China’s consumers are paying to watch movies online, but foreign streaming giants are missing out

Ninety seconds is a long time for China’s digital-native generation.

For Wang Shuai, 25, that is too long to wait for the advertisements to run out before he can watch his favourite movies and TV dramas on Baidu Inc.’s iQiyi streaming platform. So the Shenzhen resident paid 198 yuan (US$31) for an annual subscription that gives him the ability to skip the ads.

“It is quite cost-efficient, I can watch all the films and TV series on the platform,” Wang said. “Most importantly, the membership can exclude the 90-second advertisements before the videos. 90 seconds is too long for me.”

China has become a market where consumers are increasingly paying for online video content, a far cry from the days of pirated downloads. But it is a boom that foreign streaming giants like Netflix and Amazon are missing out.

Instead, the spoils are going to home-grown companies like Shenzhen-based Tencent Holdings, whose Tencent Video unit said Sunday it had 62.6 million paying subscribers as of the end of February, compared with 43 million in September. Its biggest competitor, Baidu Inc.-backed iQiyi, added about 10 million paying customers in the first two months of this year to reach 60.1 million. 

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 and 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$11.5 billion) in the five years through 2022.

Compared with the US, China still has plenty of room to grow in a country with a population of about 1.4 billion and 751 million internet users. The proportion of internet users who pay for video content has increased more than 10 times in four years, rising to 13.2 per cent in 2016, and is expected to further increase to 40 per cent in 2022, iResearch said. By comparison, Netflix’s US-based paying members represented around 28.1 per cent of total internet video users in the country as of the end of 2016.

Tencent Video, iQiyi in race to lead China’s online video market

“The growth of paying subscribers will continue, especially in China’s smaller cities where people have plenty of free time,” said James Yan, Beijing-based research director at Counterpoint Technology. “For the overseas players like Netflix who want to share China’s rising online video market, they either choose to sign deals with Chinese counterparts by offering content or cooperate with Chinese producers to make videos.”

Foreign providers have so far made little headway into the Chinese market because of strict controls that the government imposes on overseas content. There is a quota on the number of overseas films that can be imported and played in theatres. The authorities have also clamped down on video-sharing sites in the past for showing too many foreign movies or TV dramas. 

Netflix chief executive officer Reed Hastings said in 2016 that a full China launch was unlikely in the near term and would focus on licensing. Netflix had more than 117 million streaming subscribers worldwide as of the fourth quarter of last year. The company did not immediately respond to an emailed request for comment sent outside regular business hours. 

Last year, Netflix signed a licensing deal with iQiyi. Netflix achieved some early licensing success in China with its House of Cards series starring Kevin Spacey and Robin Wright about a crooked politician who plots his way to becoming US president, which became a popular hit in China through a deal with local service Sohu. 

This growing market has already led some players to pursue a public listing. Last week, iQiyi and smaller video-streaming provider Bilibili separately filed plans for a US initial public offering with the US Securities and Exchange Commission.

Tencent Video competes against Baidu’s iQiyi and Alibaba-backed Youku Tudou. New York-traded Alibaba owns the South China Morning Post. Other popular video streaming players on the mainland include Sohu Video, Mango TV, Bilibili and Funsion.