The Next Growth Frontier for Netflix Inc: China?

By Markets Fool.com

Online video streaming serviceNetflix closed out last week with a bang, soaring above $600 per share for the first time ever to reach all-time highs. The primary catalyst was a report fromThe Wall Street Journal that indicated Netflix was preparing to bring its content to China.

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Netflix may partner with Chinese online broadcasting companies BesTV and Wasu Media to deliver content in the region. Of course, China has stringent regulations on content and censorship. That is a fact of life in the Middle Kingdom and presents two important challenges for Netflix to overcome.

To partner or not to partner, that is the question
In January, Netflix saidthat it continues to explore options to expand into China but that all of these options were "modest." At the time, the video streamer said it just wanted to learn about the market by operating a small service based on its original and globally licensed content --House of Cards is particularly popular in China.

In March, Reuters reported that Netflix was looking at the Chinese market. It quoted Chief Content Officer Ted Sarandos as saying it was "unlikely" that the company would partner with local companies as a strategy, because those types of deals tend to "become very complex and very difficult to manage."

Lost in Translation (which was removed from Netflix last year)
It turns out that Sarandos' message was lost in translation. Here is Sarandos on the April conference call:

Michael, a bit of that press was lost in translation, a bit. I was explaining to the questioner why we have not taken up partners in the past. But not a reflection of what we want to or what we're willing to do in China. We're anxious and open to all forms of doing business in China. So that was -- the press was a little bit out of context there.

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Just last week, Sarandos spoke at the MoffettNathanson Media and Communications Summit, further clarifying Netflix's strategy for tackling China.

Our intent is to try to figure out China and how to get there, and it could be with a partner, it could be with production partners, it could be -- so we are open to all different models to get there eventually, because we want to be fully global. That's a pretty big chunk of the world to have an asterisk. So we definitely are working on trying to figure out our entry point into China.

And I think from a programming standpoint, their tastes don't run that much different. The US films are very big. Pan-Asian content works very well in China, so we are looking forward to figuring that out. There's not much marginal cost of not being in China, so it's not like urgent. It's not an on-fire issue, but it's part -- as we try to be more and more global, we want to be part of China too.

That last bit is important as it relates to content costs, which are by far the largest line item taken out of revenue on the Netflix income statement. Being able to redeploy original content in other geographical markets helps Netflix scale those costs better, although a lot remains to be seen on how Netflix will officially enter the Chinese market. Regardless, investors can rest assured that Reed Hastings and company are definitely working on it.

The article The Next Growth Frontier for Netflix Inc: China? originally appeared on Fool.com.

Evan Niu, CFA owns shares of Apple and Netflix. The Motley Fool recommends Apple and Netflix. The Motley Fool owns shares of Apple and Netflix. Try any of our Foolish newsletter services free for 30 days. 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.