Baidu’s iQIYI wants to become China’s Disney, but it’s up against tough rivals

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.”

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