On this episode of Industry Focus: Tech, host Dylan Lewis is joined by Fool.com contributor Danny Vena to discuss the opportunity for growth and the rising competition in China's streaming video space.
A full transcript follows the video.
This video was recorded on May 11, 2018.
Dylan Lewis: I think I've made the point here that the model is very successful. What makes this particularly enticing is, we look at the streaming market in the U.S., and in some ways it's mature, at least on a relative basis. There are still a lot of households that are on the traditional cable model. But, to go over to China, the penetration is so much lower, both from a connectivity standpoint and from an adoption standpoint. So, the growth runway in front of a business like this, I think it's a lot larger than the growth runway in front of a Netflix (NASDAQ:NFLX) right now.
Danny Vena: We don't know exactly how many people in China actually use streaming video on demand services, but estimates are somewhere around a 3% penetration rate for paying subscribers to these streaming video on-demand services like iQiyi (NASDAQ:IQ). So, when you look at it from that perspective, there are just so many more subscribers to be had. I think the runway is incredible.
Lewis: Yeah. I saw an estimate from Statista basically saying that the compound annual growth rate is expected to be somewhere around 16-17% annually over the next five or six years in China, the streaming video market. Of course, numbers that are that big entice a lot of other players into the space, and I think that this is something that people need to keep in mind with iQiyi. You have a business that's backed by the Google of China, but you also have a lot of other deep-pocketed tech companies that are interested in streaming video there.
Vena: There's some big competition. We can talk about two of the other biggest players in China. By now, everybody has heard of Alibaba. They're a combination of so many U.S. companies, but they're most often compared to Amazon. But there's so much more going on there. One of the things that Alibaba has is a video streaming service called Youku Tudou, which is also one of the big players. Then, Tencent Video, from the video game company in China, although they're also into a lot of different areas.
Those are the two main competitors, and they have very deep pockets. They have a lot of money. And those two companies are second and third in the number of video streaming customers. I think Tencent Video said they have about 450 million monthly active users under an advertising model. Alibaba has about 325 million. Alibaba has about 30 million paying subscribers, and Tencent has about 43 million, compared to iQiyi's 60 million. So, there's a lot of competition there. All three of these companies are trying to develop original content. They're all going after those China consumer dollars pretty hard.
Lewis: I think another point to note with this business is that the economics are slightly different on a per-user basis. Subscribers for iQiyi pay somewhere in the neighborhood of around $2.50 a month for the service. Or, I think, ultimately, it might boil up to about $30 per year, depending on what they decide to opt in to. But, the value of those users is quite a bit different than the value of a Netflix subscriber, because Netflix subscribers are paying $11-12 a month. So, when you're thinking about valuing those subscribers, that's something to walk back a little bit. We see that they have 60 million paying, Netflix has over 100 million paying at this point, and I think that's an important thing to keep in mind.
Vena: Absolutely. I've seen a couple of commentators who've said, you really can't compare them to Netflix on an apples-to-apples basis for a number of reasons. One of those reasons is related to the fact that they have the hybrid model between Netflix and Hulu, so they're not a pure subscriber-based business. Then, on the other hand, when they do get paid by those subscribers, those dollars don't go nearly as far. I don't know what the economics are for a company in China that's going to a studio and saying, "I want to use this content, how much do I have to pay for it?" But, you can imagine that it's still going to be pretty expensive for them. So, I don't think they're going to get the same economics out of it that a Netflix does.