Entertainment

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

There's no doubt Netflix Inc. needed to find a way into China. And the stock's pop Monday shows shareholders are excited about news of its plans there.

Baidu Inc. was the other beneficiary. Netflix aims to license content to iQiyi, a video-streaming service, and the Chinese search engine is its major shareholder.

A Series of Fortunate Events
Markets loved the news of a tie-up between Netflix and Baidu's iQiyi
Source: Bloomberg

Let's take a walk through China's online video landscape to see what Netflix is getting into.

The company's massive global rollout last year helped boost international subscribers at a time when U.S. figures were starting to slow. But China was missing from the portfolio.

International Is the New Black
It won't be long before Netflix has more customers outside the U.S. than inside
Source: Bloomberg

China has an internet population of more than 730 million, with 44 percent of those people watching online videos at least once a week, and 74 percent doing so at least monthly, according to data collated by Kepios, a consultancy. Youku Tudou Inc., iQiyi and Tencent Holdings Ltd.'s qq.com dominate the market, with numerous smaller contenders.

To get into China, Netflix could have gone solo and attempted to build the brand on its own. Titles like "House of Cards" are already popular there, so name recognition does exist. But licensing and censorship are minefields that have caught out numerous foreign entrants, and letting a local distributor handle such bureaucracy makes sense. By airing new episodes in China at the same time as, or soon after, the original U.S. release, Netflix will also help reduce the enduring risk of piracy.

Disjointed
iQiyi is not actually the market leader by users; Youku gets more visitors each month, while qq.com isn't far behind
Source: iResearch
Note: Data are for February 2017 and there's a lot of overlap between platforms.

To date, advertising is the major source of revenue for streamers. Consumers, accustomed to getting entertainment for free, are reluctant to pay.

House of Ads
Advertising revenue will continue to rise in China's online video sector, yet streaming growth is stronger
Source: iResearch. Calculations by Bloomberg Gadfly

Like Netflix, iQiyi is spending its own money to develop original content in the hope of selling subscriptions. That budget will be at least 10 billion yuan ($1.45 billion) this year, Bloomberg News cited CEO Gong Yu as saying in October. Thanks to Baidu's depth of data, iQiyi keeps its finger on the pulse to produce shows that tap into the latest trends and feature the hottest stars. This seems to be working -- iQiyi expects advertising to account for less than half of revenue in the future.

3 Reasons Why
Ad share is on the wane, streaming is on the rise, and other sources of revenue aren't enough to drive growth; that makes China a good place for Netflix
Source: iResearch

Such exclusive programming also helps iQiyi hold the attention of users longer than its rivals, some of which are also trying to get into the original-content business. The company also got a boost last month with Warner Bros. signing an exclusive distribution deal that includes such titles as "The Lord of the Rings," "Gravity" and "Godzilla."

The Crown
Original content helps iQiyi command more of users' time than rivals
Source: iResearch

As Netflix's China story plays out, expect HBO, also owned by Time Warner Inc., and even Amazon.com Inc. to tune in for the next episode.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net