Even with over 100 million paying subscribers, Chinese Netflix-style providers are facing a tough time

There’s a bumpy road ahead for iQiyi and Tencent Video, the world’s second- and third-major video streaming services by paying user base.

Image credit to 123rf.com.cn.

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 services 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.

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, streaming giant US-based Netflix reported over 158 million paying users, and is projected to reach 177.5 million by 2023.

Unlike ads-free Netflix, which is predicted to generate total revenues of USD 20 billion and a net income of USD 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 RMB 8 billion in 2019. Likewise, iQiyi is also money-bleeding. In the first nine months of the year, its accumulated net loss surpassed RMB 7.8 billion, 40% wider than the figure from the same period in 2018. Last year, iQiyi booked an annual net loss of 9.1 billion.

Chinese streaming providers are also shelling out big bucks on content, including buying copyrights license and self-produced shows. iQiyi, for example, reported that only in the third quarter of 2019, it spent RMB 6.2 billion (USD 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 RMB 22 billion in the second quarter of 2019, mainly due to higher content costs for services, which also included online games.

According to iQiyi CFO 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. Though, 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 RMB 2.1 billion (USD 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 RMB six (less than one dollar).

iQiyi reportedly laid out a plan to raise its subscription prices, aiming to boost revenues and stop the widening net loss. The company’s CEO said that the Chinese market has stabilized after a period of intense competition for subscribers, laying the groundwork for price hikes of 10% to 20% in the second half of 2020.

While Tencent Video didn’t announce similar plans, recently, it introduced a controversial money-making idea, which was also followed by iQiyi. Tencent’s video unit unveiled a premium VIP plan targetting its paying members where it charged an additional RMB 50 (USD 7) for access to the latest episodes of the trending Chinese TV series “Joy of Life,” KrASIA reported.

The policy promptly triggered a backlash from netizens and even from state-owned news outlet People’s Daily, which in a commentary wrote that both platforms are “looking down upon users’ right”. Tencent Video and iQiyi later apologized and canceled part of the new VIP program.

Although more than 300 million Chinese paid for video streaming services in 2018, contributing more than one-third of platforms’ overall revenues, according to a Xinhua report, it remains unclear if these major Chinese streaming services will be able to hit profitability soon.