Chinese social media and entertainment giant Tencent may be eyeing a move to take over rival video streaming firm iQIYI. A combination of the two would a create streaming platform comparable in scale to Netflix.
The Reuters news agency on Tuesday cited two unnamed sources said to be familiar with the matter. They said plans are at an early stage and that Tencent may not yet have approached iQIYI.
The sources said a merger “would lower costs and counter competition in a sector boosted by stay-at-home virus policies.”
Streaming video has enjoyed huge growth in China over the past five years, since smart phones became the norm in the Middle Kingdom. It has also benefited from the financial arms of Tencent and Alibaba making online and mobile payments ridiculously easy in every walk of Chinese life.
Tencent Video recently reported 112 million paying subscribers at the end of March, while iQIYI, which is NASDAQ listed and majority-owned by Baidu, claimed 119 million monthly subscribers. Third-ranked generalist streaming platform Youku, which is backed by Alibaba, does not disclose its figures separately, but is estimated to have 90-100 million subscribers. For comparison, Netflix reported 182 million subscribers worldwide at the end of March, of which 69 million were in the U.S. and Canada.
All three of the Chinese platforms are losing vast sums of money. They are spending heavily on bandwidth and servers, but more importantly acquired and original content, which they use to attract and retain members. iQIYI recently reported net losses worsening to $406 million for the three months between January and March, while revenues and subscriptions improved.
A combination of the two platforms would reduce costs and create even greater scale at a time when the rate of organic growth in the sector has slowed. Additionally, it would potentially help fend off the growing challenge to their Chinese business models from short-form video companies such Bytedance (TikTok/Douyin) and Bilibili, and allow unduplicated expansion into Asian markets.
How such a deal would be engineered is currently unclear, especially as hostile takeover bids are almost unheard of in China, and would need regulatory approval.
The most obvious route would be for Tencent to use its vast financial firepower to make an offer that would be acceptable to iQIYI shareholders, in particular Baidu, which owns 56.2%. Buffeted by the company’s growing losses, U.S. government animosity towards Chinese stocks, and fraud allegations (which the company denies), iQIYI shares have had a bumpy ride since their $18 per share IPO in March 2018. They ended last week at $17.8, but in pre-market trading on Tuesday were headed for a leap to over $24 apiece, giving the company a valuation of some $18 billion.
An alternative route could see iQIYI buy Tencent Video, and use shares to make the payment. That would likely see Baidu exit or be demoted to the second-place minority shareholder behind Tencent. Investment industry sources have told Variety that this route would be more tax efficient and allow the combined Tencent Video-iQIYI to keep its U.S. share listing, should Tencent find that useful.
Variety contacted both Tencent and iQIYI for this report. Neither company offered any comment.