Chinese Streamer iQiyi’s Woes Have Been Long in the Making

Once billed as the “Netflix of China,” video streaming firm iQiyi is now laying off staff in order to bring its costs under control. The former high-flyer is still busily promoting new original shows “Jirisan” and “Bad and Crazy,” but it may struggle to regain altitude.

The Beijing-based company has previously been admired for its Chinese-made shows, smart software engineering and innovations, such as making the “Mysterious Summer,” a rare Chinese-Japanese TV drama. It even experimented with development of user-programmable movie theaters.

In 2017, it announced a deal with Netflix under which Netflix titles would be available day-and-date in China, where western entertainment-tech firms do not operate. The announcement was a huge public relations coup, but the deal was short-lived and did not provide a breakthrough to either greatness or profitability.

A year later, iQiyi reached its corporate zenith with a share listing on the NASDAQ market in the U.S., with its ADR shares offered at $18 apiece. They now stand at $5.16, a more than 70% discount to the IPO price and 87% below their all-time high.

While the company has continued to do interesting things, including opening a Singapore headquarters for its overseas operations and, through it, getting involved with content that could not be shown back home in mainland China, the red ink and corporate bad news have scarcely stopped flowing.

The company was founded in 2010 with Baidu, China’s internet search leader, and Providence Equity Partners as powerhouse backers. Baidu, seeing great promise in the two-year-old company, bought out PEP’s stake in 2012. Around that time, iQiyi received two useful, external stimuli.

One was search integration with Baidu, which increased the visibility of its content. The other was the success of electronic payment systems launched by other Chinese tech giants Alibaba and Tencent. These solved the recurring payments problems that had stymied many forms of subscription service in China and allowed the SVOD industry to flourish.

Stellar growth and those useful Netflix comparisons may have been at the root of iQiyi’s first major corporate controversy in 2016. Robin Li Yanhong, founder of Baidu, and Gong Yu, iQiyi’s founder, CEO and substantial shareholder, offered to buy iQiyi for $2.8 billion, a price which a U.S. institutional investor in Baidu said very substantially under-valued iQiyi. The company had recently achieved market leadership in China, with 20 million subscribers, and saw rival Youku Tudou scooped up by Alibaba for $4.8 billion.

The deal collapsed and in March 2018, Baidu instead gave iQiyi an IPO at a valuation of $13 billion — effectively confirming that the Li and Gong takeover proposal had been opportunistic and lowball. As part of the flotation, iQiyi also raised more than $2 billion of additional capital.

At the time, U.S. investors were still enamored by U.S.-listed Chinese companies and iQiyi’s (ADR) shares soared from their $18 offer price to over $40 apiece by June 2018. That gave iQiyi a market capitalization close to $28 billion.

But hope value can only take a company so far. The problem then, as now, is that iQiyi has never made a profit.

Instead, iQiyi has burned through billions of dollars of capital as it splashed out on content production and client acquisition.

Competition with the video offshoots of China’s tech giants, which had created vast ecosystems around e-commerce (Alibaba), social media and gaming (Tencent) was tough, especially as the emergence of apps had anyway lessened the usefulness of iQiyi’s search integration with Baidu.

Simultaneously, at the short-video, live-streaming, gaming-related and user-generated end of the spectrum, users were increasingly turning to Kuaishou, Bilibili, Bytedance’s Douyin (TikTok overseas), Huya and DouYu.

IQiyi’s answer was to raise yet more capital. It did this through the issue of bonds that are convertible into equity in December 2018 and March 2019 and by selling convertibles and equity in December 2020.

By the time of the third fund raising, many of iQiyi’s problems had been exposed.

In March 2020, with shares modestly under water at $16.71, iQiyi was broadsided by U.S.-based short selling firms Muddy Waters and Wolfpack Research, which accused the company of fraud by overstating subscriber numbers, inflating its revenues and multiple forms of accounting tricks.

The company denied the accusations and its shares quickly recovered on reports that Alibaba and Tencent had attempted to buy the company and had been rebuffed. Speculation that the tech giants might come back with higher offers were dashed when U.S. regulators announced a probe into some of the short sellers’ accusations. Around the same time, Donald Trump’s administration talked of expelling Chinese companies from U.S. capital markets, and the Chinese government started a multi-pronged regulatory assault on tech firms. Dozens of U.S. law firms began preparing class action suits against the company.

Some optimism still clung to iQiyi, as it doubled down on Korean content and the Singapore offshoot appeared to be gaining subscriber traction in Southeast Asian markets. But at home in China, things were looking considerably bleaker.

Astonishingly, and contrary to the ground gained by many streaming firms around the world, iQiyi failed to make lasting progress during the pandemic when hundreds of millions of people were locked down at home. In May 2020, it blamed COVID’s inflationary impact on content costs. In February 2021, it pointed to “a lack of compelling content” for causing millions of viewers to cancel their subscriptions.

By the end of December 2020, iQiyi had 101.7 million paying subscribers. That was a decrease compared with 106.9 million at the end of 2019 and a 14% tumble since subscriptions peaked at 118.9 million in March 2020.

With more bad news on the content and subscriptions fronts in its 2021 third quarter financial results, iQiyi is now swinging the axe. While the company has said nothing publicly, Chinese media have reported that 20% of jobs are to be eliminated. That figure could rise to 40% in non-core departments. And other business media have reported a retrenchment in the Philippines, a loss-making part of its overseas empire.

IQiyi is not alone. Many Chinese companies affected by China’s regulatory crackdown are finding that costs of compliance are rising and that their growth prospects have been trimmed.

Chinese streamers have been ordered to ban artists that don’t meet moral or cultural standards. Some game show and reality TV programs have been taken off air. And companies use of consumer data (for marketing, content recommendation and cross-selling of services) is being severely crimped.

Kuaishou is reported to be cutting its staff by 10%, while Bytedance has stopped hiring since August.

There is now a yawning gap between mid-sized Chinese entertainment firms’ bright shiny ambitions — all talk of ecosystems, super-apps and the metaverse — and the new realities of a Chinese economy that is slowing down and is being braked further by the regulatory crackdown.

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