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How Chinese rivals threaten Netflix

Netflix has established itself as the global leader in online video streaming. Over the past decade, the once humble DVD delivery service has grown into a global behemoth that has challenged Hollywood, inspired countless competitors and copy-cats, and changed how consumers view video consumption.

While Netflix remains king in terms of paying subscribers and revenues, its days as the market leader may be numbered. Over the past three years, paid streaming video services have exploded in China with three services from China’s tech giants Alibaba (Youku), Tencent (Tencent Video) and Baidu (iQyi) battling for streaming supremacy in the world’s largest video market.

Explosive growth

Over the past two years China’s two leading video platforms, iQyi and Tencent Video have seen explosive growth in paid subscribers. From June 2017 to June 2019 Tencent Video paid subscriptions grew 187 per cent to 96.9m while iQyi grew 160 per cent to 99.4m subscriptions over the same period. Alibaba owned Youku also experienced impressive subscriber growth of 200 per cent over June 2017 to June 2018 and 40 per cent subscriber growth over June 2018 to 2019; however, the company does not report total subscription numbers. The growth is all the more impressive when considering China’s pay-TV segment; particularly the IPTV industry is also experiencing incredible growth.

Content is king

Like Netflix, the Chinese streaming services have taken the approach of investing heavily in producing their own content. iQyi spends $794m on content (both own production and content licensing) in 1Q 2019 and has stated ambitions to become a feature-length film producer working with various studios in China to accomplish this goal. This follows Tencent Videos’ purchase of a $524m 28% stake in New Classics Media, a Shenzhen based film studio. However, the content arms race in China is not only around in-house production but also focuses on live sports, a departure from the Netflix model. Tencent Video has had wild success via its partnership with the US-based National Basketball Association, the world’s premier basketball league, with 490m individual users streaming at least one NBA game over the 2018-2019 season. Tencent recently renewed the partnership with the NBA to be the sole distributor of live games and other NBA content in China. iQyi also offers exclusive access to sports content, partnering with La Liga, Spain’s top football league, to be the exclusive distributor of games to China. Youku has also invested in live sports delivering the 2018 FIFA World Cup to Chinese viewers. As subscribers and revenues continue to grow for these streaming giants so do the budgets for content as well the range of types of content they streaming. 

Profitability

While the Chinese streaming platforms have figured out the formula for subscriber and revenue growth, profitability is still elusive. iQyi’s losses continue to grow with 2Q 2019 losses increasing 10% year over year to $335m. In the June 2019 Alibaba’s Digital Media and Entertainment group, of which Youku is a key component posted a negative EBITDA (earnings before interest, tax, depreciation and amortisation) of $325m. While Netflix’s international operations were not profitable until 4Q 2017, nearly six years after its first ventures into Canada and Latin America, Netflix uses a subscription-only business model where a longer time to return on investment is expected, all three major streaming platforms in China also offer ad-supported viewing options and content distribution services, reselling their content, which should deliver a return on investment more immediately. Profitability may be even more of a challenge in the coming year as the overall Chinese advertising market has declined amid more bearish consumer sentiment. Further, the Chinese content regulatory body the National Radio and Television Authority, which previously put less scrutiny on online platforms, announced that many of the content regulations that traditional TV distributors had to follow would now be placed on online platforms as well. This includes the banning of period dramas that depicted storylines set during China’s imperial era. These types of shows were some of the most popular on iQyi and Youku’s platforms. 

Following the regulation, iQyi postponed the launch of a planned period drama that was planned for 2H 2019. Despite the profitability issues, all three major platforms are backed by massive companies that also use user data to create synergies with their other businesses like gaming, fintech, digital advertising, retail and more and profitability may not be as important to these platforms as it is to Netflix.

What’s next

So far iQyi, Youku and Tencent Video’s subscription services are limited to Chinese audiences. However, with large investments in large scale content production, tightening of Chinese regulatory controls on some of the most popular content and a declining advertising market in China, an international push is not out of the question. In fact, iQyi is currently offering its services in Taiwan as a trial run for what an international expansion may look like and stated ambitions in April 2019 to consider entering Southeast Asia. Tencent Video launched its first international foray in Thailand in March 2019, titling the service “WeTV”. While all three platforms own content production focuses on Chinese language programmes, foreign language content from other Asian markets has been successful in the Asia Pacific in the past, particularly in Southeast Asia. While competition is fierce in the region with regional players like iFlix and Viu already battling global platforms like Netflix and Amazon Prime for subscribers, the Chinese platforms have powerful parent companies behind them and strong capital commitment to content production. If the Chinese streamers can get an international foothold, it may not be long before Netflix is no longer the king of video streaming.

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