Bilibili and iQiyi Go Public in the U.S., But Where is the Netflix of China?
Recently two major Chinese video websites completed their listing in the U.S.: Bilibili and iQIYI. Although these two companies all belong to the same industry, they have different business models and different values.
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Bilibili: a video website for the ACG subculture
There are often two distinctive approaches to creating content, either become a big and comprehensive platform that acts as a one-stop shop for all content, or become an expert platform for a certain vertical.
Bilibili is obviously the latter. It is currently China’s largest video website for the ACG subculture, ACG is short for anime, comic, and games, all of which are very popular in China. It also introduced danmu (弹幕), a feature that literally means “barrage” that displays real-time comments flying across the screen. According to the prospectus, Bilibili had 71.8 million monthly active users by the end of 2017, of whom 81.7% were born after 1990. They will become the most important consumers of Chinese culture and content in the future.
Due to their focus on content from the ACG vertical, professional user generated content (PUGC) has become the majority of content on Bilibili, accounting for 85% of the total content. Bilibili has an endless amount of ACG content coming in thanks to the PUGC model. Bilibili is also regarded as the embodiment of ACGN culture, and users spend on average over 76 minutes on the website. Because the content is specialized enough, their user retention rate is also very high.
The value of a company lies in its future. Regarding the value of Bilibili, we need to answer a few questions first:
- Is interest in anime long-term and sustainable, or is it something that only pertains to a certain age group. The core of this question is whether the fans who were born after 1990 will continue to frequent Bilibili as their income grows.
In Japan, there are a lot of adults who like to read comic books on the subway. Many anime audiences are middle aged men, and reading comics is a form of content consumption.
Like Facebook, the first group of users Bilibili attracted were in their twenties. Now they are in their thirties with a higher income, increasing Facebook’s commercial values with it. - In the long run, what are the sustainable ways to make money for video sites with a focus on anime?
For Bilibili, 83% of its revenue in 2017 came from the mobile game called “Fate/Grand Order”, which contributed close to 1.5 billion yuan ($2.5B) to its total revenue. In terms of commercialization, Bilibili hopes to lead users to anime-related mobile games with its content. Users can download games directly after viewing the content in-site.
Of course, the biggest problem with commercialization of mobile games is its uncertainty. Therefore, Bilibili still needs to find a stable source of revenue in the future. Based on its growing user base, it will certainly be able to dig out the value of its users with enough customer loyalty.
iQiyi: striving to become the Netflix of China
Based on the large number of viewers of video websites, the past few years has seen rapid growth of concentration ratio, represented by companies like Youku (under Alibaba), iQIYI (under Baidu) and Tencent. These video sites are increasingly characterized by strong distribution channels that can disseminate content.
Today, more and more people would rather go on video websites for various shows and videos than to watch television. From a global perspective, no television producer in this world can become a big platform or distribution channel, as users are loyal to software, not hardware.
When Chinese people watched movies in the past, they liked to buy pirate CDs. Now they directly pay for the videos on iQIYI or other video websites through membership purchases. The membership payment system undoubtedly saves the searching costs to a largest extent, and the picture quality is very good. In the era of mobile internet, users are becoming ever lazier and want to watch videos whenever they want.
As for the generation born after 1990, they are starting to understand paid content and believe that paying for good content is reasonable. So now in China, we are seeing not only paid videos, but also paid audio content as well as paid knowledge content. The payment process has become ever more convenient and has accelerated the rise of the entire paid content industry.
Where is the Netflix of China?
With a market capitalization of $120 billion, Netflix has over 110 million global paid subscribers, among which overseas paid subscribers have exceeded North American subscribers. From the company’s previous financial report, Netflix had 8.33 million more paid subscribers in the fourth quarter, which is a new record. The company’s single-quarter revenue has reached $3.29 billion.
At present, no Chinese video websites has adopted a similar business model to Netflix, although everyone wants to be the Chinese Netflix. The main differences are the followings:
How does a site maintain user loyalty? Netflix continuously invests in content to gain exclusiveness to premium content. This kind of content investment has grown bigger with the company’s increase in scale, which has greatly increased the barriers to entry for the industry. The following figure shows Netflix’s new user acquisition cost for the past few years. We can see that the single-user acquisition cost in North America has raised to $100.
Although the saturation of the video industry in the country has increased in recent years, but there is no monopoly yet. While Netflix has defeated all its competitors in the industry as early as when DVD leasing was still popular. So when Netflix began to make their transition to the streaming model in 2011, it was already the largest video content distribution platform in the market. In the past few years, it has been focusing on the expansion of the streaming media market through the Internet.
Netflix is a global streaming media platform, with more international subscribers than the North American market.
Netflix also seeks out high-quality international content, expanding its overseas market through cooperation with famous local celebrities and procurement of copyright. For example, the generation of Chinese born in the 1980s are looking forward to the new Netflix version of Saint Seiya, a famous Japanese manga series originally released in the 1980s.
More importantly, in the past, there were different competitors in the global market. Although these competitors still exist today, the practice of paid video content has already been established. Netflix relies on its strong cash flow to support the purchase and production of its premium content. Big productions of $100 million by Netflix are distributed through its global channels. Local investments on a smaller scale are of no competition in comparison.
Over the past few years, Netflix has increased its content monopoly to an even greater level and has produced content that is completely monopolized through self-produced Netflix series. Seen from the number of TV series and movies, the number of Netflix series has dropped sharply in the past few years, but the overall production cost has increased. That is to say, the production cost of a single TV series or film is increasing, as the “exclusivity” of the content itself is becoming more important. Only with exclusive content can the value of the distribution channels be reflected.
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China’s video websites will ultimately abandon the traditional advertisement payment model, and will transition to the membership payment model. In this process, a new round of industrial consolidation is inevitable.
Back in the days when Youku merged with Tudou, it was thought that this move could end the industrial consolidation of the video website industry, but competition has not slowed in one bit. One important reason is the lack of content exclusivity, maintaining a low barrier to entry.
Today, people are increasingly aware of the importance of content quality, and the platforms adopted a buyout model for good content, which greatly elevated barriers to entry. With the rising industrial entry threshold, only the current three video sites with BAT background will be able to survive.
