China is set to reverse the course of history and again defy expectations. iQiyi, an on-demand video streaming service, expects their advertising revenue to account for only half of their total revenue for 2016.

“iQiyi’s total revenue for 2016 will be more than 10 billion RMB. Advertising accounts for only half of that with the rest coming from user-facing offerings [i.e., premium subscriptions] and other sources,” said Gong Yu, CEO of iQiyi, at the 2016 China Internet Audio-Visual Conference (referred to as CIAVC hereafter) last week.

Major Chinese on-demand video sites are still struggling with fierce competition and profitability. Since 2015, they have heavily promoted paid subscriptions in an effort to diversify their revenue structure. The hope is to move away from an advertising model to a model based on paid subscriptions. In June of this year, Gong Yu told Yicai (report in Chinese) that they want to reduce advertising from about 75% in 2015 to around 33% in 2016.

Subscription prices are relatively low, from 15 RMB to 25 RMB per month. However, Vice President of iQiyi, Yang Xianghua, told Jiemian (article in Chinese) the average revenue per user was 20 times more than revenue from advertising.

At the same time, advertising growth is slowing. According to QuestMobile (report in Chinese), a mobile market research firm, monthly active users on Chinese mobile video apps reached 800 million in July of this year. With fewer new users, the growth of impression-based advertising revenue is set to flatten or decline.

At a media event last week, Yang Xianghua estimates that next year, major Chinese on-demand video sites will be able to generate more revenue from subscription than from advertising (report in Chinese).

10% of Monthly Active Users are Paying

At CIAVC, Sun Zhonghuai, President of Tencent’s Online Media Business, said that Tencent Video estimates paying users now account for 10% of the total active of online video and audio services in China.

Earlier this month, Youku-Tudou, the online video site of the Alibaba Group, announced it has 30 million paying subscribers. Tencent Video and iQiyi announced the 20 million user milestone last month and earlier in June, respectively.

According to a report by the EntGroup (report in Chinese), the number of paying consumers for online video services in China has increased from 8 million in 2013 to 20 million in 2015. With this amazing growth, we can expect the total for 2016 to be another big increase.

Starting from the middle of 2015, iQiyi added a paywall for a selection of new releases. This strategy quadrupled their subscribers in just one year. Mgtv.com, the video site of China’s leading TV broadcaster Hunan Broadcasting System, adopted the same strategy to sign up subscribers.

Youku-Tudou was able to sign up some 7 million subscribers from one campaign during the Chinese Spring Festival holiday earlier this year. Jointly run by Alipay, Alibaba’s online payment service, both companies promoted the new subscriptions through their various services to amazing success.

No Slow Signs for Costs Growth 

Paid subscription offerings have actually been available for a long time. However, there were quite a few limiting factors: 1) pirated digital content was abundant and users were reluctant to pay; 2) online payment services were not as widely used; 3) there was little differentiation in content or services between the different video sites.

Now we see that the first two problems are virtually non-existent with many users already converted into paying subscribers for differentiated content. However, this paid user acquisition comes at a cost; almost all Chinese video sites have been spending heavily on exclusive content.

LeTV was one of the first companies that made a fortune from purchasing TV show rights at low prices. However, they are now exploring a new model as those rights get more expensive. In an internal email earlier this month, Gao Fei, President of LeTV, disclosed that more than 70% of new releases in 2017 will be either self-produced or co-produced (source in Chinese).

Other sites are also placing big bets on self-produced content as it’s easier to control costs and have more ways to monetize such as selling adaptation rights or licensing rights to game developers. Tencent Video found the views of self-produced content as a percentage increased to 14% in August from 8% at the beginning of this year.

And as TechNode has discussed before, the traffic to these video sites is mainly driven by a small number of hits or new titles, but the costs to produce these shows keeps climbing. Sun Zhonghuai estimates that the user base is growing by 10% while views are growing by 50% to 100%. The costs, however, are growing by 200%, according to Sun. On top of that, of course, is also the marketing spends for those shows that are increasing as well.

But that hasn’t stopped big companies, including Tencent, iQiyi, and Youku-Tudou’s parent company, Alibaba, from establishing film and entertainment content companies to produce and distribute content not only for their own platforms but also to movie theaters or TV stations. The content and related rights will be their new revenue sources.

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