IQiyi also emphasized that this cooperation would take place in strict accordance with the regulations of online foreign movies and TV series.

This cooperation is an intractable business. After all, China has a strict review-before-broadcast policy on foreign movies and TV series. But the two parties also have inherent urgent requirements.

For IQiyi, the first things is the hope that high-quality contents of Netflix’s leading program will attract new audience. For domestic users, there is no difference in watching new TV series on different platforms as long as there are new series that can be watched. They do not have too much loyalty to platforms. To keep the number of users growing, the platform would have to continue to increase the investments in exclusive contents. Netflix has a large number of high-quality American TV series resources, if they can be put on IQiyi simultaneously it will attract new audience. Therefore, IQiyi hopes that the cooperation with Netflix will lead to user growth. After all, ever since the number of users has reached 20 million, IQiyi stopped announcing new data and Youku were the first to announce that the amount of users reached 30 million.

Second, the cooperation with Netflix would save copyright payment for IQiyi. The investment on copyrights is a huge burden for various video platforms. The main reason IQiyi can maintain its leading position in the business is they invested on copyrights more than other video platforms. According to Baidu's annual report, the operating costs of IQiyi in 2016 was 14 billion yuan, and the operating costs in 2015 was 7.6 billion. The operating costs have increased by more than 80%, and most of the costs are related to content. The operating costs of IQiyi accounted for a large proportion in Baidu's global costs. So it is clear that IQiyi's losses will inevitably affect Baidu's financial report. On April 28, Baidu announced that its profit in the first quarter of this year was 1.777 billion yuan, which is a 10.6% decrease compared with last year. Also, Li Xin who has been the CFO of Baidu for 9 years was moved to another position. Baidu is now under a lot of pressure.

From the perspective of the impact on other video platforms, the cooperation will temporarily consolidate IQiyi’s first position in the industry. In addition to the impact on the structure of industry, Netflix's arrival will further expand the influence of paid-video. As we all know, Netflix relies on exclusive TV series and the model of paid-video, VOD to obtain its leading position in the market. Currently 95% of its global 100 million users are paid users. At present, other video platforms are basically using this business model. Certain data predict that in the next few years the size of the Chinese video market will reach a $100 billion level, and paid users will account for about 38%.

But how long the cooperation can be maintained is still at question. Netflix is forced to cooperate with IQiyi. They were lucky to obtain a license, but the harsh regulatory environment in China forced them to step back. If Netflix wanted to operate alone, they would have to obtain eight video licenses. After engaging with regulators, Netflix realized that finding a partner was a shortcut to Chinese market. It is only natural to imagine that two parties in a relationship will inevitably have frictions in management, or split of interests. Once Netflix will have been in the Chinese market for a while and gotten familiar with it, breaking up with IQiyi would be a natural choice. Therefore, for Netflix this cooperation can only be considered as ‘water testing’. In addition, the regulatory authorities have specified that the foreign contents on video platforms must not exceed 30% of the total, which also limits the scale of this cooperation.

Disrupting the structure of competitions between e-commerce streaming medias

After the consolidation of Chinese e-commerce giants these past years, the momentum of online retail development is now weakened. The power of development now comes from the combination of online and offline retail. The accurate prediction of consumer behavior, and the construction of trading environment based on scenarios have brought new challenges to e-commerce giants.The core challenge is to figure out how to make consumers stay on the platform longer, to create a better consumer experience and to stimulate new consumer demands outside a single purchase.

Amazon is a good example of how to respond to this challenge. In April 2016, Amazon announced the company was launching its own streaming media video service. In December of the same year, Amazon announced that the streaming media video business would be launched in more than 200 countries around the world. This time, Amazon also applied a lower price than Netflix strategy, providing users with a half-year period of concessions.

Netflix is ahead of Amazon: it has expanded its territory to most countries in the world in 2016, with twice as much revenue per year as Amazon. But Amazon also has advantages. Its streaming media service is relying on the entire chain built on its e-commerce services and other logistics. The client target is clear, and the sales data can be combined with video viewing data for the development of more targeted movies and TV series. At present, the number of Amazon’s streaming media video service users has reached 65 million.

The giants have already realized the importance of streaming media services to e-commerce, so they are expanding their layouts in the business. In 2015, Alibaba announced the establishment of the video site TBO, to provide users with domestic and international video contents and Ali Pictures movies. At that time Ali was hoping that this video platform could compete with Netflix. But then Ali acquired Youku &Tudou for $ 4.5 billion, gaining a new video platform. Its new strategy for video marketing is also including this new platform. At the same time, Ali is pushing streaming media services abroad. On April 20, Lazada, Ali's business platform in Southeast Asian announced that customers can enjoy Netflix’s streaming video services for half a year.

Jingdong also refuses to fall behind. In 2015 they announced along with Tencent that they will launch "the Jing-Ten" plan of creating a goods-business platform. At the beginning of 2016 Jingdong launched its streaming video services in Russia.

Considering the fierce competitions between e-commerce giants, the ones who have partners with high-quality content such as Netflix in the streaming media industry are undoubtedly winning. Domestic e-commerce giants may be able to learn a few things about streaming media operations from Netflix.

Will it be submitted to a Chinese enterprise?

Netflix itself is in perfect condition. It has thousands of movies and TV series- mostly exclusive; nearly 100 million users- mostly paying users. At the moment, the content is far more important than the channels. And In the field of entertainment, Netflix is super attractive.

In fact, there have been several rumors about the acquisition of Netflix. In November last year, foreign media reported that Disney planned on acquiring Netflix. And at the end of September 2015, there was a rumor that Wanda wanted to acquire Netflix. Compared with BAT (Baidu -Ali -Tencent), Wanda is the only giant who didn't heavily invest in the entertainment sector and that still doesn't own a video platform. After its acquisition of Mtime, Wanda intended to create an online video platform similar to Netflix, to carry out VOD business and other services. But, after all, Mtime only has a limited volume, and the transformation has not started yet. Is it still likely that Wanda will follow up on the acquisition of Netflix? Since its previous acquisition was rejected by the regulatory authorities, acquiring a company with such a high market value seems to be too much for Wanda.

The rumors about Ali's buying Netflix have not stopped even when Ali was in the process of acquiring Youku & Tudou. Of course, the acquisition did not happen. The two parties are currently cooperating in Singapore.

Unfortunately, due to the tightening of domestic regulatory policies, the time window for the Netflix acquisition seems to be closed. Perhaps the only thing left for the industry to do is to polish the charging models or to try producing more high-quality content.

Original article here

#Baidu #Netflix #VOD #Alibaba #Wanda #video #entertainment