Internet & Tech

Plotting for profit

‘Free’ versus ‘paid’ battle it out as models for China’s online literature


The upstart: Lianshang Literature’s boss Wang Xiaoshu

JK Rowling tries not to talk about her wealth but its immensity made headlines in 2003 when the Edinburgh-based writer was described as richer than the Queen, thanks to the royalties generated by the Harry Potter series. Last year her net worth was estimated to be more than $1 billion as her Wizarding World franchise expanded beyond movies into video games, Broadway shows and theme park attractions.

Rowling’s financial success is a source of inspiration for some aspiring writers – not least in China where they tout their own fantasy fare on online reading platforms. As screentime continues to increase, there are more writers trying to hit the literary jackpot by distributing their work online, giving rise to a market worth more than Rmb25.5 billion ($3.8 billion) in sales last year, according to the China Audio-Video and Digital Publishing Association.

Similar to Netflix or Spotify, China’s digital reading industry has thrived on the subscription model, with as much as two-thirds of the readership (totalling 432 million in 2018) being willing payers.

A newer trend in the sector is a flood of Project Gutenberg-like platforms that offer content for free and rely on advertising income instead.

In less than a year the number of these free-to-read archives had tripled to make up 52% of the market’s platforms as of April, according to Beijing-based research outfit Questmobile. The larger practitioners of the paid-for model are having to respond to the insurgents by launching competing alternatives.

The shake-up began last May with Midu Novels, an offshoot of mobile content aggregator Qutoutiao. Despite criticism of shoddy content and too-frequent pop-ups from advertisers, Midu accumulated a large active user base, which moved past six million daily readers by the end of the first quarter. That sudden growth improved the overall results of its Nasdaq-listed parent and average user time on Qutoutiao’s offerings jumped 91% on the year to 62.1 minutes a day.

Emulating Midu’s success, Lianshang Literature launched a free-to-read version last August. Within two months it had attracted a daily following of over 10 million, and was said to have secured a unicorn valuation in December, following a fundraising round led by local private equity fund Hopu Investment (see WiC25). Liangshang Literature’s meteoric rise has prompted various internet giants to join the free-to-read fray, including TikTok’s owner Bytedance and search engine Baidu (through its flagship video platform iQiyi).

Much like e-commerce operator Pinduoduo (see WiC404) and livestreaming platform Kuaishou, Lianshang Literature owes its rapid expansion to its strong penetration in lower-tier cities, which account for 62% of its active users. One key feature of this demographic is a determination to find lower prices.

“For a group of people who spend just a few cents on basic foods, reading can be expensive. You have to first help them develop the habit of reading books online with a freemium model,” Wang Xiaoshu, Lianshang Literature’s CEO, told NetEase News, noting that a purely paid-for model could have deterred 90% of his potential audience.

“For our industry, the shift to ‘free’ from ‘paid-for’ is progressive because our main struggle is the still small user base,” he added.

Critics have argued that the freemium model is not sustainable because of the difficulties in monetising the non-paying audience. Digital reading platforms make some of their money from selling the rights to blockbuster novels to other mediums – such as video-streaming sites that want to convert the more popular pulp fiction into TV dramas. If the freemium model has trouble securing stable income from advertisers, that restricts a platform’s ability to procure engaging content and talented writers to publish there, notes

A case in point: there are only 4,507 fantasy titles on Lianshang, versus 880,963 on Qidian, a platform run by Tencent-backed China Literature, which commands more than a quarter of the total traffic. Its co-CEO Wu Wenhui says the freemium model presents no serious threat to China Literature’s market position because the type of customers it attracts tend to be those previously consuming pirated texts.

Nevertheless, the company has launched a similar free-to-use (but also ad-free) product called Feiduo Fiction. The defensive move – designed to kill off the newer breed of upstarts – comes at a time when China Literature has struggled to improve its financial results. Last year revenue growth slowed to 23% from 60% the previous year as its pool of monthly paying users shrank.

The slowdown in the growth rate was likely exacerbated by the rising popularity of alternative forms of smartphone entertainment, especially short videos like those on Douyin, which commanded 33% of screen time among Chinese mobile users last year, according to QuestMobile.

China Literature has responded by putting more focus on monetising its huge content library, the intellectual property of which it shares with the authors. Last year it licenced over 130 titles to various third parties planning to produce adaptations in the form of web and TV series or animations. In August it also spent Rmb2.25 billion to acquire domestic film studio New Classics Media Holdings with the aim of speeding up the production of hit dramas. The collaboration works in both ways. China Literature’s daily average revenues from the book version of Ruyi’s Royal Love in the Palace were said to have grown nearly fivefold during the release period of the adapted TV drama (see WiC422).

Sales from its intellectual property operations – which encompasses TV production and distribution, as well as the licencing of rights for adaptations and online games – jumped 1.6 times to over Rmb1 billion last year, making up almost a fifth of the company’s income (versus 9.4% a year earlier).

Smaller rival IReader Technology is also investing in its intellectual property business through the setting up of a production house and the acquiring of more platforms with original content. It has also spun-off its hardware unit, which produces reading devices akin to Amazon’s Kindle.

Similar to other content-oriented businesses, the bets on making money from licencing rights can be risky in an increasingly censorious cultural environment (see WiC452 for how Tencent reinvented its popular online game PlayerUnknown’s Battleground as the less gory and more nationalistic Game for Peace in a bid to comply with domestic distribution laws and win a coveted licence).

Last week China Literature found itself in hot water with regulators in Beijing and Shanghai as two of its platforms were criticised for publishing risqué material. Those sites were ordered to “revise” their content and suspend future updates, resulting in the removal of titles and blocking of author accounts.

The news sent the company’s Hong Kong-listed shares to historical lows, reducing its market capitalisation to nearly 70% below its peak of November 2017, when it went public.

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