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The biggest challenge standing between Netflix and global domination

Netflix chief executive Reed Hastings announces the company's global expansion during an address at the 2016 Consumer Electronics Show in Las Vegas. (David Paul Morris/Bloomberg News)

Netflix chief executive Reed Hastings spoke with little timidity on Wednesday when he said the world was “witnessing the birth of a new global Internet TV network,” announcing his streaming giant would open for business in 130 new countries, tripling the number of nations it serves overnight.

But one big country was missing: China, even though it’s set to dethrone the United States next year as the largest movie market in the world. Talking up Netflix’s Chinese prospects at a news event after his announcement, Hastings spoke much more cautiously: “I think we’re going to be a success there, but it’s going to take some time.”

Netflix’s global debut this week showed the speed with which it could envelop the world, and highlighted how far it had expanded its creative and competitive ambitions.

Now comes the hard part: Going global will force Netflix to deal with entrenched governments, regional rivals, international quirks, even calls for censorship — stumbling blocks the go-fast video giant has fought for years to avoid.

The expansion will allow Netflix — previously available in the Americas, Western Europe, Japan, Australia and New Zealand — to flicker on across 190 countries, including Russia, Nigeria, Saudi Arabia, Antarctica and India, where plans start at 500 rupees, or about $7.48, a month. Besides China, the few places left out are those where the U.S. government restricts companies from operating, such as Syria, Crimea and North Korea.

Coming six years after Netflix first went international (into Canada), and only three years after it shocked the industry with “House of Cards,” the global play shows just how quickly the start-up became a powerhouse. In one tweet, Netflix quoted from a movie in its catalog, “Mean Girls,” to highlight its boundless resolve: “The limit does not exist.”

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But many hurdles stand in the way from becoming a truly global TV empire. Some shows and movies remain walled off from certain countries, because of multiyear deals Netflix signed with regional providers that will, for instance, block Israeli subscribers from watching “Orange is the New Black.” The company is pushing to expand all content for global availability, though they remain, as the company's Twitter account put it, “prisoners of territorial licensing.”

And then there’s China. Netflix’s biggest obstacle there may just be securing the chance to start. Chinese administrators require all foreign movies and shows to be registered and inspected before they can air online, and Beijing’s censors are known to block the kinds of sexual, violent or political story lines central to some of Netflix’s biggest hits.

Chinese laws also force any foreign company wanting to run an Internet-TV service there to get a license from Beijing, a rare permission. Netflix, analysts said, would probably have to buddy up (and share earnings) with a Chinese-based firm to operate.

Netflix said this week it “continues to explore options” for a Chinese launch. Meanwhile, millions there already subscribe to rival streaming-video services, and retail juggernaut Alibaba Group and China’s state-owned media giants have invested heavily to expand their own Netflix-style alternatives.

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Although acknowledging that China is “super-dynamic” in terms of censorship and foreign ownership, Netflix chief content officer Ted Sarandos said in an interview that many in the country were already fervent Netflix fans, if often through means unsupported by the Communist government.

“We’re mindful of where the Internet is being regulated,” Sarandos said. But “we know our shows are wildly popular there. ... The key is we have to build a product that’s desirable enough for the Chinese people that they will figure out ways for us to operate in China.”

Chinese censorship demands are onerous, but companies have long held their nose for a chance at the 1.3 billion potential customers in the world’s second-largest economy — with mixed results.

HBO signed a content deal in 2014 with Tencent, a Chinese investment holding company, that would allow it to distribute “Game of Thrones,” even though heavily censored episodes of the show have been, as a Beijing TV critic said, “cleansed of all nudity and violence,” making its plot now “barely coherent.”

The big question: Would Netflix, a proud risk-taker, change its content or censor itself for a way inside China? “When there’s a market that big,” said Jim Nail, a principal analyst at Forrester Research, “companies will do what they need to do to get access.”

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The sudden expansion allows Netflix to counter worries of slowing U.S. sign-ups, and could make it easier to grow everywhere else. Gone are the disruptive single-country launches, but also the expensive efforts to put out programming that is created, designed and marketed for one country at a time. “Nearly every new dollar we spend is for global content and global rights,” Sarandos said. Regional offerings, he added, “will narrow out of existence over time.”

For every new American original such as “The Get Down,” on disco and hip-hop in ’70s New York, there are new Netflix series rife with regional flavor: a British series following Queen Elizabeth (“The Crown”), a French-language political nail-biter (“Marseille”), a Mexican comedy-drama (“Club de Cuervos”) and an upcoming Korean monster movie (“Okja,” by the director of “Snowpiercer”).

Netflix’s global gambit is made riskier because its content budget this year will for the first time surpass $5 billion, making it the second-biggest content spender after ESPN (which some analysts say overspent) and vastly outpacing the $2 billion HBO spent in 2014. Executives says it’s worth the cost as long as Netflix is growing its loyal base of binge-watchers, but some analysts wonder how long investors will agree.

“The real question is: How much bigger does that number have to get to continue to grow subscribers?” Nail said. “And can a $10-a-month subscription continue to support that investment on an ongoing basis?”

Netflix’s international play follows the blueprints of several multinational media giants, who see a goldmine in countries where, unlike the United States, the broadcasting and movie businesses are underdeveloped and audiences are easier to grab. Executives expect to court subscribers in places where cable TV has yet to flourish, in much the same way parts of Africa leapfrogged landlines to adopt mobile phones.

“The analogy we use internally with employees is that today’s launch is like having a baby,” Hastings said. “It’s a big deal. But the real work is the next 20 years.”