The pace of change is so rapid that it’s always hard to keep up with developments in China. What made sense last month often makes no sense this month. Here’s my attempt to make sense of what’s going on in video streaming right now.
1. More subscribers
As recently as four or five years ago it seemed that Mainlanders simply weren’t prepared to pay for online content. Advertising-supported delivery seemed the only commercially viable form of distribution. These days, millions of Chinese are prepared to subscribe, either to access the increased volumes of premium content now on offer or simply to avoid advertising. The rapid growth of mobile wallets like those provided by WeChat and Alipay is supporting this process. Whatever the reason, in 2017 online video revenues increased by 49% to $14 billion.
2. More streaming, less social media
Over the last five years we’ve seen a huge increase in traffic on VOD sites as Chinese people move over from social media to VOD. The 2018 WeChat Social Commerce Report says that increased engagement on video apps is causing the decreasing use of social apps.
3. VOD, and not TV, is now driving production
VOD platforms are pushing TV broadcasters aside with their production spends. Anke Redl, MD of CMM-I, says “VOD platforms have become production powerhouses. They are investing in other platforms and spending more on production costs. Their content creation spends now far exceed those of the TV stations”.
4. Big platforms are spending big on original content
According to Redl, “The VOD ecosystem has changed dramatically in the last few years. In the past, the platforms were more inclined to buy existing content, much of it foreign. As foreign content restrictions bite, they are now more careful about acquiring foreign content and more inclined to invest in local content”. Youku, Tencent Video and iQiyi, China’s three big OTT players, are all investing more in the production of premium content. In an interesting twist, increased local production spend may be a way of allowing platforms to access more foreign content because their foreign imports must be a proportion of their local offerings.
5. Content prices are up
The transformation of China’s video market is driving up content acquisition prices. Platforms are now spending two or three times more per episode than they did two years ago. Per episode production spends are reportedly now in the range $1.6 to $2.4 million.
6. Content is local language, China focused
While there will always be demand for foreign content, Chinese people mostly like watching Chinese content. They are very happy with Chinese programs. This basic fact often comes as a surprise to foreigners. This is an underlying cultural preference that can’t be blamed on foreign content restrictions and import quotas. The good news for China’s producers and distributors is that the domestic market is large enough to show substantial returns on investment. The bad news, though, is that there is no foreign market for Chinese programs. A show that fails here has nowhere else to go.
7. Regulation of foreign content is increasing
No surprises there. The US-China trade war obviously isn’t helping. See this recent post for a summary of new proposed regulations. By the way, the Chinese aren’t the only ones restricting foreign content. Look at the new EU law requiring streaming platforms to carry 30% European content.
8. There is a growing market for non-exclusive foreign content deals
Quota places follow the imported programs, not the importing platform. Non-exclusive foreign content deals therefore allow more than one platform to benefit from a quota place. More and more of the smaller platforms are operating in this space. They will clear particular programs for a quota place, shop them around and then license them non-exclusively to bigger platforms. In this way the benefit of quota places is spread more widely across the market.
9. Capital markets are paying attention
Thomas Hui, CMC Holdings COO, says “Specialty and short form content platforms are gaining traction with viewers and in capital markets“. There sure has been a lot of activity at the big end of town. iQiyi raised more than $2 billion when it went public in New York earlier this year, while Tencent invested $1.1 billion in a single day — $461.6 million in Huya and $632 million in Douyu TV.
10. Despite it all, big China platforms are making losses
Subscriptions may be up but subscribers still remain in the minority. They accounted for only a quarter of total online video revenues in 2017, with advertising accounting for half. Tencent recently reported its first profit decline in more than 10 years, wiping more than $100 billion off its market capitalization. According to analysts referred to by The Information, Youku, Tencent Video and iQiyi are all operating at a loss.