Netflix’s new, brilliant strategy for China is to stay the hell out of the country

Keep your distance.
Keep your distance.
Image: Reuters/Kim Hong-ji
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Netflix is saying zaijian to China, before it even got a foot in the door.

In a letter (.pdf) issued alongside its quarterly earnings report, the company told shareholders it was no longer attempting to bring its video streaming service to China, a shift from hints it made about entering the country in mid-2015.

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…We expect revenue from this licensing will be modest. We still have a long term desire to serve the Chinese people directly, and hope to launch our service in China eventually.

Signs of Netflix’s interest in China first surfaced in May 2015, when the company was in reportedly in talks to form a partnership with Wasu Media, a Chinese holding company backed by Alibaba’s Jack Ma. China’s hundreds of million internet users  are the world’s largest online audience, making the market irresistible to Western entertainment and media companies in recent years.

In the past year, however, regulatory burdens on streaming media in China have increased. Rules restricting what types of content can be shown in China have broadened, as authorities have placed a nominal ban on subjects ranging from homosexuality to witchcraft.

At least three foreign companies have launched media streaming sits in China, only to be thwarted. In April, Disney’s streaming video partnership with Alibaba was shut down by authorities just five months after it went live. That same month, Apple’s iTunes movie store also went offline. And in June, UK-based video streamer Mubi, which screens independent films on the web, terminated plans to form a $50 million venture with Chinese film distributor Huanxi.

Less than two weeks ago, at an event held by the New Yorker, Netflix CEO Reed Hastings candidly remarked that this climate makes it  difficult to enter China. “Disney, who is very good in China, had their movie service shut down. Apple, who is very good in China, had their movie service closed down. It doesn’t look good,” he said.

Licensing content to “existing online service providers” means Netflix could sell China’s domestic video streaming sites the rights to broadcast series that Netflix owns. For example, Netflix could charge iQiyi, the video streaming site affiliated with search giant Baidu, the rights to show Stranger Things to a Chinese audience. Local companies would likely shoulder the burdens of complying with rules set by China’s capricious media censors.

Netflix isn’t just dodging regulatory headaches by staying out of China.

The video streaming industry there is already fiercely competitive. Internet giants like Tencent and LeEco, in addition to Baidu, each have Youtube-esque portals that offer a mixture of professionally-produced (often Hollywood-made) movies alongside amateur videos, through both free and subscription tiers. Moreover, they’re all engaged in a vicious money-burning war as they compete for more users. Netflix would likely have to re-consider its fixed subscription model and broaden its library to stand out.

The video streamer’s retreat from China places it alongside Twitter in the relatively short list of major consumer internet companies to write off China early on. Given the mixed results companies like eBay, Google, and Uber had in China, expect that list to grow longer in the future.