China’s digital landscape is vast in more ways than one. Sure, there are over 730 million Chinese internet users and mobile internet users have doubled since 2011, but that’s only the start of it.
On top of the crazy fact that there are as many Chinese internet users as people in Ukraine, China’s digital landscape is extremely competitive and there are no lengths the industry’s main players won’t go to increase their market share and dominate their rivals.
In previous weeks, we’ve already discussed the digital wars surrounding mobile payment and hongbao, as well as the ever-present trio of BAT (Baidu, Alibaba and Tencent), but this week we’re going to explore arguably the most competitive of all digital content industries in China – the online video market.
Having previously been dominated by Youku and Tudou, China’s online video industry has since welcomed a plethora of new competitors that have expanded the market to such point that it’s eating up the market share of traditional TV and forcing the industry’s players to revolutionize their business models in an attempt to break free from the rest.
Overview of the market and its players
Let’s begin with some facts. As of June 2016, Chinese online video platforms had reached over 450 million viewers, that’s 80% of the internet-connected population.
Add to that the fact that at the same period, mobile video streaming had already attracted 440 million users, and you can start to appreciate the sheer immensity of the market.
But as mentioned above, what really characterizes China’s online video market is the ever-growing competitiveness it’s home to, driven by a bevy of ambitious competitors of all shapes and sizes.
There are unfortunately too many players for us to analyze them each one by one, but for the purpose of this piece,we’ll be focusing on the market’s four main actors: iQiyi, Youku-Tudou, LeTv.com and Tencent Video.
- iQiyi: Formerly known as Qiyi, iQiyi was founded by Baidu back in 2010 and is currently the largest online video site in China in terms of hours spent on its service (supposedly 5.579 billion hours per month).
- Youku-Tudou: The resulting company of the 2012 merger between China’s two biggest online video streaming websites at the time, Youku-Tudou was acquired by Alibaba Group at the end of 2015 in an aim to access an even larger user base, add to its growing portfolio of media interests and strengthen its already dominant position in the Chinese digital industry.
- LeTv.com: LeTv.com, commonly referred to as Le.com, was founded in 2004 and is a subsidiary of LeEco, a leading online video-centric hardware and software company. LeTV was one of the first Chinese online video companies to purchase TV show rights in an effort to provide users with exclusive content.
- Tencent Video: The online video portal of Chinese internet giant Tencent, Tencent Video is a mainstay in the Chinese online video market. As a side note, Tencent is HBO’s exclusive partner in China meaning that only Tencent Video can host shows such as Game of Thrones, The Wire etc.
As one would expect as soon as China’s 3 biggest players get involved, the market has become exceptionally competitive in recent years.
In an effort to overcome fierce competition and increase profitability, the market’s main players have therefore had to diversify their revenue structure and move towards a business model based on paid subscriptions, rather than advertisements.
Transition to paid subscribers
But why did they have to move away from their ads-based models you might ask?
Well, on top of the fact that many industry experts believe the display-ad business model is reaching its saturation point, the number of new users on China’s online video platforms has stabilized in recent years. In some cases, annual growth is even decreasing.
Seeing as impression-based advertising revenues increase when more users visit the website, and stagnate or decrease when they don’t, China’s major online video players knew they had to diversify their revenue structure if they wanted to survive.
The big companies therefore set on replacing yesterday’s advertising revenues with income related to user-facing offerings such as premium subscriptions, but getting users to sign up required added value.
Since 2015, in an aim to encourage users to switch to premium subscriptions, the market’s different players have tried different approaches, but adding paywalls to selected new releases has been the most widespread.
These paywalls require users to either invest in a subscription account, or pay a one-time fee to watch the movie/TV show in question.
But as you can imagine, no one would pay to watch online media if said media was available elsewhere for free.
That’s why, in order to provide users with content they’re prepared to pay for and differentiate their offerings from their competitors’, market players increased their spending on TV show rights, therefore allowing them to host exclusive content. (Such as Tencent Video’s agreement with HBO).
So, has it worked so far?
In June 2016, Tencent Video and Baidu-backed iQiyi both announced they’d reached 20 million paying subscribers while one month later, Alibaba’s Youku-Tudou claimed it had reached the 30 million mark.
Even more interestingly, iQiyi went as far as confirming it expected advertising revenue to account for only half of their total revenue for 2016.
But although the number of paying subscribers has increased, this newly redefined exclusivity-based model comes with a catch.
While it may drive more users to invest in premium subscriptions, securing exclusive content comes at a cost and the increase in the price of TV rights has forced market players to question the long-term profitability of this strategy and shift towards self-produced content instead.
Transition to self-produced content
After being one of the first companies to purchase TV show rights in an effort to provide users with exclusive content, LeTV continued to set the pace in the industry by communicating in December 2016 that 70% of their new releases in 2017 would be self-produced or co-produced.
In all honesty, Youku and Tudou began making original content years ago but what really characterizes this new wave of self-production is the fact that the market’s biggest players, including Tencent, Youku-Tudou, iQiyi and LeTV have all established their own production companies, knowing their self-produced content will be cheaper to possess and easier to monetize (selling adaptation rights or licensing rights etc.).
While it must be said that Tencent have a certain edge in the sense that their recent adaptations of popular online games and online books have proven popular among netizens, in-house game shows and adaptations of proven foreign formats have been successful for most other video platforms in terms of cost control and viewer retention.
As well as being an increasingly interesting option for online video platforms, self-produced content is becoming more and more popular among netizens and Tencent Video found that views of self-produced content as a percentage increased to 14% in August from 8% at the beginning of 2016.
The shift towards self-produced content has not only had an impact on online video trends, it’s also encouraged market players to expand their businesses and search for new financial opportunities.
Indeed, while Tencent, Youku-Tudou, iQiyi and LeTV have all established film and entertainment companies to produce content, market players are increasingly distributing content to movie theaters and TV stations, rather than keeping the aforementioned content for their own platforms, in an aim to create new revenue streams based around content rights.
We hope you enjoyed this week’s piece! Here at Sekkei, we’re experts in all things online and we know China’s digital landscape inside out. If you’d like to discuss a project or get some answers to your questions, feel free to get in touch.