It is said that "Tencent and iQiyi are already in contact with capital" How to move forward after the emerging board is blocked?

After Robin Li and Gong Yu teamed up with MBO iQiyi, the latest news from the capital market was that iQiyi and Tencent were in capital contact.

This is not the first time that iQiyi and Tencent have had a "capital scandal". In the first half of 2015, it was rumored that Tencent, Baidu, and iQiyi had contact, and even introduced Youku Tudou and Alibaba into this capital game at one time, but the negotiations failed. Then iQiyi and Tencent Video moved rapidly on their respective tracks, and Youku Tudou hooked up with Alibaba.

On April 6, Youku Tudou officially announced that it had completed a merger transaction with Alibaba Group, delisted from the New York Stock Exchange, and became a wholly-owned subsidiary of Alibaba. The night before, another backdoor listing of China Stock Co., Ltd., also signed a privatization agreement with Shanda. In line with iQiyi's goals, they all hope to show their skills in the domestic capital market.

But it may not be too optimistic. After the strategic emerging board was deleted from the outline of the 13th Five-Year Plan, iQiyi lost its important channel to quickly log into the domestic capital market. The A-share market's financial indicators that require profit for listed entities also block iQiyi from the door without any suspense. In the second half of the marathon as it continues to burn money and expand, it is imperative for iQiyi to introduce investors.

Divesting from Baidu's listed assets is a double benefit for iQiyi and Baidu. iQiyi can tear down the VIE and return to China. Baidu can remove loss-making assets and improve its financial statements. In the longer term, iQiyi's entry into the domestic capital market can at least be like the two "evil stocks" of LeEco and Storm.

At the National People's Congress that ended last month, the fourth session of the National People's Congress deleted the content of "establishing a strategic industry emerging board" from the revision of the draft outline of the "13th Five-Year Plan".

The spokesperson of the China Securities Regulatory Commission responded to this question: The "13th Five-Year Plan" outline is a major event to judge the general development trend in the next five years, determine the general direction, and clarify the need to be done. The specific issues of establishing a strategic emerging industry board require in-depth research and demonstration. There is no need to include specific work that is still under study in the outline.

This means that iQiyi, which had previously been highly vocal on the strategic emerging board, will be blocked. Except for the strategic emerging board, there are few places where iQiyi can find breakthroughs in the domestic capital market. In the A-share market, whether it is the GEM or the main board, iQiyi, which is still losing money, cannot cross the three-year profit threshold required by the market in the short term. It cannot be achieved through backdoor borrowing. With iQiyi's market share and revenue volume, it is obviously inappropriate to go to the New Third Board.

When the open market doesn't work, iQiyi needs to solve its financing problem through the private market. In the video industry, where losses are widespread, money is the good medicine to support the survival of video companies and expand market size. Shi Yu, CEO of Yuanku6.com, once used two incisive sentences to summarize the survival rules of video website competition: improve content and user experience, maintain financial health, and then slowly wait for competitors to burn their money; continue to burn money, hoping to burn all competitors to death before you finish burning it.

However, it is not easy for iQiyi to burn anyone to death now. Youku Tudou has just completed its privatization and become a wholly-owned subsidiary of Alibaba. Tencent Video has become more confident by relying on the wealthy Tencent and the mobile distribution portal WeChat. LeTV and Storm can also continue to draw money and supply blood from the A-share market because they have a boss who can tell stories. The only Sohu Video that is not so worrying about iQiyi is backed by listed companies Sohu and Changyou.

Iqiyi, which has been separated from Baidu's parent body, needs to burn its operating income and the cash of previous investors. According to a research report released by Morgan Stanley, iQiyi's dilution of Baidu's Non-GAAP (non-GAAP) operating profit margin in the second fiscal quarter of fiscal 2015 was 5.1%, and in the third fiscal quarter it was 5.4%, indicating that iQiyi's Non-GAAP operating losses in these two quarters were RMB 564 million and RMB 727 million respectively.

