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Analyzing Some of the Risks with Netflix’s Entry in China

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Netflix faces a number of issues in China

In the last part of this series, we discussed why investors are excited about Netflix’s (NFLX) entry in China. However, there are a number of risks associated with its entry in China. First, Netflix will have to encounter the issue of the high piracy rate that prevails in China.

Second, Netflix will have to undergo strict censorship issues from Chinese authorities. For example, Netflix’s popular show House of Cards has been running in China because Netflix allowed another online streaming site—Sohu.com (SOHU)—to show them. Recently, Chinese authorities delayed the launch of the third season of the show. They took time to review it for any objectionable content.

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Netflix will also have to face stiff competition from local online streaming sites in China. The local sites show ad-supported content for free. This means that Netflix can’t price its service high in China. This will impact Netflix’s bottom line from the International segment. Netflix’s operating losses from international markets are already growing, as the above chart shows.

Currency headwinds will be a major issue for Netflix in China

Finally, Netflix will have to face issues pertaining to the strong US dollar for the revenue earned in China (MCHI). Netflix earns about one-third of its revenue from international markets, as we discussed previously in this series.

In the last quarter, the strong dollar negatively impacted Netflix’s International segment’s revenue. It was $48 million lower on a YoY (year-over-year) basis. This is equivalent to currency issues shaving off about 4% from Netflix’s overall revenue growth.

It isn’t just Netflix, the overall tech sector has been suffering from currency headwinds. Apple (AAPL), Facebook (FB), and Amazon (AMZN) each cited an impact of 6%–7% on revenue growth rates due to the currency issues in the quarter ending in March 2015.

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