China's battle for Internet content yet to see profits

Baidu secured the exclusive distribution rights for the award-winning Korean drama Descendants Of The Sun (left) in China, one of the chapters in the fight for supremacy in online video among China's Internet giants.
Baidu secured the exclusive distribution rights for the award-winning Korean drama Descendants Of The Sun (left) in China, one of the chapters in the fight for supremacy in online video among China's Internet giants.PHOTO: KBS

But largest players will not let up on spending as video is 'too strategically important'

HONG KONG • 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.

Streaming platforms from Baidu, Alibaba Group and Tencent Holdings are among more than a dozen vying for dominance in an industry forecast to expand almost 30 per cent a year to 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 (S$4) a month, to watch more compelling characters on original, professionally-made TV shows and in movies.

The drive for content has resulted in an expensive - and so far, unprofitable - creative showdown for Internet firms. 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.

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

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

It moved to a "freemium" model last year, commissioning content and introducing a porous paywall under which users need to buy VIP membership to avoid ads, enjoy higher-resolution videos or get access to the full collection of digital content.

While the shift boosted viewer numbers, the Baidu unit is yet to make money. iQiyi founder Yu Gong said last month that he does not expect the business to make a profit until 2018 at the earliest.

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 sixth-century war between the Chinese 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 at a recent event in Beijing. Streaming specialist LeEco said it would commission 30 movies and 400 hours of TV shows next year.

Ms Michelle Ma, an Internet and telecoms analyst with Bloomberg Intelligence, said spending on content is unlikely to ease any time soon for China's biggest tech firms. "It's too strategically important to them and it's too integrated into their services.

"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."

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.

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

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A version of this article appeared in the print edition of The Straits Times on October 19, 2016, with the headline 'China's battle for Internet content yet to see profits'. Print Edition | Subscribe