There are three principal subscription video providers in China: iQiyi (NASDAQ:IQ), Tencent (OTC:TCEHY) Video, and Youku Tudou, which is owned by Alibaba (NYSE:BABA). iQiyi had been the initial streaming leader, but in recent years, social media and gaming powerhouse Tencent overtook iQiyi. Alibaba'a Youku is also a strong contender, but it doesn't disclose its paying subscribers -- though Alibaba did reveal about 30 million subscribers at the end of 2016.

But as recent earnings reports showed, iQiyi has once again assumed the throne. Here's a recent history of the Chinese streaming fight, and how investors should play it.

A woman wears headphones and glasses that show video images that fly by her face.

Image source: Getty Images.

Neck-and-neck

The video streaming wars are fierce in China. Though the Chinese population had traditionally been averse to paying for entertainment, all three of these tech giants probably saw the success of Netflix (NASDAQ:NFLX) across the Pacific and followed suit.

The investment in streaming video is also very capital-intensive, and the industry quickly consolidated around the three players with the deepest pockets. Alibaba bought Youku Tudou in late 2015, iQiyi was incubated by search-engine giant Baidu (NASDAQ:BIDU), and Tencent Video came out of gaming giant and WeChat creator Tencent.

The battle became so intense that Baidu sold part of iQiyi in a partial IPO to the U.S. market in early 2018 to fund content spending. That money probably went to investment in 2018, which may be the reason iQiyi has just retaken the lead:

Two lines showing iQiyi and Tencent video sub counts over time since 2015.

Data sources: company filings, press releases, conference calls. Chart by author.

Content drives subscriptions

It's quite possible that iQiyi's recent surge has to do with a heavier investment in content. However, Tencent doesn't separate out its video business financials from the rest of its content across ad-supported video and music subscriptions, so it's difficult to compare to the "pure play" in iQiyi. Nevertheless, the fact that iQiyi gained 10 million subscribers quarter over quarter while Tencent's paying subscribers were mostly flat does indicate something is up.

iQiyi did point to a number of content drops last quarter that might have allowed it to surge ahead. CEO Yu Gong said on the conference call with analysts:

In terms of premium content, we released several high quality original [dramas] during the quarter such as The Legend of Haolan, The Golden Eyes, [and] The Legend all of which quickly saw [subscriber] growth. Licensed dramas such as The Story of Minglan, All Is Well and I Will Never Let You Go also contributed to [subscriber] conversion as we granted [subscribers] early access to watch. ... [W]e've been privileged [with] our value added services to members, which helped further drive subscriber growth.

Meanwhile, it appears that Tencent Video rescheduled some of its top drama series from the first quarter until later in the year, with CEO Pony Ma saying, "[W]e did not add certain top tier drama series that we intended to broadcast during the first quarter[,] reducing our video product ad inventory and negatively impacting our overall media advertising revenue." 

Subscribers are nice, but what about profits?

Even though iQiyi appeared to invest more heavily in content than Tencent in the past quarter, iQiyi's content costs rose only some 38% year over year, which is far lower than its 64% growth in membership subscription revenue. Management also revealed that content costs were down sequentially.

For its part, Tencent management said, "the biggest participants in the online video and the streaming video industry have generally become more cost conscious in the last six to nine months." Tencent, of course, doesn't break out streaming individually, so it's hard to tell if its video platforms are profitable overall.

However, we know that iQiyi is definitely not profitable, as it lost 1.8 billion yuan ($270.3 million) just in the first quarter. iQiyi has seemingly outspent rivals on a relative basis to reassume the streaming lead in China.

Though streaming stocks in general have done quite well, it's yet to be seen how profitable they will ultimately be. Although iQiyi has done an admirable job of competing, the company continues to post heavy losses. Meanwhile, Tencent on the whole is much more profitable, thanks to its gaming and social media network, which iQiyi doesn't have.

So while iQiyi has pulled ahead in streaming subscribers, history shows that that can change, so I'd still go with the more conservative play in Tencent.