KEY POINTS
- THE POSTIVES: NFLX has entered into a distribution agreement to license its original content to iQiyi, which is China's largest online video platform. NFLX now has access to China, which many thought was off the table, hence the move in the stock today. The positive is the additional capital NFLX could raise from reselling its original content. In a sense, China could help defray the cost of NFLX's original programming.
- THE NEGATIVES: We literally know nothing; the economics and/or breadth of the licensed content is up in the air. NFLX has already told us back in 3Q16 that it wasn’t expecting material revenue from any prospective Chinese license agreements. Regarding content, we have no idea what will actually make its way into China, regardless of what has been licensed to iQiyi. Internet censorship is far more restrictive than other mediums in China. Most mediums are restricted if there is a risk of disclosing "state secrets”, while Internet has a much broader restriction that applies to pretty much anything that the gov’t doesn’t want in the country (see Chapter II). For context, Chinese regulators supposedly pulled House of Cards when it was licensed to Sohu, which is another online video platform. But who knows, maybe NFLX will be the first to succeed where pretty much every other US Internet player has failed.
Let us know if you have any questions, or would like to go commiserate in a bar somewhere.
Hesham Shaaban, CFA