source from:wsj
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Netflix’s China Deal May Prove a House of Cards

The video-streaming giant has had to partner with a local player to gain entry to China’s vast market
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By Jacky Wong
Updated April 26, 2017 3:14 a.m. ET
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Netflix NFLX 5.79% has finally found a way into China, its largest untapped market. Yet this is likely a Pyrrhic victory.

The video-streaming giant says it has struck a licensing deal with iQiyi, one of China’s biggest video sites, to distribute its original content in the country. iQiyi is a subsidiary of Nasdaq-listed Baidu, China’s most popular search engine. Few details have been disclosed, although iQiyi says the first batch of shows it will stream include Netflix favorites such “Black Mirror” and “Stranger Things.” Shares in the two companies jumped on the news, with Netflix up 6% and Baidu 4% overnight .

That reaction looks overdone, at least for Netflix. It has done well to enter a market that has been notoriously difficult for American internet firms to crack, due to its censorship regime and protectionist policies. Distributing online content is an especially sensitive area: Foreign sites with masses of user-generated content, such as Facebook and YouTube are banned in China.



Still, the deal looks like a compromise for Netflix. The company said in a letter to shareholders last October that it expects revenue from any licensing deal it does in China to be “modest.” Like other foreign companies that have entered the Chinese market, it has had to do so by hooking up with a Chinese partner. Similarly, western videogame makers need to find local partners to distribute their games in China—one reason Tencent has grown to become one of the country’s most valuable companies.

When foreign shows find their way into China, they tend to prove popular. Netflix’s political drama “House of Cards,” which has been available in China via Sohu, another website, is a smash hit. This should be good news for iQiyi: It will be getting high-quality original content to stream, potentially boosting its subscribers without having to pay all those pesky high production costs.

Netflix will have to console itself with the idea that it has at last made it into the market of 1.4 billion potential viewers.