"Tencent and iQiyi are already in contact." It is very likely that the two are preserved independently

after Li Yanhong and Gong Yu cannot become the white knight of iQiyi, who is the white knight of iQiyi?

The above-mentioned capital market person revealed that "Tencent and iQiyi are already in contact." This is the same as when Baidu invested in PPS and integrated with iQiyi. If Tencent invests in iQiyi, it will still allow business collaboration between Tencent Video and iQiyi, and it is very likely that the brands of the two will be preserved independently.

In the eyes of some video practitioners, Tencent Video and iQiyi Video can achieve complementary advantages. From the perspective of content alone, Tencent Video is more good at news and information, and iQiyi is more good at self-control and entertainment. The two sides can complement each other's advantages.

A major background for introducing external investment is that Baidu launched the "Aircraft Carrier Plan" in July 2015-Baidu has more than a dozen projects ready to be further opened to external investors, providing them with the opportunity to directly invest in Baidu's high-quality assets. In other words, introduce foreign investors, spin off projects that burn money and have no profits, and raise and list them separately. Before iQiyi MBO, Baidu Takeout and 91 Desktop had taken the lead in independent development and open financing.

Focusing on iQiyi, Baidu, as an early strategic investor to controlling shareholder, has also gone through a process. During this period, Baidu once introduced strategic investor Xiaomi to iQiyi. In November 2014, Xiaomi announced a US$300 million investment in iQiyi. Gong Yu said two meaningful words to this strategic investor: iQiyi has encountered very good investors in the four years since its establishment; the Internet resources owned by Xiaomi can form a synergy effect with iQiyi's content side.

Before Xiaomi invested, iQiyi was basically influenced by Baidu's strategic direction. In August and December 2011, Baidu spent US$45 million to subscribe for Series B preferred shares of Qiyi (predecessor of iQiyi). In November 2012, Baidu acquired the shares held by Providence, the former second largest shareholder of iQiyi, and became its single largest shareholder. In May 2013, Baidu invested US$370 million to acquire PPS, realizing the merger of PPS and iQiyi. In November 2014, Xiaomi strategically invested US$300 million in iQiyi, and Baidu made additional investment.

It is worth noting that 2013 was an important watershed for Baidu's strategy for iQiyi. This has an important relationship with the mobile Internet environment and the increasingly fierce competition in the video industry. For Baidu, the former has a fundamental impact and damage, causing the moat that Baidu built in the PC era relying on search to be decomposed into one APP portal after another. The latter made Baidu eager to consolidate iQiyi's territory in video and compete with Youku Tudou after merging PPS.

The effect is remarkable. Three months after the merger, iQiyi achieved overtaking in corners on the mobile side. According to iResearch IUT data in August 2013, with the joint efforts of iQiyi and PPS, the average daily active users on the mobile terminal were 18.12 million and the monthly active users were 66.5792 million, both of which surpassed Youku Tudou by a slight advantage.

Although user size is a core indicator of the business ecosystem, video websites have high user overlap and high mobility. Users often change platforms with content, which is why major websites have high copyright purchase costs. This also creates another problem-the scale of membership fees is still very small.

Despite this, iQiyi has made a lot of efforts to increase revenue and reduce expenditure. In terms of cost control, iQiyi has completed the integration of CDN and P2P technologies to reduce bandwidth costs. Content cost is good. Through PGC and UGC, iQiyi has produced cost-effective online dramas and variety shows, optimizing the content cost structure and increasing user stickiness. In terms of commercial expansion, iQiyi and Jingdong have launched a "video + e-commerce" shopping model, which is no different from the "buy while watching" launched by Youku Tudou and Tmall.

As a result, iQiyi did not solve the problem of profitability through economies of scale, and its losses continued and tended to expand year-on-year. Of course, peers Youku Tudou, Sohu Video, and Tencent Video also failed to get rid of losses.

