iQiyi may team up with Tencent to compete with Netflix
February 10th, 2022

Focus

1.Long video and short video have long-term confrontation, paying subscribe model is more competitive than advertising model

2.If iQiyi gets the support of Tencent, it will have more confidence to compete with Netflix

3.Baidu's sale of iQiyi business helps reduce the impact of non-core business on itself

If Netflix is the pioneer of Internet video, iQiyi is undoubtedly its biggest Chinese fan.

Gong Yu wrote in the recommendation of Netflix Patty McCord's Netflix Culture Handbook: "Perhaps because iQiyi and Netflix are in the same industry, so we understand and agree with Netflix's corporate culture more."

According to foreign media reports, Tencent, which owns Tencent Video, is looking to buy a stake in iQiyi, whose majority shareholder is Baidu with a 56.2% stake. And the "Chinese Netflix" is coming. Once the transaction takes shape, the Internet content industry will usher in a huge change, and the fate of countless enterprises will be decided and changed accordingly.

Beating opponents by money

When Google bought YouTube for $1.65 billion in October 2006, the story of China's online video business began, which stimulated Chinese video website to enter this field.

Then Youku, iQiyi and Tencent went online, and BAT entered the battle. Without the era of the mobile Internet, long video takes advantage of video copyright to increase user stickiness and the advertising model becomes the first choice to make profit.

From 2004 to 2011, there were many online video participants, and the peak reached thousands at a time. The imitation objects were the world's largest online video websites, such as YouTube, Storm Codec, and PPS all appeared. At that time, UGC content became most platform's first choice.

Subsequently, the market entered a new stage, with capital becoming the dominant force. In September 2011, YYeTss.com bought 56.com for $80 million. In less than a year, Youku bought Tudou at a price of $1.04 billion. In May 2013, Baidu bought PPS for $370 million and merged with iQiyi to help iQiyi entered the first echelon of the video industry. In 2013, Suning.com and Hony Capital invested $420 million in PPTV.

In November 2015, Alibaba announced the acquisition of Youku and Tudou by $4.77 billion in cash. Excluding the latter's book of $1.1 billion in cash and Alibaba's previously held shares, the actual purchase price was $3.67 billion.

So far, China's long video industry has entered the era of the BAT. Baidu's iQiyi, Tencent Video, and Alibaba's Youku become the industry's giants.

Less than 10 years after YouTube was acquired by Google, Chinese giants used capital to accelerate the reshuffle of the video industry. Funds represent hard power, which means that the platform needs to invest a lot of money to complete the copyright layout. Mergers and acquisitions can avoid long-term competitive costs.

Thanks to the "pay cap", iQiyi's full-year content cost in 2019 was 22.2 billion yuan. Tencent spent more than 70 billion yuan through investment and copyright purchases, an increase of nearly 20% compared to 2018. The fund is still a threshold in the video industry.

There is no doubt that whether it is a merger or an alliance with competitors, it is the fastest way for BAT to end its fight and enter a new era.

New enemies are hard to deal with

In addition to the old rivals, Youku, iQiyi and Tencent is facing new competitors, like Douyin, KuaishouBilibili and Xigua video, which bring new variables to the market structure.

According to data from the China Internet Network Information Center (CNNIC), as of March 2020, the number of online video users in China was 850 million, of which the short video user size was 773 million, accounting for 85.6% of the total netizens. 

Aurora Mobile data shows that in the daily use time of mobile users per capita, short video reached 21.1% in the first quarter of this year, close to Instant Messaging of 22.8%, while online video remained at 10.4%, and the average length of online video in 2019 was also only 11.52%. Short video is challenging long video to seize the users.

Short video platforms are even starting to have a try in the long video field. Douyin launched the movie "Lost in Russia" on the New Year's Day for a long video test, and then on March 20th ByteDance launched the movie "The Winners", which once again attracted user attention.

In addition to short videos, long video platforms are also challenging the dominant position of Youku, iQiyi and Tencent. 

In 2017, Xigua video announced to enter the home-made variety show with 4 billion yuan, since then, it became the executor of ByteDance's long video strategy.

Tencent and ByteDance have faced each other for a long time on the content battlefield. ByteDance's action in the long video is a red flag for Tencent. There is an obvious gap between their competition. Toutiao has made an attempt to enter the long video by purchasing movie copyrights, so Tencent needs to do more in the relatively advantageous long video field.

Bilibili adopts a long-term layout to upload content from the first UGC to self-collecting copyrights, which achieves overtaking in corners. The monthly active users of Bilibili have reached 172 million, and its daily active users exceed 50 million, the official users exceed 82 million, with retention rate of the twelfth month exceeding 80%.

