People sometimes remark on how Cisco got to be the superpower it is today, when it ran without an R&D function, saying instead that it used mergers as its method of R&D and completing 191 mergers since 1993. A similar strategy surrounds the large Chinese internet companies – their government prevents companies like Google, Facebook, Netflix and Amazon setting up to sell services directly in China, and so they must either reach out to local companies for partnership in order to enjoy access in the most populous market in the world, or face having their services shamelessly copied.
And this is the strategy which sits behind how Tencent Video has jumped some 19.59 million new SVoD customers in just 6 months to sit where it is today at 62.59 million customers, growing in China alone at twice the speed Netflix is growing globally.
In our Asia Pacific report on OTT Video services out last year we recorded subscriber levels of 22.9 million, 14.5 million and 14 million to Youku Tudou (Alibaba), iQiyi (Baidu) and Tencent Video. These numbers were all that were available and were extrapolations from earlier leaks. By September of last year Tencent had moved ahead of the other two, to 43 million, a sudden jump of over 20 million customers. This makes a bit of a nonsense of our forecast that would have placed 2019 Chinese numbers at around the level Tencent is at on its own today.
Partly this is because we could not believe the size of the numbers being discussed, with AVoD numbers for the 3 businesses collectively at over 1 billion. Today they have risen to 1.22 billion. There are many instances in the past where official Chinese sources have claimed more working devices for a service than there were chips available to build the device, often with a ratio of 2 to 1 (double). We have an instance of this recently with a Chinese set top maker claiming to be the third largest in the world but including digital TV adapters and other devices which cost far less, in order to make the claim.
But given those free numbers, then virtually everyone in China has an account with one or another AVoD service and that’s the starting point for sending offers for SVoD. Our guess is that what is really going on here is that 500 million or 600 million people are using multiple free AVoD services and that a proportion of these think it is worth paying for a premium service.
Taking Tencent’s revenues and the idea that 70% of its revenues are advertising driven, it looks to us that these services are costing closer to 10 yuan ($1.15) a month rather than the 15 to 25 that was the going rate two years ago. So part of this sudden growth is simply down to price. In one instance Tencent advertised a service at 10% of its price by mistake but was forced to honor those who were lucky enough to order it before it reversed the error.
By our calculations this is only driving something close to $1 billion in SVoD revenues, and the content value is primarily coming from partners – Tencent has US content from Warner Brothers, Universal, Miramax and Lions Gate, while its great rival iQiyi has access to (some) of the Netflix originals. We don’t think for a second that any of these deals are exclusive with a long tie in – not at the prices which are being charged to the consumers and we know that Tencent video has only allocated $294 million for its own original content slate compared to Netflix’s $8 billion.
But all content business, from Netflix to the UK’s BBC, need to get some revenue from China, so they all tend to cut distribution deals with one of these 3. Separately Tencent has been keen to part fund major movies with US partners in return for Chinese rights. It also has a massive gaming franchise which it can call upon to build video assets around gaming brands. Not to mention it has huge reach with its WeChat app and it almost snatched WhatsApp out from under the nose of Facebook, before it acquired it.
So effectively Baidu, Tencent and Alibaba mimic Google, Facebook and Amazon, and can get video assets cheap for China, because there is no other scalable route to market there.
But this does not give Netflix a long term problem, nor any of the others, on the bigger stage. Outside of China Tencent and iQiYi do not have these video rights, and while exclusive IPR can be flagrantly ignored under the Chinese courts system, when Chinese firms try to build on their dominance of China by moving abroad, they will always meet a volley of legal actions, which would dilute any commercial success they discover.
What Tencent has the potential to do in the long term is create a content dominance in China, which will eventually translate to considerable revenues, more original content with an export value, and a chance to barter some of its content for use of other original programming from studios and broadcasters the world over.
Tencent now says that 137 million people a day access its content, which amounts to 457 million open accounts and if it pushes a paid service at just over $1 a month, then the platform with the best content is going to amass new paying customers incredibly rapidly. Netflix has jumped only 27 million subscribers during the past year, but at 6 or 7 times the subscription revenue of Tencent, it has more ammunition for original content, and a broader sourcing of that content – not just the US and China.
Last year Tencent made an undisclosed investment in media company Skydance Media to include partnership for Tencent to co-finance and distribute Skydance movies in China and it also acquired Finnish games firm Supercell for $8.6 billion which owns Clash of Clans.