Internet & Tech

Video victory

Shareholders force Robin Li to drop bid for Baidu’s streaming site

Chinese-language Internet search provider Baidu, Inc. Chairman and CEO Robin Li attends the Asian Financial Forum (AFF) in Hong Kong

Robin Li: less cause for smiles right now

One of the principles of feng shui dictates that those who are born in the same year as the current zodiac sign may also face the worst luck in the 12 months ahead. And since this year is the Year of the Monkey, some feng shui masters have suggested that Monkeys (those born in 1956, 1968, 1980 or any 12 years before or after these dates) may face a challenging time.

If the fortunes of Robin Li are anything to go by, there could be some truth to the belief (he was born in 1968). The chairman and chief executive of Baidu, the country’s largest internet search firm, appears to have spent the majority of the year trying and failing to keep the company he founded away from being on the receiving end of negative headlines.

Back in May, a student died after receiving advertising-led information on flawed cancer treatment from the search engine (for more, see WiC324) and last month a senior Baidu executive was accused of being sexist at an industry event (see WiC333).

Even Li’s efforts to take the online video site iQiyi private have been portrayed as a sweetheart deal for himself. Last week, New York hedge fund Acacia Partners, a major shareholder in Baidu, wrote an open letter accusing Li of acting “against the best long-term interest of Baidu and its shareholders” and turning the firm into “an extension of the pocketbook of one man”.

Back in February, a consortium led by Li and iQiyi’s chief executive Yu Gong made a bid to buy Baidu’s 80% stake in the online video site for $2.3 billion. But Acacia says the price, which valued the online video site at $2.8 billion, is far too low. In May, independent research group 86Research estimated that iQiyi was worth at least $5.8 billion and the proposed price tag was considerably less than the $4.8 billion Alibaba paid late last year to acquire Youku Tudou, another online video platform.

Amid the backlash, Li decided to drop the bid. On Monday, the consortium announced that it had withdrawn the offer to acquire iQiyi because the parties couldn’t reach an agreement on the deal structure and purchase price.

Still, analysts have questioned why Li would want to take iQiyi private at a time when the online video site appears to be picking up more customers. The video site now boasts more than 20 million subscribers – up from 10 million as of the end of last year. They pay for content and quicker streaming time, and the subscriber base outnumbers Tencent Online Video and Youku Tudou combined, says Beijing Youth Daily. Online video advertising remains a bright spot in the internet industry too, estimated to reach Rmb53 billion ($7.9 billion) by 2018, up from Rmb16 billion in 2014, according to 86Research.

Small wonder then that some observers have agreed with Acacia’s complaints. “This is a sentiment that is very similar to homebuyers who have bought houses at a very high price only to find that buyers who come after them were given steep discounts,” one told Entertainment Capital.

To be fair to Li, there were some more practical reasons behind the move. Baidu has come under pressure as users are increasingly accessing the internet through mobile devices and social networking apps rather than search engines. It also saw a decline in drug and medical advertisements – one of its biggest revenue streams – after this year’s cancer scandal. The company’s shares have dropped 13% since the beginning of this year.

As a result, the search firm has reviewed its position in fast-growing but loss-making segments like online travel booking and online video. In truth, iQiyi’s results have been dragging down Baidu’s profitability. In the last three years, iQiyi has been bleeding cash, says Tencent Technology, a portal. The online video platform reported a loss of Rmb743 million in 2013, which widened to Rmb2.4 billion last year.

One reason is that content costs have continued to climb. Online video sites in China either licence content or develop their own. But the cost to acquire material has surged as competition becomes increasingly intense. Content costs for iQiyi jumped from Rmb830 million to Rmb1.9 billion between 2013 and 2015. Similarly, marketing expenses and bandwidth costs increased by over 80% in 2015.

Nor do content costs look like they will come down in the near future. Tencent Video recently committed Rmb1 billion to the development of its own exclusive variety shows – a lucrative segment for traditional TV networks because they are immensely popular amongst advertisers. Variety show producer Ma Dong revealed that, “70% of our audiences are below 30, while 58% of them are female”.

One insider told Tencent Finance: “This is Baidu’s dilemma: if it sells the stake in iQiyi, the deal will generate over $2 billion in cash for the search giant. But cash is not its biggest problem: it is the lack of businesses that have any potential for growth. But if Baidu doesn’t get rid of iQiyi, it also means that the search firm will have to continue to burn cash to support this high potential but non-core business.”

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