Even with 100 million paying users, China’s Netflix-style providers face a tough time

With over 100 million paying subscribers, China’s iQiyi and Tencent Video have secretly grown to become the world’s second and third major video-streaming service providers by paying user base, only after international streaming top dog Netflix. However, both firms are facing continued net losses amid slower growth of new users and sluggish advertising sales.

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At a Tencent’s conference held in Beijing last Friday, the Chinese tech giant announced that its video-streaming service is used every day by over 200 million users, while its platform has surpassed the milestone of 100 million paying subscribers, a claim that was first revealed in the company’s Q3 earnings report.

Tencent Video is the second Chinese video-streaming business to hit the 100 million mark, after its rival Baidu-backed iQiyi, which announced a subscriber base of 105.8 million as of September. Meanwhile, US-based streaming giant Netflix reported over 158 million paying users and is projected to reach 177.5 million by 2023.

Unlike ad-free Netflix, which is predicted to generate total revenues of US$20 billion and a net income of US$1.5 billion in 2019, according to its Q3 earnings report, Chinese players are facing difficulties in paving the way to profitability.

Although Tencent does not detail the financial situation of its streaming unit, the deep-pocketed tech powerhouse said at the beginning of the year that Tencent Video’s annual net loss could hit 8 billion yuan in 2019. IQiyi is also money-bleeding. In the first nine months of the year, its accumulated net loss surpassed 7.8 billion yuan (US$1.1 billion), 40% wider than the figure from the same period in 2018. Last year, iQiyi booked an annual net loss of 9.1 billion yuan (US$1.3 billion).

Chinese streaming providers are also shelling out big bucks on content, including buying copyright licenses and self-produced shows. IQiyi, for example, reported that only in the third quarter of 2019, it spent 6.2 billion yuan (US$870.5 million) on video content, which is equal to 84% of its revenue during the period.

Tencent did not specifically mention this part of expenses, but its cost of revenues for value-added service increased by 32% year on year to hit 22 billion yuan (US$3.2 billion) in the second quarter of 2019, mainly due to higher content costs for services, which also included online games.

According to iQiyi chief financial officer Wang Xiaodong, the company sees content costs as a kind of investment, which is necessary for the business. “We will continue to lower the number down to somewhere below 70% next year,” Wang said during the company’s Q3 earnings call.

While membership services are the main revenue generator of these video-streaming platforms – 50% of iQiyi’s revenues were from paying users in Q3 – attracting more paying viewers is becoming harder.

Net additions of iQiyi’s subscribers from the end of 2018 to the end of September 2019 were 18.4 million, down by 38% year on year. Tencent instead managed to earn 11 million new subscribers in the first nine months of this year, only about half of the 20 million obtained last year over the same time span.

Tencent and iQiyi also make a part of its revenues through online ads. However, ad revenues also slowed down in 2019, as mentioned by Sun Zhonghuai, chief executive of Tencent Video, who predicted in May that the growth rate of advertising sales will decrease from 37% to just 19%, as reported by the Nikkei Asian Review. 

IQiyi also reported that its online advertising services revenue decreased by 14% year over year in Q3 to 2.1 billion yuan (US$289.2 million), largely due to the challenging macroeconomic environment in China, the delay of certain content launches, and the intensified in-feed advertising competition, the company stated.

In the race to get more paying users, Chinese streaming services are also running aggressive discounts on their platforms. With coupons and promotions, users can sometimes get one-month subscriptions for as low as six yuan (less than a dollar).