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Netflix shares soar as China talks continue

A rumored partnership with Jack Ma (pictured) may offset what some financial experts say may be a bumpy ride for the popular SVOD.
May 15, 2015

Recent talks between Netflix and Wasu Media Holdings Co., a Chinese cable TV and broadband provider backed by Alibaba founder Jack Ma, have further fueled speculation of Netflix’s potential expansion into China.

When news broke of the possible expansion last week, Netflix shares shot up, trading at just over $627 per share as recently as Tuesday morning (May 19).

Reports indicate that no definitive deals have yet been reached, but talks are said to resume, starting Tuesday.

Chris Ciaccia, technology editor for TheStreet, said that expansion into China is a smart move, economically.

“China has close to half a billion people on smartphones, and it’s the second-largest economy in the world (behind the U.S.),” said Ciaccia in an interview with StreamDaily. “Anything Netflix can do to get into China is an enormous opportunity and investors are right to seize on that.”

But Ciaccia and other financial analysts watching the SVOD remain cautious about how smoothly the transition will actually go, noting the size of China’s video-on-demand market is not yet comparable to that of the U.S., as well as Netflix’s slow growth in other countries.

“China is a relatively small VOD market,” said Ciaccia. “It’s only about a $6-billion market.”

By comparison, Ciaccia estimates that the U.S. VOD market is a $50- billion industry.

Ciaccia said Netflix’s profitability in other countries is not impressive, noting the company has just started to break even in Canada. (Streaming service in Canada started in 2011.)

Eric Johnsa, a tech news analyst with the market analyst site Seeking Alpha, said profitability in foreign markets is not as much of a concern for Netflix as growing its subscriber base.

“I think they’re just in land-grab mode right now,” said Johnsa. “I think they feel the more international subscribers they have, even if they don’t turn a profit, gives them a bigger scale, which helps them to acquire more content, and so forth. It helps them differentiate their scale from the likes of Amazon and the others.”

However, Johnsa said Netflix may have trouble disrupting the linear TV market in China the way it has in the U.S.

“You’re starting to see (linear television) disrupted in the U.S., but that’s because people are paying $60-$70 per month for these big bundles and they only watch a fraction of the content. The prices aren’t that high in other places,” he said.

The other issue prompting caution from some is China’s tight censorship laws and restrictions around online and streaming content.

“This is going to be a learning lesson for Netflix,” said Ciaccia. “If they go in expecting it to be a bed of roses, it’s going to be a rude awakening.”

Johnsa was more measured, noting, “There are other companies like Disney and Comcast that have navigated China before.”

As for those rumors that Netflix is looking to partner with Jack Ma (pictured) in the potential China expansion, both Ciaccia and Johnsa share a positive outlook.

“It’s a very smart deal for them, given Jack Ma’s relationship with China,” said Ciaccia. “He is well respected in the People’s Republic of China.”

Such a deal could also help Netflix to legitimize the company in the eyes of Chinese content creators, added Johnsa.

“Alibaba’s made a ton of video investment. It’s possible that this could tie into (Alibaba’s) deal with Netflix. It could help (the companies Alibaba has invested in) in terms of how much original content they produce there.”

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