Netflix: Breaking into the Chinese Market

2067 words (8 pages) Essay in International Business

23/09/19 International Business Reference this

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Netflix: Breaking into the Chinese Market

International Business Entry Plan

Table of Contents

Executive Summary

Project/Service Introduction

Barriers

Product or Service

Resources

Competition

Public Policy

Pricing & Costs

Conclusions & Implementations

Bibliography

Executive Summary 

Netflix has established itself as an industry leader for online movie and television show streaming. They offer customers hours of entertainment and provide content that is consistently updated with new and old movies and shows. What has contributed to their success is their saturation of the market by making their services available in as many ways as possible. Along with market saturation, pricing, and content they clearly separates themselves from competitors. It is with their membership pricing scheme for services that they appealed to many customers and has contributed to them becoming market leaders.

Project/Service Introduction

 “Netflix is a streaming service that allows our customers to watch a wide variety of award-winning TV shows, movies, documentaries, and more on thousands of internet-connected devices” (Netflix, 2018a). Netflix’s popularity grew exponentially when it premiered its first original show: “House of Cards.” House of Cards season two, became the number one American show viewed in China through a service called Sohu (Greenberg, 2016). Netflix is currently offered in over 190 countries, but not yet available in China, Crimea, North Korea, or Syria (Netflix, 2018b). Due to U.S. government restrictions on American companies, Netflix is unable to expand to any of the above named countries, with the exception of China. Netflix aims to expand into the Chinese market.

As noted above, Netflix offers a variety of movies, TV shows, documentaries, and is even creating original content of their own. The streaming service is attractive a wide range of audiences as the monthly subscription fees allow viewers to enjoy streaming without any interruptions through advertisements.

The number one reason for targeting China as their next market, is that there is very limited competition, and the competition that exists does not have the amount of licensing deals that Netflix currently holds. “According to research firm IHS Markit, video streaming in China will more than quadruple from $3.5 billion in 2015, to $17.6 billion in 2020” (Wang, 2018). China’s strict censorship and governmental regulations will be a fierce barrier to overcome, and will be discussed further in the next section.

Barriers

The biggest barrier Netflix will need to overcome to successfully enter the Chinese market is their strict censorship laws and governmental regulations. The Chinese government has complete control over what types of media are allowed into their country and in the past has “blacked out” or blocked the use of certain websites including Google, YouTube, and Facebook during times of turmoil or unrest (Xu, 2017). This makes it excruciatingly difficult for services like Netflix to enter the market as their services are delivered through their streaming platform on the Internet. All the video, documentaries, and movies would need to be screened by the Chinese government and their censorship committees prior to being allowed to be viewed by their citizens.

These strict censorship barriers may limit the quality and quantity of content that Netflix is able to provide to their future clients. The amount of time and finances needed to sift through the video content may end reduce the amount of revenue that Netflix may generate.  Another barrier Netflix will face is how quickly they are able to deliver new content to the Chinese market.

Product or Service

The product or service, in Netflix’s case, is the streaming content they provide. Since it is a streaming service and not a physical product it is relatively easy to maintain. The difficulty comes in with managing the trademark and rights fees associated with the content they can provide.

As previously discussed, China has strict rules that dictate what content can be distributed to its citizens. Since majority of the other video streaming platforms available in China are only able to offer a limited number of shows, Netflix may surpass them if their expansive library is approved. This would provide Netflix a direct competitive advantage if they are able to break into the market before their competitors are able to secure additional licensing’s.

Netflix does not have limited appeal as the content they provide targets people of all ages and demographics. As previously noted, Netflix’s original show “House of Cards” became the number one American TV show viewed in China. As there is no streaming services available, the series was viewed via their internet provider service called Sohu. It is reasonable to believe that the new market would be receptive to Netflix’s services and offerings.

Streaming has gained popularity over the years, and has caused a direct decrease in the number of households that subscribe to cable. It is reasonable to assume that Netflix, and other streaming video services, will be in demand for a long period of time.

As previously noted, China has strict censorship laws and the government heavily regulates what the citizens are able to view. Even though streaming is not directly restricted abroad, it is not readily available due to the heavy censorship restrictions.

Resources

Netflix will need to invest several resources in order to successfully break into the Chinese market successfully. These resources include financial costs, employee costs, marketing and technical skills, and most importantly the company’s time. Even though Netflix is a billion-dollar company, it is difficult to put a specific price tag on exactly how much the company can and will invest into its available resources to enter the Chinese market.

