Baidu – Videodrome

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Short term gain is likely to mean long term pain.

• Baidu has received an offer to purchase its 80.5% stake online video asset Qiyi at a valuation of $2.8bn from its own CEO and chairman, Yanhong Li, and the CEO of Qiyi.
• Qiyi is an advertising supported online TV and movie portal in which Baidu bought its first investment in 2010 along with US based Providence Equity Partners.
• Baidu bought out Providence Equity Partners in 2012 and added the assets of a video transmission technology company called PPS in 2013 for $370m.
• Qiyi has risen to become one the leading video platforms in China, with 40 new shows planned for 2016, and a constantly strong position in the top 10 app chart in the Chinese Apple App Store.
• Despite this strong position, Baidu has been unable to really make a return from Qiyi as in Q2 2015, Baidu admitted that Qiyi had dented its margins by 5.1%, losing $134m which widened to $150m in Q3 15A.
• Although Qiyi is clearly a drag on Baidu, this could prove to be a YouTube moment for Baidu as the strategic importance of video in the Chinese market is clear.
• Alibaba has recently agreed to by YouKu (Chinese YouTube) for $4.8bn and Xiaomi’s ecosystem usage is primarily driven by content consumption.
• Consequently, while getting rid of Qiyi would make its short term financial statements look a lot better, the loss of this crucial Digital Life segment could deal a meaningful blow to Baidu’s ecosystem aspirations.
• I think that the parallel with YouTube is clear.
• I very much doubt that YouTube in its own right makes Google any money, but if it were removed, I am certain the group revenues and profits would fall.
• This is because Google can gather data from what users watch and monetise that through better targeting on search.
• Consequently, YouTube is a core asset for Google and one that pulls its weight despite not being profitable in its own right.
• The reason why Qiyi loses money is mainly because of the content costs that it incurs but as the US example is showing, content is becoming more and more important.
• The fact that Baidu is pondering selling this asset implies makes me concerned that it has been unable to execute on this acquisition and really integrate it into Baidu.
• This is a key step in moving from being a jumble of random assets like Yahoo or Amazon and becoming a fully-fledged ecosystem like Google or Apple.
• It is clear that this is where all of the Chinese contenders want to end up but the fact that Baidu may sell this assets raises doubts in my mind as to whether it knows how to get there.
• Baidu and Qiyi are likely to continue some form of co-operation if it goes private but history has shown that these sorts of arrangements rarely work out.
• Hence, this would be a meaningful loss for Baidu and would dent its aspirations handing the initiative to Alibaba and Tencent.
• I still think that there are three slots open in the race to become a successful Chinese ecosystem but there are many contenders including: Baidu, Tencent, Alibaba, Xiaomi, China Mobile, LeTV and several others.
• Alibaba and Tencent look to be moving ahead leaving everyone else to scramble for number 3.