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Online Video Sector in China Heading for Profit by 2019 (Study)

China’s heavily loss-making online video sector could finally break even by 2019, according to a new report by investment bank JP Morgan.

The report describes an oligopoly consisting of Chinese companies iQIYI, Youku Tudou, and Tencent Video – backed by Internet giants Baidu, Alibaba, and Tencent, respectively – and operating unchallenged by foreign players.

The report says that a massive structural change in the sector is currently underway. The three conglomerates and their video subsidiaries are all shifting from a content-acquisition model to one increasingly based on producing, investing in and distributing original content.

That shift requires continued heavy investment, but paves the way for growth in subscriber numbers and for the conversion of an advertising-supported business model into a subscription-driven one. JP Morgan says that there are some 520 million Chinese users of online video but only 60 million with paid subscriptions across the three leading platforms at the end of 2016. The report estimates that the number of paid subscribers could rise to 234 million by 2020.

While Baidu, Alibaba, and Tencent are the three dominant players in the Chinese Internet sector and are often lumped together, the report makes sharp distinctions between the strengths of their video operations. It describes Baidu’s iQIYI and Tencent’s Tencent Video as leaders, while Alibaba’s Youku is a “chaser.”

Significantly, the bank forecasts different timelines for each of the three video services to break even. It predicts that iQIYI will get there first, in 2018, followed by Tencent Video in 2019 and Youku in 2020. The sector as a whole would reach the break-even point in 2019.

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