China's online video market is transforming with the amount of pirated content decreasing and a rising number of paying subscribers. This is a positive to online video portals that have struggled with meaningfully monetize these platforms by moving beyond advertising. A subscription-based service could generate significantly more stable revenue stream than advertising in my view if the platform holds proprietary contents, which explains why Chinese media companies have been on a hunt for media assets to differentiate their respective product offerings. I view this to be a positive for online video plays such as Alibaba (NYSE:BABA), followed by Baidu (NASDAQ:BIDU). However, I am more positive on BABA given its significant media exposure, studios asset and prior collaboration with foreign media companies.
China's online video space has historically been flooded with pirated content that it was difficult to monetize these sites beyond advertising. However, recent regulation on IP and online content has limited the availability of pirated content and the affordability of the subscription model have allowed viewers to evolve into paying viewers. This is a positive to online video platforms in that it could potentially reverse the losses from content inflation (nearly all of the online video platforms are not profitable on my observation) and generated much needed and recurring subscription revenue.
BABA's Youku is the largest online video platform in China, followed by Tencent's QQ video and Baidu's iQiyi. None of the platforms disclose their subs on a consistent basis but iResearch estimates that China had 28.8m subs by the end of last year, which accounts for 5% of the total online viewer base. Given that we are in the earlier stages of the growth cycle, I see considerable upside to subscription-based revenue given that it can bring more than 50% more annual revenue on a per user metric than advertising. In terms of revenue, subscription only accounts for 13% of industry's total in 2015 per iResearch, a significant increase from the 5.6%.
In my view Alibaba remains the best way to play this theme given that the company is gradually becoming an integrated media distribution platform that controls online distribution and the studios. Particularly on content, I note that BABA has been on a hunt for quality foreign content to enhance its library and I believe that it could potentially be a suitor for Paramount Pictures considering that its portfolio of movies are greatly popular amongst the Chinese. Given that media content will be a key differentiator for both Youku (online distribution and OTT) and Ali Pictures (BABA's studios arm), Paramount could be an important addition for BABA to alleviate Ali Pictures to become a competitive studio on a global basis. (see - Viacom: An Epic Reality TV Show).
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