INSIGHTS | Time’s up for entertainment windfall

From short video to live streaming and gaming, the coronavirus outbreak in China has driven people confined at home to spend their time consuming online content. Products such as short video app Douyin and Kuaishou and mobile games have seen a surge in downloads and active users. These are good times to be in the online entertainment business—but we still don’t know if platforms can bank lasting gains. 

Bottom line: Online content platforms provide a replacement for people to kill their time when they are not able to dine out or go shopping, but they will not be indispensable when things go back to normal. Companies still need to address quite a few challenges before they can turn new users into regulars. In a protracted downturn, entertainment can be a resilient sector, but reliance on ads for monetization could mean unprofitable eyeballs.

Windfall users: The Covid-19 outbreak in China which has led to more than 2,700 deaths is pushing the country’s already tech-savvy population further online for entertainment, groceries, and healthcare, wrote TechNode reporter Emma Lee.

• Short video apps added nearly 150 million new daily active users (DAU) during the extended Spring Festival holiday compared with a year ago, according to a Quest Mobile report published on Feb. 12.
• DAU for short video apps combined reached 574 million during the 10-day holiday which ran from Jan. 24 to Feb. 2. The number was 426 million during last year’s week-long holiday.
• Douyin, known as TikTok internationally, saw its DAU surged 39% year on year to 318 million during the period. Its main rival Kuaishou amassed 227 million DAU, up 35% year on year.
• The percentage of total time users spent online jumped to 17.3% for short video apps during the 2020 holiday from 11.8% during the holiday last year, a 47% increase.
• Users spent 139 minutes on social media apps during the 2020 holiday period compared with 121 minutes in the holiday period a year earlier, growing 14.9%. Users spent 105 minutes on short video apps during the 2020 holiday compared with 78 minutes during the 2019 holiday period, a 34.6% surge.
• The gaming sector has seen a surge of engagement with the average time spent on mobile games increasing to 159 minutes during this year’s holiday from 113 minutes during the Spring Festival 2019.
• Taobao Live, the live streaming unit of e-commerce behemoth Alibaba, said last week that the number of live broadcast rooms on the platform had doubled and livestream events surged 110% year on year during the month as of Feb. 18.
• The overall mobile app market is also booming. Smartphone users in China made more than 222 million downloads through Apple’s App Store in the week starting Feb. 2, and average weekly downloads of apps during the first two weeks of February jumped 40% compared with the average for the whole of 2019, according to the Financial Times.

Challenges: One of the biggest challenges for online content platforms is how to turn new users seeking novelty into recurring users. 

• Gong Yu, founder and CEO of video streaming site iQiyi, said in an earnings call with analysts Friday that the company had seen a “more-than-expected” increase in paid subscribers in the past month. However, he warned that momentum won’t last in the remainder of the year.
• “As people start to go back to work [after the Spring Festival Holiday], the growth of news paid members began to slow down,” said Gong.
• Some worried that people would spend more time and money consuming offline when things go back to normal. “After the crisis, cultural consumption will come back with a vengeance, and most of which will happen in the offline world,” Liu Jingjing, deputy director of the College of Cultural Industries Management of the Communication University of China, told Chinese media.

An inferior good? Belt tightening potentially cuts both ways for online platforms. Economics suggests that digital entertainment may be an “inferior good”—i.e., consumers will pay for more of it as overall budgets decrease. A month of premium Bilibili costs less than a night out at the cinema or drinking with friends. 

But most of the money in online entertainment isn’t subscriptions. Rather, platforms sell ads—or, in the case of e-commerce live streaming, sell luxury goods directly. If consumers aren’t willing to buy stuff sold on these platforms, more eyeballs could still mean less revenue.

• Companies may struggle to monetize new users amid the virus-hit economy. 
• Most digital content companies depend on online advertisements to earn money. Bytedance, the company that owns TikTok, Douyin, and news aggregator Jinri Toutiao, earned RMB 50 billion (around $7.2 billion) from digital ads in the first half of 2019, accounting for 86% of its first-half revenue.
• A subscriptions up, ads down scenario could be better for subscription-based video-streaming platforms such as IQiyi, which is known as China’s Netflix, generated RMB 29 billion in revenue in 2019 with earnings from subscriptions accounting for 39.3%.
• According to an online survey conducted by Beijing-based fintech company Rong360.com, 31.4% of respondents said they would not increase consumer spending in the short term after the outbreak is brought under control.
• In the long term, 64.4% said they would be more “restrained” in spending, and 12.6% said they would cut spending.

Slow growth ahead: The surge of new users for online content platforms is caused by a “black swan”—the coronavirus—not the improvement of their content quality or increased marketing budget. Once the crisis is under control, companies will inevitably see growth slow down and face an uncertain future as the country’s economy recovers from the impact of the virus.