iQIYI, Netflix of China is striving for streaming supremacy

• Rapid growth of online video streaming globally
• B.A.T. hold a major share of the online streaming market in China
• Where iQIYI stands as compared to Netflix?
• Will iQIYI gain a supreme position in the online streaming industry in China?

Online video streaming has grown significantly in recent years. It transmits visual content in a compressed manner over the internet with the help of high-speed internet connectivity, viewers watch this uninterrupted and unhindered content without any requirement of downloading and consumption of additional storage space. Moreover, increasing smartphone penetration and proliferation of high-speed internet connectivity has led to a growing demand for online video streaming and there has been a shift from traditional mediums of entertainments. According to a report published by the Motion Picture Association of America, video streaming services at present has more subscribers (~613 million subscribers) globally than cable connections (~556 million subscribers) for entertainment. Furthermore, according to the Ampere Analysis, online streaming services globally are set to surpass worldwide theatrical market in terms of the revenue in 2019 and are expected to grow to ~58 USD Bn by 2022 (Source: PricewaterhouseCoopers).

China Market

China is seen as the next big market after the USA as the online video market in the nation continues to experience rapid growth with ~609 million users in 2018. This is a representation of ~76% of the online population in China, which highlights that online video viewership is one of the most common online activities. According to the China Netcasting Services Association (CNSA), currently, China has surpassed 600 million monthly average users (MAUs) and this number is expected to grow ~850 million by 2025 at a CAGR of 6%. Unlike the USA, where tech and media companies make strategic moves to catch up with Netflix, the industry leader who invented this streaming concept and launched it in 2007, the leading tech companies in China like Baidu, Alibaba, Tencent (commonly referred to as B.A.T.) among others picked up the streaming concept early. While there are more than 200 players in China, the premium content space is dominated by three players; iQIYI, Youku and Tencent Video, which aggressively compete head-to-head across a range of digital businesses.

iQIYI, where it stands?

iQIYI (IQ), often referred as the ‘Netflix of China’ spun off from the tech giant Baidu last year and is the top player in the domestic video streaming market in terms of online video subscriptions, with Tencent’s video platform holding a second place and Alibaba-backed Youku at the third position. Launched in 2010, it is currently one of the largest online video sites with ~6 Bn hours spent on its services monthly and ~500 million monthly active users. As Netflix is unavailable in China and iQIYI is mostly domestic, it has wide opportunity to grab the global market.

IQ generated USD ~3.8 Bn as compared to Netflix with its revenue crossing USD15.4 Bn in 2018. But, while Netflix generates its revenue mostly from subscriptions, on the other hand, iQIYI makes its revenue from both subscriptions and advertising and makes it more like a mix of YouTube and Netflix. In addition, it also runs video games, social media platforms, books and novels platform, merchandise licensing business and line of virtual-reality headsets among other elements that set it apart from the Netflix model with a diversified focus.  

Presently, IQ has three main revenue streams; a) subscription fee, which gives exclusive content viewership with the latest content to its paid users, b) advertising fee as advertisements may play before content and c) content distribution fee, which comes from licensing on its own original content and sub-licensing of licenced contents to other online video websites.

In recent years, the company has been focusing on original content including movie and local content in order to strategise on its growth potential. Like Netflix, IQ is continuously investing in content to gain exclusiveness on premium and high-quality content and to have more users as subscribers for its offerings. While advertising revenue is shrinking, but at the same time company’s subscription revenue grew to ~43% share, which reflects that the subscription-based offerings have now repositioned as a core for iQIYI's growth strategy. Consequently, the company witnessed exponential growth in its subscriber base.

Opportunities and hiccups for iQIYI

IQ’s subscriber base has grown tremendously and has reached 96.8 million subscribers, while Netflix is still holding the top position with 155.4 million subscribers. But interestingly, while IQ’s subscriber base is totally domestic, Netflix’s international subscriber base has crossed 60% share in the total streaming membership of Netflix, with 93.6 million international streaming users as compared to 61.8 million domestic subscribers as on March 2019. It is worthy to note that Netflix has been focused on a subscription-based model for much longer than IQ and thus, the growth rate in subscriber base remained stagnant at ~25% in the last two years, whereas, IQ is growing at a much faster rate and is focusing on a subscription-based model in recent years.

The company has grown to RMB ~25 Bn (~USD 3.8 Bn) in terms of revenue in FY 2018 by adding 36.6 million new subscribers to its base, which is up by ~44% from the last year. But this rapid expansion has come at a steep cost. IQ has reported not only a negative operating margin of ~33% but a negative gross margin of ~8% in 2018, while Netflix has posted an operating profit margin of ~10% in the same year. IQ’s spent more than 80% of its revenue for its content cost, which left little room for other associated costs. In fact, its content cost is almost twice the size of its membership fee. However, iQIYI’s key focus remains on content and the company is making efforts to balance content cost with its revenue as the content cost was slightly lower at ~76% of revenue in March 2019 quarter. The reason could be increased regulatory scrutiny in the Chinese video market leading to delayed content production, but on the other side, subscriptions are growing at a much faster rate than content costs showing positive signs of expansion with better operational margins.

According to the company, a total of 69% American families have subscribed for Netflix, while this number is only 20% for Chinese families in the case of IQ, which depicts ample opportunity for the company. As per Netflix, the Chinese market is yet to become hospitable for outsiders and as long as China is growing in terms of the internet users, per capita discretionary spending and overall economy level, the Chinese media company has feasible avenues to expand its offering and business. IQ has a much stronger and more competitive AI (artificial intelligence) platform backed by Baidu (which it claims predict popular content among users with 88% accuracy rate) to back its aspirations to be the ‘Disney of China’ with Netflix-style production house and plans to merchandise and licence its massive library of IP. Though it is facing fierce competition from local giants Youku and Tencent video, hence, there would be limited headroom to raise subscription prices. But with the focus on better quality original content, joint membership with few of China’s top platforms like JD, Ctrip, etc. and a similar approach to that of Disney’s business for building an IP ecosystem of products from literature to comics, novels and video games, all this gives a silver lining and hope for future success in a competitive market.