After obtaining the investment from Sony, Bilibili further increased its investment in the copyright of animation, film, education, documentary and TV series.

In the mobile environment that users are accustomed to, the advantages created by short videos are magnified. The content advantages of the original video are converted into the threshold of the platform. The arrival of 5G has further reduced the cost of traffic and the cost of users' access to video has been further flattened …

Netflix and Disney's new dream

Disney realized the value of IP earlier than Tencent and iQiyi. Early Mickey Mouse became a classic. Disney did not stick to its old book. With the help of the acquisition of companies such as Pixar, Marvel, Lucas, etc., it completed multi-faceted layouts including comics, short animations, and movies, games, …

Netflix and Disney both focused on copyright and content creation. Compared to acquiring copyright, the giant is more keen to grasp the cheaper upstream.

With high-quality content, Disney launched Disney+ in 2019. As of April 8, Disney+ has 50 million subscribers worldwide. Netflix spent 7 years and Disney only spent 5 months.

The capital story of iQiyi comes from Netflix. Netflix, which started with disc rentals, followed YouTube and Spotify online streaming in 2007. With the user experience accumulated in the DVD era, founder Hastings hopes to create a website that can watch videos at any time. Then, Netflix started the road of copyright cooperation and self-made.

As of now, Netflix has a market value of more than $180 billion, and its 2019 revenue reached $20.156 billion, its net profit was $1.867 billion. As of the first quarter of 2020, total global users exceeded 182.9 million, a year-on-year increase of 22.8%.

With a large amount of high-quality home-made content, Netflix has been recognized by the American Film Association as another content producer.

iQIYI cannot become Chinese YouTube, but it can become Chinese Netflix.

Compared with the revenue growth of iQiyi, Netflix, and Disney, the future growth of the three parties comes from high-quality home-made content and high-viscosity paying users. All three parties clearly recognize that home-made needs short-term losses to build user scale, production capacity, and brand popularity. Netflix and Disney's success gave iQiyi confidence.

From the perspective of user's usage time, the opportunity for long video platforms is actually greater. Although short video is more likely to refresh the user's freshness in the form of the product, in terms of persistence and information, long videos is still better than short videos.

At present, iQiyi is still at a loss, but if you benchmark Netflix, you can see that its value is obvious, and the future growth ability is expected.

Baidu wants to dump its burden business

Although the business prospects of iQiyi are still attractive, Baidu has reasons to abandon it. After experiencing mobile internet, betting on O2O, All in AI, and returning to the traffic ecology, iQiyi has relatively weaker value for Baidu, so it would be beneficial to focus on business if it is released.

iQiyi's financial losses dragged down Baidu's financial performance, and Tencent had a stronger determination and willingness to invest in the downstream of cultural and creative industries. Some people think that it is the most likely time for Baidu to sell its equity in iQiyi. The best option for Baidu is to sell some of the shares.

In fiscal 2019, Baidu's revenue was 107.4 billion yuan, core advertising business revenue was 79.7 billion yuan, iQiyi contributed 29 billion yuan, and search business is still Baidu's cash source. Although iQiyi is Baidu's second largest source of income, iQiyi still cannot escape the loss situation. From 2015 to 2019, iQiyi has accumulated a loss of 32 billion yuan.

As of March 31, 2020, iQiyi held 9.9 billion yuan in cash and cash equivalents, calculated at a quarterly loss of 2.5 billion yuan, which could support only four quarters.

In March 2020, the monthly active users of iQiyi, Tencent Video, and Youku were 606 million, 590 million, and 446 million, respectively. If the first two in the market complete the alliance, it is possible to beat Youku in one fell swoop. 

In fact, Hillhouse Capital between Baidu and Tencent may be an important promoter. At present, iQiyi is still the second largest holding target of Hillhouse Capital. Hillhouse Capital, which is closer to Tencent, can bond the two parties to facilitate transactions.

China's Internet is never lacking in imagination. Long video platforms have always been the stage for the giants to play, regardless of whether the transaction will take place, they are still the decisive force in this field.

For Youku, the first two alliances in the market can't help them take profit. Once the three-legged situation disappears, the artillery fire faced by Youku will be even more violent. 

The trend of consumption upgrading in China's content market has led to the formation of paying subscribe habits. "Chinese Netflix" may change, but it will definitely come.

This is an article from Yiouwang(ID: i-yiou), written by Huang Zhilei, translated by Chris Yuan.

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