Netflix, Not in China

Netflix is in every country in the world except North Korea, Syria and China. For North Korea and Syria, it is easy to figure out why, but for China it is more complex. Let us have a look at what has prevented Netflix from entering China.

Netflix Around the WorldCountries where Netflix was offered in early 2017. Source: Business Insider.

Early on, Netflix knew that they had to proceed carefully with their efforts to enter China. They communicated extensively with the national government, interfaced with the proper government departments and studied the business landscape. They were determined to try to find a way into China with its population of 1.4 billion. Unfortunately, they encountered challenges that could not be resolved.

The first hurdle was regulatory. The Chinese government, similarly to western governments established a series of rules that govern what cannot be shown in films, on TV and through on-line streaming. Topics related to health (smoking, drinking, etc.), and sexuality have been extensively regulated in a large number of countries, including Canada, Europe and the USA. China, through SAPPRFT (State Administration of Press, Publication, Radio, Film and Television) has established a more comprehensive series of regulations. Here are the categories of topics that are banned:

  • Does not meet the national conditions and social systems, to the detriment of national image, endangers national unity and social stability
  • Damages ethnic groups unification
  • Violates the state policies on religion
  • Promotes feudal superstitions contrary to science
  • Exaggerates terrorist violence, or shows ugly behaviors that potentially induce crime
  • Contains pornographic or vulgar content
  • Distorts ethnic cultural traditions
  • Harms public morality, adversely affects minors

For each category, comprehensive details were provided resulting is many topics normally covered in shows produced in the West coming into conflict with these rules.

Like so many regulations in China, there is substantial leeway in their interpretation, making life more challenging for companies that need to meet those regulations.

These guidelines were tightened in early 2016, and affected foreign companies like Disney and Apple who both had been able to develop a market for their online entertainment content. Both saw their online services permanently interrupted.

Netflix could not find a way around these comprehensive regulations.

Netflix Regulatory ChallengesNetflix faced regulatory constraints in China. Source: Bidness Etc.

The other challenge that Netflix encountered was the strong desire from the national government to support local champions. Over the years, China has endeavoured to develop local companies in support of a “Made in China” policy that it frequently advocates. This policy is applied firmly particularly if the foreign company has no capabilities to improve the Chinese society. In this area, Netflix was not able to demonstrate that it possessed technology that would be of value in the Chinese market. Even if it had, Netflix would have had to follow the challenging content rules in order to obtain an operating permit.

Netflix - AlibabaNetflix and Alibaba squaring off in China. Source: Bidness Etc.

So, as with many other foreign internet companies like Twitter, Google, Facebook, eBay; Netflix will not be operating in China. Netflix has elected to license in-house developed programs to Chinese companies. But these will bring only modest revenues compared to being able to serve this large market. Instead, Chinese companies, like Alibaba and Tencent will continue providing on-line video streaming services as Netflix had nothing to offer that was of interest to the government.

Pierre

Note: For further details on the regulatory requirements, refer to: https://qz.com/630159/chinas-new-television-rules-ban-homosexuality-drinking-and-vengeance/, or to the original site in Chinese where one can use Google translation to obtain it in English: http://www.gov.cn/flfg/2010-05/20/content_1609751.htm.

Google; not in China

All large companies that target a broad spectrum of consumers and are active around the world need to be present in China. With a potential consumer base of 1.36 billion, this is an opportunity that no company can avoid. Not Google. Here is the story of what happened.

Created in 1998 by two students from Stanford University (California), Google is the leader in the search engine market with Google Search. It is the most widely used search engine in the US with a market share of 60%. Across the Western world, it has a similar market share.

In 2005, it established a fully owned subsidiary in China. In Jan. 2006, Google launched its China-based google.cn search engine, with results subject to censorship by the Chinese government.

google-china
Source: Google

By early 2009, its market share in China was 78%, with Baidu trailing at 18%. It was well positioned to capitalize on the Chinese market.

In March 2009 China blocked access to Google’s YouTube site due to footage showing violent images in Tibet. Access to other Google online services was also denied to users.

In January 2010 Google announced that, in response to a Chinese-originated hacking attack on them and other US technology companies, they were no longer willing to censor searches in China and would pull out of the country completely if necessary.

By April 2010, searching via all Google search sites in all languages was temporarily banned in mainland China, without affecting Google Map or Google Mail.

baiduBaidu is the Chinese market leader in search engine. Source: http://www.baidu.com

In November 2012, China had blocked access to Google. All Google domains, including Google search, Gmail, Google Maps, YouTube, etc., became inaccessible.

By 2014, in response to a series of terrorist attacks, China tightened its Internet censorship.

Google’s Gmail, Chrome, Map, YouTube and Google-based search inquiries have not been available to mainland China users since 2014. However, Google has maintained that it would continue with the research and development offices in China along with the sales offices for other Google products such as Android smartphone software.

youkuYouku online video service. Source: www.youku.com

By mid-2015, Baidu dominated the market of search engines with a share of 55%, followed by Haosou at 26% and Suogo at 10%. No western company had any meaningful market share in the search engine market in China. The same happened with online videos, where YouTube was replaced by iQiyi and Youku, which are key players in this market.

Pierre

Metro, subway, underground, et al.

A key characteristic of a modern, well managed city is the presence of a subway system. Currently in China, 26 cities have a subway system. Some are fairly small as in Fuzhou with 1 line and 9 stations over 10 km. For 6 cities, the subway system has more than 100 stations stretching over 100 km.

For these 26 cities, a total of 2,116 stations are operational over a distance of 3,283 km. These are amazing numbers.

shanghai-metro-mapShanghai Metro map. Source: Shanghai Metro

The Shanghai and Beijing metro systems have more than 300 stations covering over 500 km each, with stations having up to 21 different exits.

On a world basis, both cities are a match to Paris (303 stations and 214 km), London (270, 400 km), New York (504, 420 km) and Tokyo (293, 312 km).

Only 3 cities compete in annual ridership above 3 billion: Shanghai at 3.1, Beijing at 3.3 and Tokyo at 3.5. These are gargantuan numbers that can only be understood by riding the subway in these cities. To keep up with the number of customers, in Tokyo, individuals were hired to “gently” push passengers into the subway cars. Shanghai has started doing the same in the last year as ridership has continued to increase.

peak-time-in-shanghai-metroPeak time in Shanghai Metro. Source: Unknown

What is the future of subway systems looking like in Chinese cities? Currently, there are 12 cities that are building a new subway system. In addition, the 26 cities that currently have a system, are adding more stations and lines. For example, Shanghai is planning to add a further 114 stations covering a distance of 226 km by 2020 (i.e. within 4 years). The plans for Beijing are even more grandiose as they plan to add 192 stations covering 368 km also by 2020.

Subways in China have become a tool for engineering a society that uses public transport. Governments (central, provincial and local) realised early on that with a population of 1.36 billion, it is impossible to have the level of car ownership that exists in the West. A high quality public transit system needed to be built to discourage car ownership.

What has compounded the challenges for the municipal governments has been the migration of hundreds of millions of people from rural areas to the cities. In China, the level of people living in cities (i.e. urbanization) has only recently reached 50%, which is low compared to an average of 78% in the West. So it is reasonable to anticipate further growth in Chinese cities, therefore more subways.

Pierre