Content is king in the streaming sector. But it’s expensive too: just look at Netflix’s spending on content, which has grown from $9 billion in 2017 to $14.6 billion this year. Part of the increase has been covered by higher subscriber fees. But the real battle is to boost subscriber numbers, bringing in the cash to cover the expense of all the new series and dramas.
Netflix’s China counterparts are under similar pressures, which is why Tencent Video is said to be looking at a takeover of iQiyi, which is listed on Nasdaq and majority-owned by search engine giant Baidu.
Tencent Video and iQiyi are the two largest video streaming platforms in China. Tencent Video reported 112 million paying subscribers at the end of March, while iQiyi claims 119 million monthly subscribers. Youku, which is backed by Alibaba, does not disclose its audience figures in similar detail but is thought to have 90 to 100 million subscribers. For comparison, Netflix reported 182 million subscribers worldwide at the end of March.
Baidu, iQiyi and Tencent have declined to comment about the potential acquisition, although several people close to the companies told Caijing, a business magazine, that the two have been in discussions for a while without agreeing the final terms.
A takeover makes sense for Tencent – taking it a step closer to becoming China’s dominant online entertainment provider. The internet giant is already the biggest player in online gaming and music streaming. It recently expanded its music empire by purchasing stakes in Warner Music and Universal Music (see WiC498).
Industry observers say Baidu will be interested in offloading its stake in iQiyi too. The video platform’s market share has been going up, but it remains deeply unprofitable. According to iQiyi’s latest annual report, net losses widened to Rmb10.3 billion last year, from Rmb9.1 billion and Rmb3.7 billion in 2018 and 2017 respectively.
“Even if there is a lot of synergy between Baidu and iQiyi, losing Rmb10 billion a year is still a burden [for Baidu],” the insider told Caijing.
Advertising revenues have also slowed on the video streaming platform (unlike Netflix, iQiyi makes the bulk of its revenue from advertising, although paying members can bypass the ads). Small wonder then, that Baidu saw its share price rise 5% after news of the potential sale started to surface.
Behind iQiyi’s losses are the costs of making higher quality, original programming. In the first quarter of this year content costs of Rmb5.9 billion accounted for a staggering 75% of sales. The number suggests that even at a fantastic time for the video streaming platforms (people stuck at home during lockdown and other forms of entertainment and leisure closed) it was still a lossmaking business.
Not that iQiyi is unusual in struggling to make a decent return. All of the main streaming companies have to figure out how to make premium movies and TV shows more cheaply, especially at a time when more competition has driven production budgets higher. Tencent Video, too, lost Rmb3 billion in 2019.
There is also the conundrum of how best to monetise the larger audiences that are watching the streaming platforms. “Tencent is slowly losing confidence in Tencent Video, which it has invested in for 10 years. It has tried advertising and subscriptions and advance screenings to boost membership but it has failed to be profitable,” says Caijing.
Is that the reason that Tencent wants to take out iQiyi? Caijing thinks so. “Most people believe the reason Tencent Video isn’t making money is because of iQiyi,” it claims. “If the acquisition is successful, it will reduce the competition for content and the industry may become a more profitable business.”
Of course, Tencent has managed to consolidate highly competitive industries in the past – food delivery and music streaming are two examples. It is also pushing for similar consolidation in other parts of the video streaming industry, with news this week that it is in talks to take control of Iflix, a Southeast Asian streaming firm with operations in 13 countries.
Iflix has also been losing money but operates in a number of markets where there is overlap with Tencent’s emphasis on Chinese content.
For Tencent, the acquisition could also be a defensive move against Bytedance, the owner of short-video platforms Douyin and TikTok. They have gained tremendously in popularity, putting pressure on Tencent’s video business. “Although the positioning of long and short videos are different, they are both content industries. The content of long videos is richer and can serve as a source for medium and short videos. And as Douyin continues to expand, it is going to need more content to support its development. If Tencent cooperates with iQiyi to block the supply of content, it could have a great impact on Douyin,” says We YT, an opinion-led financial news portal.
Fans of Tencent Video say the threat from Bytedance is overstated because it would have to change its business model from user-generated content to investing in expensive dramas. But Bytedance has already signalled that it could soon be competing in the long-video segment too. In the most striking example, it paid Rmb630 million for the exclusive rights to stream the movie Lost in Russia earlier this year. It then made the film available for free, racking up over 600 million views across its various platforms.
Executives at iQiyi won’t be as excited about a potential takeover by Tencent, of course. At best iQiyi would survive as some kind of sub-brand, with more limited reach. “On one side, there is its own son; on the other side, there is the step-son. It’s clear who Tencent is going to favour,” reckoned NetEase’s news portal.
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.