Breaking China: A Disney fairytale with an unhappy ending

How does a content provider break into China? Partnering with a Chinese internet titan increasingly looks like the only possible route in and a safe bet given tightening Chinese media regulations – but such a move is a gamble nonetheless.

Disney found this out the hard way when its DisneyLife streaming service was booted out of China last year after just five months, when it partnered with e-commerce company Alibaba in 2015, and the US studio has been working on reaffirming its status in the country ever since – even going so far as to build a mega theme park in Shanghai. Disney is now having a second stab at OTT video in China through Alibaba’s video streaming service Youku Tudou – striking a multi-year licensing deal for thousands of series and movies available on multiple connected devices.

Disney’s recently collapsed collaboration with Alibaba has been brushed under the carpet by most, along with the countless other failed attempts to go to market with a branded TV streaming service. Disney believes this time around will be different and Youku Tudou will provide the foothold in China it so badly craves, particularly now Netflix is present in China – inking a licensing deal with Baidu’s online video platform iQiyi in April last year.

Anybody knows that breaking China is anything but simple, yet it took some severe Chinese regulation changes to make Disney realize its previous strategies were way wide of the mark.

While DisneyLife was ejected from China for infringing foreign content regulations, we suspect that because Disney content will account for such a small fraction of Youku Tudou’s total online catalog, it will not be viewed as asserting too much foreign influence. Although each Disney title is likely to come under extreme scrutiny, such as Disney’s animated movie Zootopia, which was banned from China for allegedly inciting US propaganda.

Laws implemented in China in March 2016 prohibited foreign companies from selling or distributing digital media services in China, unless done so in cooperation with a Chinese company. Despite DisneyLife rolling out in partnership with Alibaba, as well as through cable TV and broadband operator Wasu Media Network, one of the first companies in China to receive an internet TV license from the government, the service was still shuttered. This was due to breaking a new regulation stating catalogs of online video services cannot exceed 30% foreign content.

For the Chinese partner companies, licensing deals with Hollywood studios and content providers satisfies subscriber demand for popular Western shows, while simultaneously combating piracy. Disney and Netflix won’t benefit enormously in financial terms but increasing brand recognition in the booming Chinese market is invaluable – cultivating the land before investing in original Chinese content in the future. However, our gut feeling is that Netflix will beat Disney to the punch in developing original content tailor made for China.

Through its subsidiary Buena Vista International, Disney will distribute titles including Pirates of the Caribbean, Mulan, Frozen and Beauty and the Beast to Youku Tudou subscribers – claiming 30 million subscribers and a 40% share of the Chinese online video market.

Alibaba is said to have previously attempted to strike a deal with Netflix, but instead pressed ahead with its own OTT video platform and then decided to buy all outstanding shares in Youku Tudou for $5.2 billion in 2015. Youku Tudou is essentially the Chinese version of YouTube, with an SVoD package too.

Disney’s failed 2015 plan for China involved selling an OTT streaming device distributed by Alibaba – a $125 piece of hardware with a one-year subscription to access DisneyLife, nothing else. Faultline Online Reporter predicted this venture would flop, considering pirated copies of its popular movies are available in abundance across China.

“The addition of Disney content greatly enriches the library of quality international content on Alibaba’s media and entertainment ecosystem, giving us a leading edge in foreign content distribution in China. Further cooperation with global entertainment companies will help increase our penetration in the family entertainment segment and strengthen Youku’s position as a leading multiscreen entertainment and media platform in China,” said Youku President Yang Weidong.