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China technology

Chinese equivalent to Netflix? No, we want to be China’s online Disney, says iQiyi CEO

The Nasdaq-listed company, which was spun off from online search giant Baidu, has sharpened its focus on artificial intelligence, big data analytics and other technologies to improve its efficiency in content production, sourcing and even censorship

PUBLISHED : Thursday, 31 May, 2018, 7:00am
UPDATED : Thursday, 31 May, 2018, 7:00am

While many investors compare iQiyi to US-based Netflix, the head of China’s largest online video-streaming service said it was built to be like The Walt Disney Company, the media and entertainment conglomerate behind Mickey Mouse and the Star Wars franchise.

“Our business model is more like Disney’s than Netflix’s,” said Tim Gong Yu, iQiyi’s founder and chief executive, in a recent interview at the firm’s headquarters in Zhongguancun, a hi-tech zone in Beijing.

Describing Netflix’s subscription business model as one that is “simple and can be easily replicated in any country in the world”, Gong said following that same path will not help iQiyi achieve sustainable growth in future.

“Netflix has mainly English-language content, with Hollywood culture at its core,” Gong said. “For iQiyi, what we have is a big domestic market. But neither Chinese-language content nor Chinese culture has a huge audience overseas.”

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Compared with the “horizontal” expansion of Netflix worldwide, iQiyi will focus on a “vertical” business model in the near-to-mid-term that will entail going deeper in the Chinese market, he said.

That strategy does not include building bricks-and-mortar theme parks like Disney. Instead, iQiyi plans to sharpen its focus on creating a Disney-like ecosystem of businesses.

“If a user likes to watch cartoons or TV dramas, he or she may also want to play a game or buy some merchandise based on a character [from our content],” said Gong, noting that Disney also derives income from various businesses, such as hotels and live-show ticket sales.

China’s online entertainment industry nearly trebled in the four years to 2016 to 157 billion yuan (US$24.5 billion). It is predicted to become a 690 billion yuan market by 2022, according to an iResearch report cited in a recent iQiyi regulatory filing.

“We’re crystal clear that our strategy right now is to build an ecosystem based on content and IP, such as literature, comics, light novels and gaming,” Gong said. “We don’t think they can all be successful, but we hope some of them can become top three in their individual sectors in two to three years.”

On Monday, iQiyi’s literature unit announced exclusive agreements with some of China’s top online novelists, including Tang Shao and Nan Pai San Shu, to deliver high-quality content for the platform as part of its growing ecosystem.

Citing iQiyi’s efforts in technological innovation, Gong predicted that the company “can achieve what Disney has achieved in scale in 20 to 30 years”.

It is a goal that iQiyi, which was spun off from Chinese online search giant Baidu, has aspired to after establishing a leading position in China’s online video-streaming market by distributing films, television dramas, variety shows and other content online.

About half of iQiyi’s 6,000-strong workforce are involved in technology and product development, according to the company. Their work has focused on artificial intelligence (AI), big data analytics and other advanced technologies that help to lower cost and improve efficiency in content production and sourcing as well as censorship, a field that has gained importance amid the government’s tightened controls over online entertainment.

Our business model is more like Disney’s than Netflix’s
Tim Gong Yu, founder and chief executive of iQiyi

The company is already using AI to make casting decisions, which is geared towards helping choose the most suitable actors for a show to become a hit with its target audience. To fend off rising competition in the market for short videos, iQiyi said it has also developed a technology that can split long videos into short individual clips based on different requirements, such as scenes, characters and emotions.

Adopting machine learning, which is an application of the broader AI technology, has also helped iQiyi employ about 500 people as censors even as the number of videos on its platform increased 20-fold between 2014 and 2017, according to iQiyi chief technology officer Liu Wenfeng.

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The company’s expansion initiatives reflect how China has become a market where consumers are increasingly paying for online video content, a far cry from the days of pirated downloads.

One out of eight Chinese internet video users now pay for online content and services, according to iResearch, marking a big change from years ago when most consumers favoured films on pirated VCDs and DVDs as well as those found on peer-to-peer movie-sharing sites.

That shift, driven by a demographic change with the coming of age of the more affluent millennial generation, has contributed to the explosive growth in paying subscribers, with iResearch projecting the market will triple in size to 73 billion yuan (US$11.4 billion) in the five years through 2022.

Foreign online video-streaming giants, such as Netflix and Amazon, have so far made little headway into the world’s second largest economy because of strict controls that Beijing imposes on overseas content. There is a quota on the number of overseas films that can be imported and played in theatres.

Chinese authorities have also clamped down on video-sharing sites in the past for showing too many foreign films or TV dramas.

Eight-year-old iQiyi has about 61 million paying subscribers, out of 527 million monthly active users in China watching videos on its app as of March this year. Another major source of revenue is advertising. Netflix has about 125 million subscribers worldwide.

With a PhD in engineering from China’s elite Tsinghua University, Gong is unlike many other hi-tech chieftains in China due to his influence over the country’s entertainment industry since establishing iQiyi in 2010. He is the producer behind such hit iQiyi programmes like reality show The Rap of China and online drama The Mystic Nine.

Gong, who will turn 50 later this year, said he was an avid collector of model aircraft, with dozens displayed on the shelves inside his office in Beijing. It is a hobby that he rarely has time for because of his hefty responsibilities at iQiyi, which include executing iQiyi’s expansion plans.

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Still, there is a vast gap that iQiyi must bridge to reach Disney territory.

The Chinese company, which started trading on the Nasdaq stock exchange in March, had a valuation of US$16.5 billion as of May 25. By comparison, the market cap of 94-year-old Disney was US$152 billion on the same day.

There are also several competitors that iQiyi must contend with on the mainland. These include rival services backed by Tencent Holdings and Alibaba Group Holding, the parent company of the South China Morning Post. In addition, there are aggressive new tech start-ups such as YY, Momo, Douyin and Kuaishou.

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Alibaba’s Youku Tudou and Tencent Video have both established strong ecosystems, while iQiyi only has “a super app”, according to Gong.

Without giving away iQiyi’s budget, Gong said about a third of company’s total annual content spending in the next two to five years will be focused on original materials.

He said original in-house content production will be among the top priorities for the still-unprofitable company, despite the likely pressure that will have on its cash flow.

“Original content product is the only important measure for us to lower cost and differentiate ourselves from the competition,” Gong said.