For years, whenever companies have talked about international expansion, they’ve screamed “China!” in hopes that it will somehow carry them past the skepticism.
However, I happen to know a few people who do business over there, including a movie producer — and from what they say, China is not the easiest place to do business in.
In fact, it’s downright random.
So, for Netflix (NFLX) bulls who scream “China!” when asked about international expansion, you’d better put on your skeptic’s hat.
There’s a huge number of problems with China, and I don’t believe Netflix will ever have a meaningful presence there. NFLX stock investors are in for a rude awakening if they think there will be some blockbuster revenues and cash flow coming from China.
My bet is that China isn’t going to have the full library available, and that the whole Netflix in China thing is a pipe dream. Streaming services already exist in China. The market penetration is much smaller, but the subscriber numbers are much higher. (Population, relative size of middle class, etc.)
China Has Too Many Roadblocks for NFLX Stock
The rub is this: About a year ago, there were regulations put in place that internet streaming companies could not cut deals with U.S. content providers — that the content needed to go through China based content companies.
Here’s how my producer pal translates the situation.
“The Chinese cable companies…didn’t want their monopolies cut into by internet providers. So this precludes Netflix from ever establishing a real footprint in the PRC. China will let The Big Bang Theory in, but it’s got to come in via Chinese corporate entities, and go through SARFT. As an aside, this also explains the push from Sina.com, Alibaba, and TenCent to get into content production. They’re going to need their own content to stream.”
But more to the point, the Chinese do not give a flying astrodroid about U.S. films. There is no market for them — wrong faces, wrong language, wrong cultural backdrop. Outside of film students and elitist poseurs in Shanghai, no one in China is looking at U.S. films — except when it comes to the spectacle tent-poles.
To put this in perspective, my producer says, “The Chinese made more than 4,000 TV shows and movies of their own last year. In the U.S., you wouldn’t confuse the Henry Jaglom film that plays at Arclight with the real movie business. In China, most of our stuff is Henry Jaglom to the Chinese.”
None of this even gets to the issue of censorship. The Chinese censors look at every single thing, and scenes will get cut for reasons that make no sense to us. If there’s a broccoli convention coming to Shanghai in a few months, and a movie makes fun of broccoli, the censor will cut the scene.
The U.S. studios will not re-cut old content. There’s no upside for them to put in the expense of doing so.
So for NFLX stock bulls who think China is the next big frontier for revenues, forget it.
To me, this is one of many reasons that NFLX stock is wildly overvalued. There’s also the sky-high price-to-earnings ratio, negative free cash flow, and well-financed competitors. And all of this is happening in an increasingly commoditized business where brand will soon mean nothing — and international opportunities are not nearly what NFLX stock bulls believe them to be.
There’s also the question of churn. Getting clarity as to just how many subscribers Netflix has in China will not be easy to determine. Analysts think China hits 10 million subscribers … by 2020. But there’s a problem with verification. As my producer pal tells me, movie theaters skim money from the take, then report a prescribed number to the Chinese government. How do we know this same thing won’t happen?
NFLX stock will be volatile for some time to come. If you can short the stock and stomach the volatility, I believe NFLX stock will lose 90% or more of its value. Patience will be rewarded.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
