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'China’s Netflix' is really an 'online Disney': iQiyi CEO

Krystal Hu
Reporter
iQIYI Founder & CEO Yu Gong, center, rings the Nasdaq MarketSite opening bell, during iQIYI IPO listing ceremonies, in New York's Times Square, Thursday, March 29, 2018. (AP Photo/Richard Drew)

When Tim Yu Gong, the CEO of iQiyi, came to New York and Boston for a Non-Deal Roadshow in 2015, he found it “was very painful” to make U.S. investors understand what his company does.

Three years later, as his Chinese video-streaming company backed by search engine giant Baidu was getting ready for a Nasdaq listing, Gong found his story had become much easier to tell. Video streaming had taken off in the U.S., and Netflix had become a Wall Street darling— its share price (NFLX) at around $350, had more than quadrupled within three years.

iQiyi (IQ) was the first Chinese video streaming site to go public in the U.S. so it naturally won the title of “China’s Netflix”. Its $2.4 billion IPO in March 2018 was the fourth-largest U.S. IPO last year and the biggest among 33 Chinese companies that went public in the U.S. American investors may have never used its product, but that didn’t stop them from betting on China’s online entertainment industry.

But Gong said iQiyi is so much more than just a streaming video service.

“Our business model is quite different from Netflix, but to raise funds and make it easier for Western investors to understand, we call ourselves Netflix Plus at the time. The most accurate way to describe us would be ‘online Disney’,” Gong told Yahoo Finance in an interview. After a wild run, the stock has jumped by 54% in its first year in the public market, and grew 51% year-to-date. iQiyi shares have been holding up well among Chinese tech stocks, which have been hit by the U.S.-China trade tensions.

Gong believes the company’s “Apple Garden”-like business model differentiates itself from Netflix’s “single model” — It’s expanding vertically within the Chinese market, trying to build an ecosystem on content and IP, such as literature, comics, light novels, and gaming. Unlike Netflix, it also offers ad-supported content free to users, whom the company hopes will become paid subscribers.

Why iQiyi will remain focused on its hometown

iQiyi stock had a wild run in its first year in the public market.

While Netflix can replicate its business model and content globally, it is not that easy for a Chinese company. “There are cultural differences and language differences, so it is difficult for us to expand overseas. We are doing more in-depth development in China,” Gong said, adding that due to those hurdles iQiyi’s focus is to maintain its leading position in the domestic market and try to grow deeper.

Most Chinese tech giants are like iQiyi because it’s difficult for them to follow the same path as a typical U.S. tech giant like Netflix, according to Gong. Alibaba (BABA) and Tencent, for example, have built empires from e-commerce, social media and games that dominate every aspect of Chinese people’s daily life.

“The biggest difference is, American companies are more focused, and Chinese companies are more diversified,” he said. “In China, the development speed is too fast, and the capital investment is relatively large in terms of the scale of the industry, so in order to expand the territory, you usually have to be diverse and the single mode is difficult to survive.”

When asked about the heated discussion over Chinese tech workers protesting long work hours online, Gong said he hadn’t heard much about the “996” term, which describes the work shift from 9 a.m. to 9 p.m. for six days a week. “I think this is an exaggeration. Among my company and the companies I know, these are rare cases,” he said. “We’re in the entertainment industry. Our engineers are very happy. We always have celebrities visiting once in a while.”

Another force companies can’t afford to ignore is the Chinese government. With tightening control on social and cultural issues, any new order from the government could easily derail a project. In fact, all of iQiyi’s original content needs to be reviewed and approved by a government agency. Meanwhile, most of iQiyi’s original content is available to U.S.-based users, the only time content is not available is when the copyright is sold to local partners.

“Yanxi Palace,” a hit ancient Chinese drama, was pulled from national TV in China for promoting the lavish lifestyles of China’s past monarchs over the “virtues of frugality and hard work”.

Access to China has also been limited for Netflix, which has been trying for years to have a greater presence in the market. In 2017, Netflix struck a deal with iQiyi to license its flagship shows, including “Black Mirror” and “Stranger Things,” to the Chinese video streaming site.

How iQiyi is like Netflix

How major U.S. streaming services compare with each other

Despite its differences, iQiyi faces the same problem as Netflix: The company has to prove its ability to achieve profitability.

In 2018, iQiyi committed to investing in original content. iQiyi’s original content makes up almost 50% of its drama content, Gong said, the goal this year is 60%. In variety shows, a category that has been popular with millennials in China, original programs contribute to more than half. But iQiyi said it will continue to rely on purchasing licensed content, considering the return on investment, for movies and animes. Similarly, Netflix original shows and movies outpaced its acquired TV shows and movies for the first time last year. In December 2018, 51% of Netflix programming came from original content, according to Ampere Analysis.

iQiyi’s investment in content has already reaped some rewards. Last year, its “Yanxi Palace” had been streamed more than 15 billion times on iQiyi, and it is the most Googled TV show of 2018 globally, despite Google being largely blocked in China.

The attractiveness of high-quality original content is reflected by its fast subscriber growth. iQiyi now has 87.1 million subscribers, with 36.6 million newly-added ones in 2018. “We expect this year’s new adds in paid users won’t be lower than last year,” Gong said. Netflix had 60.5 million subscribers in the U.S. and 139 million worldwide in 2018.

Original content is a cash burn

Making original content is a capital-intensive business, both in the U.S. and China. In March, iQiyi raised $1.05 billion in six-year convertible bonds, in an effort to fuel its investment. Netflix raised its subscription price earlier this year, but Gong said that’s not something iQiyi plans on doing.

“Because the number of paying users is still fast growing, there is competition, not just us. If we raise the price, the growth will be slower,” Gong said, referring to the intense battle for China’s 600 million online video users with Alibaba’s Youku and Tencent Video. All three platforms charge 19.8 yuan ($3) per month.

“Of course we’re under pressure (of reaching profitability). But this is just a phase we have to go through,” Gong said. “The U.S. stock market is more rational and fairer compared to China’s. I believe our value will be recognized.”

Krystal Hu covers technology and China for Yahoo Finance. Write to her via krystalh@yahoofinance.com

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