What Is Netflix's Edge In China's Increasingly Competitive Video Streaming Subscription Market?

As the world’s largest video subscription service, Netflix seems like a company poised to dominate China’s multibillion-dollar video streaming market. However, with an increasing number of homegrown companies rolling out their own versions of the video subscription service, Netflix continues to lose its edge over the competition.

According to Market Watch, Netflix Inc.’s stock dropped 1.4 percent in pre-market trade Monday, following an announcement by Chinese tech giant Alibaba unveiling TBO, or T-Mall Box Office, a subscription service that sets out to be a hybrid of Netflix and HBO. Given Alibaba’s home court advantage, analysts believe that whatever leg up Netflix had going into China may be diminished as TBO and already existing services like China’s LeTV also gain popularity.

Though China is poised to become one of the largest international markets, expected to triple by 2018, according to Shanghai-based research firm iResearch, government restrictions and growing competition make it a more difficult market to penetrate. “Alibaba enjoys several advantages over Netflix in China,” Panos Mourdoukoutas, a professor of economics at Long Island University in New York, wrote in Forbes. Mourdoukoutas explains that Alibaba already has an extensive, trusted brand presence in the digital market, making it easier for the company to gain subscriptions. Additionally, “Alibaba enjoys cozy relations with the Chinese government, making it easier to obtain and execute all the necessary licenses.”

Michael Pachter, managing director of equity research at Wedbush Securities, also believes Netflix’s entrance into the Chinese market won’t be easy. “Netflix has no particular advantage over local services in China and has many disadvantages,” he said via email. “Regulators are more favorable to local businesses, the locals understand the culture and audience better, and Netflix's brand is not particularly powerful there. I think the market has underestimated the difficulty of competing in China, and I don't think Netflix shares reflect a great degree of success there.”

Still, Netflix has experience in global expansion in terms of providing content tailored to international markets that other companies have yet to reveal. Content-wise, Netflix's expansion into Britain, Scandinavia and Latin America matched the expansion of its content, obtaining licenses for shows that would have traction in each specific market.

While homegrown Chinese companies can compete with each other to license Chinese-language shows, if Western television is what Chinese want, Netflix is still a proven leader. While TBO still aims to secure content, Netflix has a growing catalog of originally produced shows, comedy specials and documentaries. Series like "House of Cards" became a surprising hit in the country, even counting China’s much feared anti-corruption chief Wang Qishan as a fan, after the second season was released on video streaming site Sohu last year through a temporary licensing agreement.

Research also suggests that Netflix already may have a staggeringly high subscription base that is operating under the radar, through virtual private networks, so that they can access the website through Chinese Internet. According to statistics compiled by Excipio, China was the number one illegal download source for the series when the third season premiered in March.

However, Netflix's biggest strength also could be a point of weakness. Instead of a rating system like that in the West, China instead has long-standing regulations on media, particular foreign media, that will still apply as well. This means potentially arbitrary limitations on violence, nudity and political content that could prove difficult when securing content for the services.