Netflix Gains a Foothold in China Through iQiyi Licensing Deal - eMarketer

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Netflix Gains a Foothold in China Through iQiyi Licensing Deal

The SVOD service was driven away by tough regulations last year

April 26, 2017

In October 2016, Netflix made it widely known that its plan to move into China would not resemble expansion efforts in other foreign markets. Up against protectionist policies, Netflix joined the ranks of other US-based internet service companies—such as Google and Facebook—that were unable to make inroads in the country.

In an earnings statement letter released that month, the company wrote, “The regulatory environment for foreign digital content services in China has become challenging. We now plan to license content to existing online service providers in China rather than operate our own service in China in the near-term.”

Now Netflix has done just that, announcing that it signed a licensing deal with one of China’s largest online video services, Baidu subsidiary iQiyi. Under the deal, Netflix’s original content will be made available to consumers in China—although the company did not disclose what material would be made available or when it would launch.

iQiyi makes for a formidable partner in Netflix’s quest to crack the Chinese market. According to mobile data analytics firm QuestMobile, iQiyi was the second-ranked mobile video app in China in December 2016, with 368.9 million monthly active users (MAUs).

That put it behind only Tencent Video, with 388.1 million MAUs. (It should be noted that iQiyi itself claims to have 481 million users, and that QuestMobile’s data was reflective of users on its network.)

Top 10 Mobile Video Apps in China, Ranked by Monthly Active Users*, Dec 2016

But iQiyi’s chief rival in China is Youku Tudou, the Alibaba-owned video-on-demand (VOD) platform with a very similar business model. QuestMobile reported that Youku Tudou had 288.6 million MAUs in December 2016.

China’s VOD sector was once populated by platforms focusing on user-generated and pirated content. Since then, the larger players have moved sharply toward legitimacy by brokering licensing deals with studios and other legitimate content creators to host television shows and films legally.

Both iQiyi and Youku Tudou have followed that trend. While iQiyi initially relied on advertising to generate revenues, it has shifted its focus to a subscription model similar to Netflix’s. The company reported it had 20 million paid subscribers in June 2016, double the figure from six months earlier.

Paid iQIYI* Subscribers in China, June 2015-June 2016 (millions)

Outside of China, Netflix still faces some stiff competition in Asia-Pacific from both Amazon—which includes video content with its Prime Video subscription service in some markets—and local players in specific markets. That has left it on uneven footing in the region.

According to research from AIP Corporation, 60% of internet users in the Philippines who paid for a subscription VOD (SVOD) service had signed up with Netflix. By comparison, 47% of SVOD subscribers in Singapore paid for Netflix, while just 12% had in India. In addition, Southeast Asia-focused VOD platforms like iflix and Hooq are drawing new rounds of funding to battle the threat posed by Netflix and Amazon, and expanding into new markets.

Netflix has made efforts to sign content creation deals with domestic studios to generate localized content in some Asia-Pacific markets, India perhaps chief among them. In March, the company announced it was investing $75 million in original shows geared towards the Indian market.

Attempts by Netflix to reproduce such efforts in China are likely complicated by the onerous regulatory environment there. But its partnership with iQiyi demonstrates that the company is not willing to cede without a fight the 569.0 million digital video viewers eMarketer estimates the country will have this year.

Rahul Chadha

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