In recent comments, Martin Lau, the President of Tencent, China’s largest internet company by revenue, said the state of the video streaming market was “very unhealthy for everyone”, and that “all other digital content industries (in China) are actually in a better shape than the video industry.”
As of June 2016 China had had 514 million online video viewers, over 70% of total Chinese internet users, according to China Internet Network Information Center. Mobile video streaming users reached around 440 million.
There’s no doubt that on-demand video streaming has been eating up the market share of traditional TV, and easy, free access to a massive legitimate online video library across the Chinese web has made piracy less appealing.
So why is China’s online video streaming market “unhealthy”?
Youku-Tudou, the resulting company of the 2012 merger between the then two biggest Chinese video streaming websites, has lost its dominant position in a new round of competition.
The challenging competitors are either backed by deep-pocketed tech companies or have an advantage in content. They include Baidu-backed iQiyi, LeTV.com, whose domestically listed parent company LeEco has become a leading online video-centered hardware and software company, Mgtv.com, the online streaming site of the leading TV broadcaster Hunan Broadcasting System, and the homegrown video site by Tencent.
No matter with which model they started with, (usually YouTube or Hulu), these major players have since become very similar in both content and business model. The majority of their revenues is from free tier advertising, an increasing portion is from premium subscriptions and a minority is from other online offerings such as games.
In the third quarter of 2015, just before it was acquired by Alibaba, Youku-Tudou took 79% of their total revenue from brand advertising and 15% from subscriptions, virtual item sales through their live streaming service and mobile games.
After the merger, Youku-Tudou expected their scale and a potential drop in content prices would lead to profitability. But the new competition only drove up content prices to a new high. Youku-Tudou only reported a couple of profitable quarters before the Alibaba acquisition, with the biggest increases in cost attributed to content.
Since this time last year, some of the major players have begun heavily promoting their commercial-free premium subscriptions with exclusive and original content that has sparked a new race for exclusive content and subscriber acquisitions. Given Chinese users’ viewing habits, it’s unclear when – if at all, they will become financially “healthy” under their new business strategy.
Local Content Driving Growth For Chinese Video Sites
The top services offer the same mix of content: a wide variety of past TV shows and movies, newly licensed exclusive content, original content, user-generated videos and, more recently, live video streaming services. Content categories include serial dramas, game shows, movies, music videos, concert performances, sports and news.
Though each of them has acquired exclusive back catalogs in certain categories, viewing is mainly driven by a small number of newly released local hits, occasionally licesned Korean dramas. Chinese viewers tend to follow the most popular serial dramas or game shows, the most talked about at the office and on Chinese social media. A single season of a game show or a serial can get hundreds of millions of views.
It’s no wonder the exclusive rights to certain shows are very expensive. Content suppliers – especially original content production companies, now in an advantageous position, are able to take revenue shares from advertising and subscription sales as well as licensing fees.
To have a good viewer retention video streaming sites have to keep releasing new shows.
Early entrants like Youku and Tudou began making original content years ago. Given viewing patterns and cost concerns, self-made content seems increasingly important to video streaming sites. In-house game shows, especially adaptations of proven foreign formats, turn out to be very successful in terms of viewer retention and cost control.
Tencent, Youku-Tudou, iQiyi and LeTV all have established their own production companies. Tencent has an advantage here in that they are adapting some of their popular online games or online published books into movies or serial dramas.
Ad-free subscriptions have long been available but some of the major services have decided to heavily promote them in the last 12 months. The aforementioned hit-driven growth does help sign up subscribers. According to an online survey conducted by Tencent’s online media division, about 49% of subscribers surveyed said that they signed up for exclusive content, 27% was for the content library and 16% for better viewing experience.
iQiyi only had 5 million subscribers as of June 2015, but would add another 5 million in the next month through The Lost Tomb, an exclusive serial drama which the site only allowed subscribed users to access, a first-time event. The show saw a billion views in the first week after its launch, according to the company.
iQiyi would continue to only allow paid subscribers to get earlier or exclusive access to some new shows, including the two new seasons of The Lost Tomb. Under the new model, iQiyi reached a 20 million subscriber milestone in June this year, with an addition of 15 million subscribers added in one year.
The churn rates are unknown. According to the same survey mentioned above, 56% of the surveyed users said they’d only purchase a one-month subscription at a time to watch a certain show (binge-watch is allowed).
And the subscription prices are relatively low. The standard monthly subscription, with offerings including ad-free, unlimited streaming and high definition, costs about 20 yuan (about US$3). They normally charge iOS device users higher rates to offset the revenue cuts that go to Apple.
Some video services provide tiered plans. iQiyi’s basic subscription costs as low as 4.99 yuan (less than US$1) with which users can avoid ads and purchase pay-per-view titles at a half price. The most expensive so far is provided by LeTV’s newly added live sports subscription that is priced at 59 yuan (about US$9).
iQiyi claimed, citing a third-party research report, that they had 366 million viewers as of June. So 20 million subscribers who may unsubscribe next month if new shows are not appealing is far from enough to drive loyalty. Chinese video sites have been working hard on expanding their subscription base, which has kept subscription prices laughably low.
To diversify their monetization approach, iQiyi said they’d work on converting their paid subscribers to purchasers in their new businesses, such as film tickets. Youku-Tudou, now an Alibaba company, said they planned to leverage their parent company’s advantages in e-commerce.
It’s unknown whether there will be another massive consolidation in the on-demand video industry in China in the near future. For now, these sites have to keep investing heavily in content and marketing to stay competitive.
At the same time, the industry has begun worrying about the new trends in live video streaming, which is taking up an increasing amount of the Chinese audience. Though all of them have added the live streaming feature, users are watching live streams on standalone apps and social services which have recently added the feature.
Some video sites hope new content categories such as virtual reality (VR)-supported shows will have a totally different business model. But they are still at an early stage.
image credit: SocialBeta