However, change came quietly. In 2015, Baidu began to adjust its strategy and focus on the O2O market. Glutinous rice, takeout, and maps have become the core businesses in the first camp alongside search. Baidu hopes to create a new Baidu on O2O. Iqiyi soon became a strategic business outside of O2O.

The worries of growth

have a bright future, but the reality is cruel. This cannot be overstated in the video industry.

From the PC Internet to the mobile Internet, video as a high-frequency portal has always been regarded as a user's just need. According to data provided by CNNIC, as of October 2015, the number of online video users in China reached 461 million, making it the second largest leisure and entertainment application on the Internet in China. The number of mobile online video users has reached 354 million, making it the number one terminal for online video viewing.

But the user's just needs did not bring about the success of video companies in commercialization. The main profit models of the video industry still rely on four major components: advertising, copyright distribution, value-added services (services for members, on-demand, monthly viewing, live broadcast, etc.), and others (game intermodal transportation, hardware sales revenue, etc.). At this stage, advertising is still the absolute main force of each family at this stage. Among them, Youku Tudou advertising revenue accounts for 80% of the overall revenue, and Sohu video advertising revenue also accounts for nearly 90% of the total revenue.

These realized revenue did not stop the video company's losses. We can see the clues from Youku Tudou's financial report. In the first three quarters of privatization, Youku Tudou suffered losses of US$83.5 million (Q1), US$55.2 million (Q2), and US$68.5 million (Q3) respectively. It continued to lose money and expanded year-on-year.

According to a research report released by Morgan Stanley, in Baidu's second and third fiscal quarters, iQiyi's losses were 564 million and 727 million yuan respectively. Correspondingly, in the "Interpretation of the 2015 China Online Audiovisual Development Research Report" released by CNNIC, in the first six months ended October 20, 2015, iQiyi surpassed Youku Tudou in terms of overall market share, mobile market share and proportion of paying users.

Even so, iQiyi's valuation does not exceed Youku Tudou. Comparing the chips offered by Alibaba to privatize Youku Tudou with the chips offered by Li Yanhong and Gong Yu's MBO iQiyi, the capital valuation of Youku Tudou (US$4.5 billion) is close to 1.6 times that of iQiyi (US$2.8 billion). Obviously, the capital market has given the pioneers a good expectation.

Both Youku Tudou and Alibaba have realized that the video industry has undergone tremendous changes in the past year. The advantages established by Youku Tudou as a pioneer are being disintegrated by iQiyi and Tencent Video. Even LeTV and Storm Video are well-established in the A-share market because of their capital stories, and continue to raise funds and layout upstream and downstream industrial chains. The embryonic form of the video ecosystem has emerged.

This is also an important reason why in less than half a year, Alibaba successfully won Youku Tudou, which has a high market value. Alibaba urgently needs Youku Tudou to withdraw from the open market and fully integrate with its own businesses to achieve the connection of "people-content-commodity". In the future layout of Alibaba's content e-commerce, Youku Tudou is an important part, which can generate content and distribute content.

iQiyi, LeTV, and Storm have also seen the value of the video ecosystem. Whether on mobile, PC, TV, or VR, video is becoming increasingly important as a connector for people and services. On video websites, in addition to seeing various movies, TV dramas and programs, we can also shop in the mall, see the latest movies, and play online games, all of which can be connected through IP. The chain between the video industry and online literature, e-commerce, online games, animation, and film industry has been opened up, and the video ecosystem is gradually taking shape.

Compared with LeTV and Storm, iQiyi is not afraid, and has obvious advantages in user scale and market share. But compared with Youku Tudou, which has fully surrendered to Alibaba, iQiyi, which has just been spun off from Baidu, needs to introduce new strategic investors. After all, the video industry's marathon has reached the second half, and to expand the lead, the sprint finish line is the key.

Editor: yvonne