When Netflix, Inc. (NFLX -0.04%) reported its fourth-quarter and full-year 2017 financial results, the larger than expected subscriber growth pushed the stock to all-time highs. The company revealed that its global subscribers topped 117 million, up 25% year over year. Netflix expects that growth rate to continue, forecasting that members will grow to nearly 124 million in the current quarter.
The company is widely regarded as the world's largest streaming service, but that discounts a very large audience in China. Netflix dialed back its ambitions to set up an outpost in the world's most populous country, citing the regulatory environment, and announcing that it would instead license its content via a local provider.
You might be surprised to know that its partner in China is also the leading streaming service in the world -- iQiyi, a division of Baidu, Inc. (BIDU -3.52%).
A worldwide phenomenon
Streaming video is popular across the globe, having taken the world by storm. Worldwide consumption of mobile streaming video has grown 150% over the two years ending in the first half of 2017, according to a report by App Annie. While those numbers are impressive, much of the growth in mobile streaming is actually occurring in the Asia Pacific region (APAC), which soared over 300% during the same period. In fact, the APAC market accounts for nearly half of all worldwide mobile video viewing.
As of September 2017, the iQiyi streaming app was installed on 541 million mobile devices and viewers consumed 6.1 billion hours of content -- in just one month. The iQiyi app is also the most popular online video app in China.
Apples to oranges
It is important to note that any apples to apples comparison is difficult. Netflix's subscription service has always been completely ad free, while iQiyi offers both paid subscriptions and ad-supported content. While it doesn't regularly report its subscriber metrics, iQiyi claimed to have 481 million monthly active users, and more than 60 million paying subscribers at the end of 2016.
There are other differences as well. iQiyi provides its viewers with more than just streaming video. Users have access to online games and graphic novels based on iQiyi's programs, as well as merchandise based on its original content. This combination provides users with a growing ecosystem of products, according to its founder and CEO Gong Yu.
A trail of breadcrumbs
Since the Baidu-controlled company isn't publicly traded, iQiyi isn't required to reveal its subscriber numbers or financial metrics, but it does drop the occasional breadcrumb. In 2017, 40% of iQiyi's revenue came from advertising, 33% from subscriptions, and the remaining 27% from gaming and e-commerce.
Last summer, iQiyi debuted its original series, The Rap of China, which became China's most profitable TV show ever. The 12-episode music competition garnered 2.68 billion viewers during the season finale in September. The total cost to develop the program was $37.7 million, and according to Yu, "The last episode earned 40 million RMB ($6 million) from just the last 60 seconds of advertising alone." Encouraged by this success, iQiyi has plans for more than 200 original programs in 2018.
Baidu is widely regarded as the leader in artificial intelligence (AI) in China. This gives iQiyi access to world-class AI tools. Since the company's founding more than eight years ago, it has used AI to inform many of its business decisions. iQiyi has used AI for audience forecasting, content filtering, and to determine how much to spend on a particular piece of content with a "pretty high degree of accuracy" according to Yu.
Currently, it isn't possible to invest in iQiyi directly -- only by investing in its parent Baidu. That may soon be changing. There are reports that Baidu may be seeking to spin off the video streaming segment, in an IPO that would value the company between $8 billion and $11 billion. iQiyi's debut on U.S. markets could come as early as this year. Baidu still plans to maintain a controlling interest in the divested company through the use of dual-class shares.
It is important to note that in its third quarter 2017 financial report, Baidu said it spent $586 million or 16.6% of its total revenue on content, up from 12.1% in the prior-year quarter. While a small portion of that is related to short-form content for its news feed, the increase was "mainly due to iQiyi's increased content costs."
Investors will need to wait until an IPO is officially revealed and the corresponding financial disclosures are made before they can make any decisions about an investment. But it will be interesting to see what the future holds for the world's largest streaming service.