(Chinese Version)

Reed Hastings, CEO of Netflix, revealed a few days ago that Netflix plans to launched its video streaming service in China and is currently negotiating with relevant authorities in the country. It’s said that the negotiation went quite well and Netflix would be granted a license.

This development generated a storm within the video site industry in China since many sites started their path with the slogan “the Chines Netflix”. The entry of Netflix is not well perceived in fact. Before Netflix we already have cases like Google, Yahoo and Best Buy etc. that had failed in China. What’s more, Netflix’s line of business happens to be the ambiguous content in regulation.

Since policy is something that’s hard to predict, this article only talks about the opportunities that Netflix will have entering China from the perspective of market. Although in China there are many Netflix imitators, Netflix has a very different business model when compared to its Chinese rivals. Netflix adopts a charging model while its rivals in China generally adopt the model of free videos + advertisements.

Netflix’s opportunities lie in whether charging system can work in China or not. At this moment, the consuming power in China is rising and more and more middle-class users are willing to pay for high-quality content. Such user habit has been formed. Netflix positions itself as a service provider rather than a copyright trader, which is a great advantage for Netflix to make something out of the Chinese market.

Users prefer free services, but they are starting to pay for services

The concept of free services that’s rooted in Chinese consumers’ minds has been declining after Xioami rose. Freemium model now is extending to the hardware sector. That’s why now we have a bunch of products that are being sell at a low price or even as freebies, including the 360 Zhijian that was extremely popular during that time. Zhou Hongyi, president of 360, himself is also promoting the freemium model of hardware. However, the trend back then wasn’t able to boost the consuming of hardware and there hasn't been any successful case. Even Xiaomi was lost in the production scale. And recently, Li Nan from Meizu stated that Meizu would control its production scale.

The core reason here is that users don’t really care about if it’s free or not that much. Freemium is just a way of promotion and users will only continue to use the service if the content is good enough. It’s a matter of whether their needs are met by the service. If users’ needs are met, then they will pay for the services even if it’s very expensive. The popularity of iPhone is the perfect example.

As for content, Apple’s App Store would be the perfect example. In the past only a few people were actually willing to pay for apps. In the early stage users only downloaded free apps on App Store. And after App Store starts to support UnionPay, users gradually start to buy apps. In November 2014, App Store started to support UnionPay payment and launched a One-Yuan promotion. Statistics from App Annie shows that in the first week the download number was 12 times larger than that in the previous week and there was a 50% jump in revenue. As the payment process became more convenient, the consuming power was unleashed with the right pricing strategy. In this case, the consuming power in China had been limited.

The rise of middle class in China is the core driving force here. More and more Chinese people are going abroad to travel and shop. Sometimes they would spend thousands on a toilet lid or electric cooker just because they thought it’s good. And such thinking is starting to take effect when users are paying for digital content and services.

Such business opportunity is also appearing in the Chinese smart phone sector. One of the classic cases is Smartian, a smart phone brand that directly states out its target audience is the middle class. “Chinese people are getting richer, which is awesome, ”Luo Yonghao said. “The so-called Internet phone sector is just a bubble and it will burst eventually, since cheap products are never the answer.”

The Chinese smart phone sector is slowing down and entering the period of maturity as content and service become more important. Luckily, content and service are exactly what Netflix has to offer, which will prove to be an advantage when entering the Chinese market.

The growth of subscribers

The number of subscribers in China that are willing to pay is on the rise. Recently, Iqiyi.com released the 2015 Online Video Service Payment Report of the third quarter, which shows that the payment volume of the video industry in China has surpassed one billion RMB and reached 1.19 billion, a 256% year-on-year growth. Up till now, even third and forth-tier cities have Netflix’s users. Additionally, the usage time of users is also growing, from 54 minutes to 72 minutes in the last season.

The offline movie sector is pretty similar. In 2015 the total box office in China hit 44 billion RMB, a 48% comparative growth on moving base. The total number of movie viewers in 2015 was 1.26 billion, a year-on-year growth of 51%. From this perspective, it’s apparent that the consuming power in China is growing fast and entertainment content is also the area that consumers are willing to pay for.

Gong Yu, CEO of Iqiyi, predicted in June last year that the time of free video sites has ended. A group of video sites has already been benefited by the change of user habits. But who will be the biggest winner? From the perspective of products, Netflix’s content is the game-changer.

It’s commonly accepted that American TV shows on Netflix are much interesting than Chinese shows for the fact that they are of high-quality and were filmed by competitive production teams with better and more exciting story plots. Even just look the investment hey have. Lost the soap opera was extremely good and its investment per episode was up to 14 million RMB while that of Chinese ones is only less than one million. Zheng Xiaolong, director of Empresses in the Palace, stated that 60% of the revenue from the TV commercials has been used in creating new stuff while Chinese TV stations only invest 10%.

Local video sites have the advantage of additional value, which means they can have different service packages to attract users. For instance, LeTV’s member users can enjoy discount when buying smart LeTV phones and LeTV television, as well as special benefits of movie-related activities. Furthermore, some video sites even have contents on concerts and music videos etc.

How many users Netflix could amass in China?

Before we discuss further about this question, we can first take a look at the index of Netflix’s shows on Baidu. Baidu’s index shows that since 2009, the index of users that watch American TV show has jumped from 100 to 12,000 in 2014, around ten times higher that that in 2009. The index now has reached 14,800 with 19,000 as the peak number in July last year. In other words, American TV shows are getting even more popular in China.

The Paper conducted a survey among the post-90s users last summer, of which result shows that 45.7% of users within this particular age group is more interested in American shows. That being said, American shows have become the most popular category among the post-90s generation. Additionally, according to statistics on video sites, American shows viewers in China are mainly overseas returnees, white collars and college students, who happen to be the most influential group in society.

Another set of data might be able to be the indicator of measuring the amount of users Netflix might get in China: Guardian has reported that according to market research firm GlobalWebIndex, the number of Netflix’s “illegal” users has reached 30 million, 50% of the current subscribers. So here comes the twist: More than 20 million out of these 30 million users are actually from China! These 20 million users pay not only for VPN to be able to have access to Netflix, but also pay for Netflix’s membership.

Although such report hasn’t been confirmed officially by Netflix, it’s no secret that in China many users are using VPN to enjoy Netflix’s service. What’s more, there are tons of tutorials on many Chinese websites that teach people how to use Netflix’s service. In this case, if Netflix is able to enter China and insure the quality of its content, then it would be easy for the company to amass 20 million users that are willing to pay for services.

However, whether Netflix’s business model could work in China or not remains unknown. Well, who knows if Netflix would adopt the mainstream free video + advertisement model in China? In any case, Netflix’s options are deeply influenced by the country’s policy. Currently most video sites in China provide free videos that they bought from foreign firms with users and earn money through advertisements. The advantage of such model is that it can attract high-end users, which are exactly what high-end brands need.

No matter what kind of charging model Netflix will adopt in China, the Chinese market will surely be a lucrative market for the company, since American TV shows have become extremely popular in China and Chinese users are forming the habit of paying for the content. For Chinese video sites like LeTV, this is no doubt a devastating blow.

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[The article is published and edited with authorization from the author @Niu Yang, please note source and hyperlink when reproduce.]

Translated by Garrett Lee (Senior Translator at PAGE TO PAGE), working for TMTpost.