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Why iQiyi Is (and Isn't) Netflix

By Danny Vena – Updated Apr 24, 2018 at 1:40PM

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iQiyi is often referred to as "the Netflix of China," and while that's partly true, it doesn't tell the whole story.

Chinese streaming giant iQiyi Inc. (IQ -2.94%) was recently spun off from China's search leader Baidu Inc. (BIDU -0.06%), raising an estimated $2.25 billion in the process. 

Investors love a good comparison, and in that vein have taken to calling the streaming service "the Netflix (NFLX -4.49%) of China." While it's true that both companies provide streaming video to consumers, there are some significant differences between their business models.

Let's look at the ways in which iQiyi is different from Netflix, and how they are similar.

A man laying on a couch watching streaming video on a tablet.

iQiyi streams video, but is it really "the Netflix of China"? Image source: Getty Images.

The biggest difference

Netflix began as a DVD-by-mail service in the U.S., but added streaming just over a decade ago, and it has become the company's primary business. Netflix has never used advertising on its streaming platform.

iQiyi began as an ad-supported video-on-demand service. In mid-2015, iQiyi added a paywall for a variety of its new releases, giving its subscriber growth a strong boost. iQiyi's subscribers quadrupled over the next year. Even in light of the popularity of its subscription service, the vast majority still use the ad-supported model.

The biggest differentiator between the two models is the use of commercials. 

Show me the money

More than 97% of Netflix's revenue comes from streaming, while the remainder comes from subscriptions to its DVD-by-mail service and licensing of its intellectual property (IP).

iQiyi generates revenue from a combination of advertising, subscription revenue, and content distribution. During 2017, the majority of its sales -- nearly 47% -- came from advertising, while 37% was subscription revenue, and the remainder came from content distribution and other sources. 

Where their viewers live

Netflix has nearly 57 million subscribers in its home market, but that's just the beginning. The company also boasts another 68 million customers in international markets, for a running total of 125 million subscribers worldwide.

After perfecting its model in the U.S., Netflix began its international expansion in late 2010, crossing into Canada. It added Latin America in mid-2011, and numerous other countries before adding 130 new countries in early 2016 -- bringing its services to 190 countries worldwide.

iQiyi operates only in China, though it has achieved similarly remarkable scale in its home market. An estimated 845 million customers access the platform each month, though the vast majority of viewers use the free, ad-supported model. The company boasts 421 million monthly active users on mobile devices, as well as 424 million on personal computers.

Of those, iQiyi reported nearly 51 million paying subscribers in documents it filed with the SEC prior to its initial public offering.

iQIYI landing page, showing the cast of Blade Attack: Yang Shuo.

iQiyi is investing heavily in content, like its U.S. counterpart. Image source: iQiyi.

There's more

While Netflix has focused almost exclusively on content thus far, iQiyi provides its users with a growing ecosystem of interrelated products and services. In addition to streaming video, customers have access to online games, graphic novels, and merchandise based on the company's IP.

Netflix has cautiously waded into licensing its IP, with a line of Stranger Things products in stores just in time for last year's holiday season. Comcast's Universal Studios recently announced that it would be bringing Stranger Things to life as part of its Halloween Horror Nights attraction at its theme parks. This revelation marks Netflix's first major foray into licensing, though I think it's just the beginning.

Then there's this ...

When reporting its fourth-quarter and full-year results for 2017, Netflix revealed that its international segment had achieved its "first full year of positive contribution profit in our history," ending the year with both its international and domestic operations profitable. The company generated $560 million in net income for 2017.

iQiyi isn't yet profitable, generating a loss of $574 million in 2017, a 22% greater loss than in 2016. The company has stated that over the short term, the cost of revenue would continue to outpace revenue growth as it worked to improve its streaming technology and invest in additional content.

It is, but it isn't

There are a lot of similarities between the two streaming companies, but many differences as well. iQiyi may be a closer match to Hulu than to Netflix, due to its hybrid-freemium and subscription model. It's important to understand the differences in the business models of the two companies, as well as the markets they serve, before deciding to invest.

Danny Vena owns shares of Baidu and Netflix. The Motley Fool owns shares of and recommends Baidu and Netflix. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$226.41 (-4.49%) $-10.64
Comcast Corporation Stock Quote
Comcast Corporation
$31.84 (-1.94%) $0.63
Baidu, Inc. Stock Quote
Baidu, Inc.
$118.75 (-0.06%) $0.07
iQIYI, Inc. Stock Quote
iQIYI, Inc.
$2.97 (-2.94%) $0.09

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