China’s Netflix Wannabes Spend Billions to Win Viewers

  • China’s streaming market set to grow 30% annually though 2020
  • Baidu unit earmarks over 10 billion yuan for content next year

China's Netflix Wannabes Lure Viewers

Tomb-raiding soldiers and imperial court villains are leading the latest battlefront for China’s internet giants, which are pouring billions of dollars into new digital content to create the nation’s answer to Netflix Inc.

Streaming platforms from Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd. are among more than a dozen vying for dominance in an industry forecast to expand almost 30 percent a year through 2020. Whereas Youtube-style videos and the odd pirated TV episode were once enough to draw web viewers, they’re now seeking -- and willing to pay up to 19.8 yuan ($2.95) a month to watch -- more compelling characters on original, professionally made TV and movies.

The drive for content has resulted in an expensive -- and so far, unprofitable -- creative showdown for internet companies. They have bought studios, distribution rights and elaborate scripts to lure streaming customers who IHS Markit predicts will spend 16 billion yuan annually on subscription fees by 2020.

Spielberg Deal

Alibaba ratcheted up the competition last week, with founder Jack Ma and Steven Spielberg announcing that their companies will jointly produce and finance films, tapping what Ma described as “an increasing demand for premium global content” among Chinese consumers.

For a Gadfly column on the streaming battle, click here

Baidu’s 80.5 percent-owned online video platform, iQiyi, will spend at least 10 billion yuan on content next year.

“My boss always says there is no limit,” Emily Dai, who runs the team producing iQiyi’s in-house shows, said in an interview. “Every year we do at least 30 programs. So as long as we can find good programs, we can fund them all.”

IQiyi is focused on buying and producing internet TV shows that can generate hundreds of millions of view, Chief Executive Officer Gong Yu said in Shanghai on Monday. The Beijing-based company moved toward a so-called freemium model last year, commissioning content and introducing a porous paywall in which users are required to buy “VIP” membership to avoid ads, enjoy higher resolution or get access to the full collection of digital content.

No Money-Maker

While the shift boosted viewer-numbers, the Baidu unit is yet to make money. Video users spent the most hours on iQiyi’s website in July while Alibaba’s Youku.com was its closest rival, according to iResearch data.

IQiyi’s Gong told online media group Caixin last month that he doesn’t expect the business to make a profit until 2018 at the earliest. Baidu spent 3.1 billion yuan on content in the first half of this year alone, compared with about 860 million yuan in 2013.

Its top hits include “the Mystic Nine,” a series about 1930s Chinese tomb-raiding soldiers cracking supernatural mysteries, which garnered more than 10 billion views, and the exclusive Chinese distribution of award-winning Korean drama “Descendants of the Sun.” One of last year’s most-popular shows was “Lang Ya Bang,” or “Nirvana in Fire,” a 54-episode series portraying the 6th century war between feudal Northern Wei and Southern Liang dynasties.

Youku Tudou subsidiary Heyi Pictures aims to invest in 15 to 20 shows next year, according to its president Liu Kailuo, and Tencent Pictures announced more than 20 new film and TV projects during at a recent event in Beijing.

Internet streaming specialist LeEco said it would commission 30 movies and 400 hours of TV shows in 2017. Netflix, in comparison, is slated to make 71 shows -- not counting the service’s growing number of kids series, documentaries, movies and foreign-language programming.

As Chinese streaming companies boost their spending, they are unlikely to face short-term competition from Netflix. The U.S. streaming service said Monday that the regulatory environment remains challenging and its efforts in the world’s most-populous nation will be limited to licensing shows it owns to existing online service providers.

Traffic Driver

Spending on content isn’t likely to ease anytime soon for China’s biggest tech companies, said Michelle Ma, an internet and telecoms analyst with Bloomberg Intelligence in Hong Kong.

“It’s too strategically important to them and it’s too integrated into their services,” she said. “Video is the driver of global traffic. It’s what people do online and on mobile now. This is all about giving the users what they want.”

Companies are also using their internet skills to lower risk. IQiyi knows the age, gender and wealth of every user. If a key demographic tends to fast-forward past certain characters, those actors may find their roles changed – or cut – in subsequent episodes.

The heavy investment, and persistent losses, may not be giving investors what they want at a time when China’s economy is expanding at its slowest pace in 25 years. It also runs counter to optimism that recent mergers, such as the one between Uber China and Didi Chuxing, signal an end to heavy spending aimed at winning users.

‘Early Stage’

Most investors want to see loss-making businesses make a profit once they reach a critical size, said Chi Tsang, an internet analyst with HSBC Securities Asia Ltd. in Hong Kong. “We just haven’t really seen that in video,” he said in an interview. “Clearly, we’re at a very early stage of competition.”

While popular titles and characters are being spun out in different ways, from plush toys to games, to provide other revenue sources, streaming remains a cash-burning exercise for now.

Tencent blamed video content-related expenses for an upswing in costs, while Alibaba said expenses related to its newly consolidated businesses, including video platform Youku Tudou, were primarily responsible.

“The video business is a loss leader for us right now, and the industry structure is actually sort of very unhealthy for everyone,” Tencent President Martin Lau said on conference call in August.

— With assistance by David Ramli, Jeanne Yang, and Lulu Chen

(Corrects user viewing hours in eighth paragraph of story published Oct. 18.)
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