Alibaba, Baidu and Tencent learn Netflix lessons in content fight

China’s long-form video platforms are stepping up acquisitions of popular media content and producing their own shows to lure back viewers from short-video apps.

Baidu-backed iQiyi, Alibaba’s Youku and Tencent Video all reported better than expected user growth in their most recent quarterly earnings thanks to the popularity of several self-produced variety shows and television series.

The increased emphasis on original content at China’s trio of big video-streaming platforms echoes the successful approach of global companies such as Netflix. The strong earnings are a boost to these older streaming platforms after years of losing out to newer short-video apps Douyin and Kuaishou as well as mid-form video site Bilibili.

It suggests that investing in content will become more important in China’s video industry at a time when leading players are encroaching on to each other’s turf.

“The products offered by different video platforms are starting to converge,” said Carlton Lai, an analyst with Daiwa Capital Markets in Hong Kong.

Tech giant Tencent, which operates China’s largest long-form video platform, last month pledged to increase investment in short videos as one of three key strategic areas. Management at short-video app operator Kuaishou also expressed interest in having more long-form videos on its platforms.

Whether they could retain viewers would depend on their ability to secure exclusive and appealing content, Lai said.

During the first quarter, Tencent benefited from its popular TV series The Land of Warriors, an adaptation of a fantasy novel, and Chuang 2021, a self-commissioned talent show for boy groups.

The success of the shows helped Tencent increase its fee-based subscribers by 12 per cent to 125m in the first quarter from a year ago.

Long-form video platforms such as Tencent Video charge viewers subscription fees to access dramas, films and variety shows that are often not available elsewhere. The business model requires the platforms to spend heavily on production — both Tencent and iQiyi recently raised subscription prices — but hit shows can draw explosive and profitable traffic.

Alibaba-backed Youku also benefited from its unexpected blockbuster Word of Honor. The fantasy series, adapted from a gay romance novel, became an instant hit even though homosexuality remains taboo in China.

The drama’s success prompted Youku to hold offline concerts featuring its main stars. Tickets priced at up to Rmb2,280 ($356) sold out within 14 seconds.

While Alibaba does not disclose viewer numbers for the video platform separately, it said Youku’s loss narrowed in the first quarter while the number of average daily subscribers rose 35 per cent year on year in fiscal 2020-21 ending in March.

After losing viewers for more than a year, Baidu-owned iQiyi gained 3.6m subscribers to hit 105m in the first quarter thanks to the TV series My Heroic Husband, about a businessman who travels back in time and marries the daughter of a merchant. The drama triggered heated online discussions about gender equality. iQiyi, also one of the blockbuster’s producers, said the success “validates its exclusive content strategy”.

However, analysts expect the platforms to face greater government controls after a recent scandal in which fans bought and wasted tonnes of bottled milk just to cast extra votes for their favourite contestants during an iQiyi-produced boy group variety show. Part of the marketing strategy called for voters to scan the QR codes on bottled milk caps. State media urged the video platform and brand sponsors to act more responsibly, prompting the media regulator to force iQiyi to cancel the season finale.

Under new guidelines, video platforms would not be allowed to encourage voting through goods purchases or membership sales, said iQiyi chief executive Gong Yu during an earnings call last month. “This means that voting in the future will be free,” he said, adding that iQiyi was still evaluating the impact on advertising revenue.

Idol survival shows, including Tencent’s Chuang series and iQiyi’s Youth With You, have become huge in China thanks to the global success of South Korean girl and boy groups. The programmes were the most popular genre on the majority of video-streaming platforms and generate lucrative returns through fan voting and brand sponsorship.

“The milk-wasting incident will have an impact on the whole industry,” said Martin Bao, an analyst at ICBC International. He expects the auditions for such shows to be more closely screened by media regulators in order to ensure they reflect correct social values.

Meanwhile, short and mid-form video platforms are exploring new revenue sources after accumulating a large user base. Both Kuaishou and Bilibili listed in Hong Kong during the quarter, raising billions of dollars to fund expansion and content acquisition.

At Kuaishou, average daily users rose 26.4 per cent to 379.2m in the first quarter, though losses widened to Rmb57.8bn from Rmb30.5bn in the same quarter last year.

Since being established, Kuaishou has generated most of its revenue from the sale of virtual gifts — a form of convertible cash that fans give to livestreaming hosts to show appreciation.

However, online marketing revenue, primarily from advertising, overtook this segment for the first time in the first quarter, contributing more than 50 per cent of total revenue after year-on-year growth of 161.5 per cent. Total sales from Kuaishou ecommerce operations grew 219.8 per cent to Rmb118.6bn from a year ago.

Robin Zhu, an analyst at Bernstein, noted that the short video platform has to spend more on sales and marketing to achieve the same revenue growth as in the past. “Looking ahead, we worry that further increases [in user acquisition costs] will continue to put pressure on Kuaishou’s growth efficiency and reported margins,” he wrote in a report.

During the period, Bilibili was able to increase its advertising revenue to Rmb714.7m, up 234 per cent from the same period last year driven by its effort to link advertisers with high-quality content creators. Monthly active users increased 30 per cent to 223.3m and total revenue grew 68 per cent to Rmb3.9bn.

Both Kuaishou and Bilibili could face greater scrutiny of their content. Beijing is preparing to act against copyright infringements on short video platforms after pleas from the film and TV industry.

Unlike their long-form rivals, Kuaishou, Bilibili and Douyin generate substantial audiences through content uploaded by individual creators — content that sometimes uses clips from TV series and films without seeking proper copyright approval. Such practices are increasingly raising eyebrows at production studios and licensed video platforms.

China’s National Copyright Administration said during a media conference in April that it would intensify its scrutiny of copyright infringements on short video platforms after more than 70 TV and film production companies issued a joint statement calling for an end to such practices. Youku, Tencent Video and iQiyi also backed the initiative.

“The short video platforms might need to acquire more [original content] to avoid such regulatory risks,” said Daiwa analyst Lai.

A version of this article was first published by Nikkei Asia on June 1. ©2021 Nikkei Inc. All rights reserved.

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