Rising Video Costs Limit Profit Gains at China’s Baidu

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Rising content costs and decreasing operating margins at online video subsidiary iQIYI contributed to flat profits at Chinese Internet giant Baidu at a time of steeply increasing revenue.

Reporting financial data for April to June, Baidu said second quarter revenues were up 38% at $2.67 billion. Net profits were $591 million, up only 3%.

IQIYI, along with online-to-offline (O2O) commerce, is a growing part of the group’s business and in future its performance will be reported separately. In the quarter “content costs as a component of cost of revenues were RMB840 million ($136 million), representing 5.1% of total revenues, compared to 3.0% in the corresponding period in 2014 and 4.8% in the previous quarter. The year-over-year increase was mainly due to iQiyi’s increased content costs,” the group said in its statement.

The losses at iQIYI had a marked impact on the group’s performance. “iQiyi reduced [Baidu’s] operating margins by 5.1 percentage points,” it said.

China’s major online video platforms are currently bidding up the cost of content as they compete with each other to acquire rights to premium content that ranges from movies to Korean TV series and sports. They have also all moved into the production sectors, with activities that range from short films and web-series through to feature movies. While their efforts may be building the foundations for a healthier ancillary rights market in China, in the current development phase they are costing their parent companies considerable losses.

Baidu has previously signalled its intention to give iQIYI its own share listing following an IPO. But China’s stock markets are currently closed to new IPOs and investors might anyway prefer a merger with or takeover of a rival video platform.

“With Baidu’s cornerstone search business delivering solid growth and enjoying ample runway ahead, and with powerful mobile gateways to leverage, we are ideally positioned to capture the O2O e-commerce opportunity and build the ‘Next Baidu’,” said Robin Li, chairman and CEO of Baidu in a statement. “As we continue to connect people with services and enable closed loop transactions, we are creating a transactional business model as Baidu grows and evolves in the age of mobile.”

Monthly active users of Baidu’s search engine reached 629 million for the month of June 2015, an increase of 24% year-over-year. Mobile map users in June were 304 million up 48%, while gross merchandise value for its e-commerce businesses totaled RMB40.5 billion ($6.5 billion) for the second quarter of 2015, an increase of 109% year-over-year.

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