As noted in the introduction section, the Chinese streaming video market revenue is project to increase to over 13 billion dollars. With this substantial increase in market share, Netflix may be more willing and eager to invest more resources than previous markets it has entered. I do not believe that Netflix would stretch its resources too tightly in order to enter the target market.

Competition

Since the Chinese government has control over almost all media that is circulated within China, there is a very aggressive competition for an outside company to enter the market. As previously discussed there are a number of barriers that have hindered outside companies from entering the Chinese market, and the ones currently available are primarily based out of China. This has caused a rat race among massive streaming video companies to attempt to enter the market. Majority of the current streaming video companies available in China offer both free and paid subscriptions but have limited libraries or content available due to licensing agreements. 

Like Facebook, Netflix has become a household name all around the world. Their global image and reputation for providing excellent customer service and affordable monthly pricing and quantity of videos they have available would help them stand out from competition. Netflix should offer a “free trial” version to customers so they are able to see how they differ from competition, in hopes of securing them as long-term subscribers.

Public Policy

The Chinese government would not offer any subsidies to Netflix. They may be required to pay a hefty tax in order to pay for the surplus amount of work that will be required by their censorship agency’s in order to vet the content and material offered by Netflix. Though since the streaming video market is expected to grow exponentially (into the billions) this should not hinder Netflix.

Pricing & Costs

Netflix currently offers three plans for their streaming service: basic, standard, and premium. The pricing of these plans vary by country and number of shows/movies available. For example, in the United States these plans start at $7.99 for the basic, $10.99 for standard, and $13.99 for premium (Netflix, 2018a). The primary differences between plans are the number of users (or screens) they may have streaming at one time, as well as the quality of video offered. Since the Chinese government heavily regulates what types of content can be offered in China, Netflix may wish to charge a lower monthly rate. However, if Netflix is able to break into the Chinese market and keep its current licensing’s, it would have a monopoly and may be able to charge an even higher rate until a new competitor joins the market.

On average, Netflix’s yearly cost in relation to the average person’s income of a country is around 0.30% (Clark, 2018). According to Statista (2018), an online statistics portal, the average person’s income in China for 2016 is around 72,180 yuan or around $10,400 in American dollars, accounting for inflation. I propose that Netflix should charge around $2.60 or 18.04 yuan per month for their services. I believe this price may need adjusted depending on the number of shows and movies available to stream. As Netflix must pay licensing fees and distribution rights, the cost may fluctuate slightly.


Figure 1. Netflix library sizes. Reprinted from Travis Clark via Business Insider in Comparitech, 2018. Retrieved November 26, 2018, from https://amp.businessinsider.com/images/5b9969ac04f16219008b5d33-750-464.jpg.

Conclusions & Implementations

 As the Chinese streaming video market is projected to quadruple in revenue by the year 2020, along with the limited competition and numerous barriers for new companies to enter the market, I would suggest Netflix continue to attempt to break into the Chinese market. I believe they should implement a free trial of their service, in order to lure in potential customers and strategize a variety of marketing measures that the Chinese government will allow. As the Chinese government has placed a number of bans on internet websites and advertising companies, Netflix should be cautious on how “tasteful” their ads are. They should focus their video content library to include both American and Chinese videos, movies, and T.V. shows to satisfy the large demographic of China.

Bibliography

  • Clark, T. (2018). Figure 1 Netflix Libraries: Library Sizes and Monthly Costs. Retrieved from https://amp.businessinsider.com/images/5b9969ac04f16219008b5d33-750-464.jpg
  • Clark. T. (2018). Business Insider. How much Netflix costs in different countries around the world, and which ones get the best deal. Retrieved from https://www.businessinsider.com/countries-where-netflix-is-most-least-expensive-or-cost-effective-2018-9
  • Greenberg, J. (2016). Netflix May Never Break Into China. Wired. Retrieved from https://www.wired.com/2016/01/netflix-may-never-break-into-china/
  • Netflix. (2018a). What is Netflix? Retrieved from https://help.netflix.com/en/node/412
  • Netflix. (2018b). Where is Netflix available? Retrieved from https://help.netflix.com/en/node/14164
  • Statista. (2018). Average Annual Salary of an Employee in Urban China in 2016. Retrieved from https://www.statista.com/statistics/278350/average-annual-salary-of-an-employee-in-china-by-region/
  • Wang, Y. (2018). The Billion-Dollar Race to Become The Netflix of China. Forbes. Retrieved from https://www.forbes.com/sites/ywang/2018/03/07/the-billion-dollar-race-to-become-the-netflix-of-china/#6b7097083495
  • Xu, B. (2017). Media Censorship in China. Retrieved from https://www.cfr.org/backgrounder/media-censorship-china

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