Acres of land in Shanghai was turned into a shooting base for iQIYI’s new hip-hop show / Image credit: iQIYI
US-based streaming services Netflix and Amazon are doubling down on original content to square off against the powerful Disney empire, which wrote the playbook for being a content creator and distributor.
In China – a market that Netflix and Amazon have missed out on because of protectionism and media regulation – a similar trend has emerged. Local players such as iQIYI are racing to become the Middle Kingdom’s version of Disney.
A unit of China’s largest search engine Baidu, iQIYI is reportedly mulling a US IPO in the first half of 2018.
“iQIYI wants to become an online Hollywood, a great business that lasts for hundreds of years, like Disney,” iQIYI founder and CEO Gong Yu said in 2016.
But China’s tech titans Tencent and Alibaba are also marching toward their own Disney Wonderlands, jostling to gain a foothold in a market valued at an estimated US$14.3 billion. How does iQIYI stack up against its rivals?
Deep-pocketed allies
A bespectacled, soft-spoken yet incisive engineer, Gong founded iQIYI in 2010, when China had begun to step up its crackdown on online piracy. The move prompted video sites to vie for the best licensed content, driving up licensing fees.
For example, My Own Swordsman, one of the most-watched Chinese TV dramas in the mid-2000s, was licensed at US$199 for one episode. In 2016, it cost more than US$1.59 million to stream one episode of the popular series Legend of Mi Yue.
iQIYI and the other players soon realized that it made more economic sense to do in-house production, so they can have a tighter grip over the creative process and distribution strategy, as well as the budget and marketing. Another significant benefit is that intellectual property remains loyal: it stays with the company for good and can be exploited into games and merchandise.
An industry white paper shows that China’s internet companies spent a total of US$4.29 billion on original programming in 2016, up 125 percent from the previous year.
However, the Disney dream is proving to be a money-losing proposition – at least for now.
For sure, better content has attracted more paying subscribers, growing from 11.7 percent to 42.9 percent out of all online video users between 2014 and 2017, according to an industry report. Quality content has also boosted revenues from in-stream video ads, which amounted to US$5.04 billion in 2017, up from US$1.95 billion in 2014, according to iResearch. But surging content costs far outweigh these uptrends. No mainstream video site in China has turned profits to date, and players are leaning on well-funded patrons behind the scenes, several industry analysts told Tech in Asia.
iQIYI found an ally in Baidu, which became the video company’s largest shareholder in 2012. Since then, the search engine’s content costs soared as iQIYI stepped up its investment in content.
Tencent Video and Youku Tudou – iQIYI’s closest rivals – also thrive on similarly vigorous support from Tencent and Alibaba, respectively. Tencent’s president Martin Lau admitted last August that while subscription numbers and advertising revenue have driven up the company’s online video business, content cost has been increasing “even faster.”
“On online video, I think it’s going to take quite some time, unfortunately, for the business to breakeven,” observes Lau.
Fast track to user acquisition
Owning content, however, doesn’t necessarily guarantee victory. Players also need to amass users, and that’s one advantage of having a strong ally from China’s internet oligopoly.
In the beginning, Baidu’s search engines contributed about half of iQIYI’s traffic, noted the video company’s senior vice president Geng Xiaohua in 2012. That dependence, though, has subsided over time.
For Tencent, “the biggest advantage is its membership system,” says Ruan Jiajun, an internet analyst who works for a big data firm in China. A legacy from WeChat’s sister app QQ, Tencent memberships offer a myriad of entertainment services, ranging from music and games to ebooks and videos. Of course, the distribution channels that come with Tencent’s widespread social apps also give its video service a boost.
As for Youku Tudou, it can “rely on Alibaba’s [ecommerce] campaigns to convert users,” adds Ruan.
The three contenders are running neck-and-neck in China’s video streaming race. As of December 2017, iQIYI was in the forefront, with nearly 600 million unique installs on mobile devices, followed by Tencent Video at 571 million and Youku Tudou at 404 million, according to iResearch. On the PC end, Youku Tudou led with a slight edge during the same period with 248 million users, while iQIYI and Tencent trailed behind at 245 million and 235 million, respectively.
A tech-driven entertainment business
Aside from capital and access to users, iQIYI is touting something different as its edge over rivals: its tech-driven focus. These days, that means artificial intelligence, an angle that comes from Baidu upping the ante in AI after missing the boat on mobile internet.
“When it comes to AI for videos, iQIYI definitely comes first because Baidu tops the AI industry,” explained iQIYI’s chief content officer Wang Xiaohui in an interview last December. For example, machine algorithms can help predict metrics like advertising revenues, viewership, and trending topics. The video site claims that its AI-driven prediction on movie box office has achieved an accuracy rate as high as 77 percent.
“AI helped us choose [pop idol] Kris Wu [to be the judge] on Rap of China,” Gong told media at the company’s annual marketing event last October. Rap of China is an original iQIYI-produced hip-hop talent show that racked up record-breaking viewership and advertising revenues in 2017.
But the other tech groups are also beefing up their AI capabilities. Alibaba has poured US$15 billion into R&D in the hopes of becoming an AI leader. Tencent has also set up AI labs, including one in Seattle that’s headed by a former Microsoft scientist.
“I believe all major video companies are capable of utilizing AI to make these forecasts [on success], as AI becomes a necessity for internet firms,” says Liang Yiming, founder of Liangfen, a short-video production company. Tencent and Alibaba representatives did not immediately respond to our request for comment for this story.
AI can work its magic, but blockbusters remain rare throughout the industry. According to a report by EntGroup, a entertainment-focused research firm, China’s mainsream video sites rolled out 159 internet reality shows in 2017, but the top 10 – one of which was Rap of China – made up nearly half of the gross viewership.
“AI might have picked the perfect topic, but the production process, such as the choice of a director, the cast, and cinematography, can go wrong,” contends EntGroup’s senior business director Da Lai.
The whims of content regulation is another factor that technology might fail to forecast. As China anticipates another successful season of Rap of China, the official Xinhua news agency slammed a winner this January for his “low-taste” lyrics, sending shockwaves through hip-hop circles and leaving the reality show in uncertain waters.
Internet giants might have the capital and user base that allow them to call the shots, but they are less ready when faced with ideological control. As such, China’s video streamers have turned to TV veterans, signing big checks to bring them onboard.
“They might have more experience in the television market than the tech bosses, but they also know better where the regulation red line lies,” comments Da.
While the cash burn will continue, it’s still unclear who will lead in China’s online video sector. But one thing is certain: iQIYI is making its way to its Disney dream.
Currency converted from Chinese yuan. Rate: US$1 = RMB 6.29
This post Baidu’s iQIYI wants to become China’s Disney, but it’s up against tough rivals appeared first on Tech in Asia.