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Netflix, Inc. May Be About to Crack China's Fortune Cookie

By Jeremy Bowman – May 23, 2015 at 11:05AM

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Netflix is in talks to enter China, a market that could one day top the U.S.

Earlier this year, Netflix (NFLX 2.84%) shares soared as the company told investors it planned to complete its global expansion by the end of 2016, entering over 200 countries and remaining profitable while doing so.

CEO Reed Hastings said his company had a good sense of how to proceed in most of the world, but he made an exception for China, saying, "For China, we are still exploring options -- all of them modest. We'll learn a great deal if we can successfully operate a small service in China centered on our original and other globally licensed content." 

China, the world's second-largest economy with over 1 billion consumers, represents the biggest opportunity in the international market for Netflix. Successful penetration of the Chinese market would be huge, and now it seems the company has found a way to do it.

Last week, Netflix stock jumped another 4% after reports emerged that it was in talks with several potential partners to enter the Chinese market, one of which is Wasu Media, a Jack Ma-backed enterprise. 

Ma is the man behind Chinese e-commerce giant Alibaba, and last year, he purchased a 20% stake in Wasu for $1.05 billion. Wasu disclosed that it had "talked with Netflix recently" but has not reached any "solid agreements on cooperation or content." 

China's online video market is estimated to be worth $5.9 billion and is growing quickly. One Internet research company expects that figure to triple by 2018. Because of regulations on content licensing, Netflix would be required to partner with a Chinese company in order to operate there. Even if it finds a partner, there are still challenges ahead.

Breaking through the great wall
China's huge market has allured dozens of major American companies over the years. Some, like Yum! BrandsStarbucks, and Nike have found considerable success in the communist country. Others, like Wal-Mart and Google -- which actually pulled out of China -- have struggled. 

Only seven Chinese companies have Internet TV licenses, one of which is Wasu. Netflix must partner with one that provides it with access to all streaming platforms to ensure its launch is successful.

In addition to those obstacles, Netflix may see some of its content banned or censored, and all of it will likely need to be approved by Chinese censors. 

However, there are signs that the leading video streamer will have an easier time than Google or Facebook have had. Time Warner's (TWX) HBO partnered with Tencent Holdings last November to make its catalog of hit TV shows available for streaming in China. The network has also been available through conventional channels like cable since the 1990s. 

Though censorship and other China-specific issues such as piracy may present further obstacles to Netflix, these problems are more likely to be headaches than reasons to dismiss the potential of the Chinese market.

Pass the popcorn
Last month, China surpassed the U.S. in box office revenue for the first time ever, at $650 million to the U.S.'s $640 million. The change in leadership shows that even as ticket sales in the U.S. are waning, movies are only becoming more popular in China.

China's fondness for American brands is well known, and movies and TV are no different. In fact, a recent favorite in China is Netflix's own "House of Cards," which was the most streamed show in the country when its second season debuted on Sohu, the Chinese Internet company that owns the rights. The show's first season was viewed 24.5 million times in China, a number close to Netflix's entire U.S. subscriber base at the time it aired. 

Despite concerns, the demand for Netflix is clearly there and will only get bigger, as China already has twice as many broadband subscribers as the U.S.

Entering China could easily unlock tens of millions of new subscribers for Netflix. All it has to do is make the move.

Jeremy Bowman owns shares of Apple, Netflix, and Nike. The Motley Fool recommends Apple, Facebook, Google (A shares), Google (C shares), Netflix, Nike,, and Starbucks. The Motley Fool owns shares of Apple, Facebook, Google (A shares), Google (C shares), Netflix, Nike, and Starbucks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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