Shares of Chinese streaming video champ iQiyi (NASDAQ:IQ) soared more than 20% on Tuesday on word that rival Tencent Holdings (OTC:TCEH.Y) is looking to buy a stake in the company -- its biggest competitor -- according to a report by Reuters. The size of the potential stake hadn't been determined.
iQiyi is majority controlled by Baidu (NASDAQ:BIDU), which controls more than half of its shares and nearly 93% of its voting power, so the streaming giant would have to approve any potential deal.
Tencent Video has battled iQiyi for the lead in the nascent streaming market in China, with each company reporting about 110 million paid subscribers in the most recent quarter.
Tencent is already one of the dominant online entertainment providers in the most populous country. Its WeChat social messaging platform is one of the most frequently used apps in China, and Tencent is also the world's largest video game publisher.
iQiyi and Tencent Video offer subscription-based and ad-supported tiers. During the pandemic, advertising budgets were slashed, taking a chunk out of each company's revenue. Content expenses have also been climbing in China as the competition ramps up. Tencent and iQiyi compete not only with each other, but also against short-form and user generated video platforms like Bilibili (NASDAQ:BILI) and TikTok, a division of privately held Bytedance.
The streaming market in China is potentially lucrative, with online video expected to generate more than $22 billion this year, and by taking a position in its biggest rival, Tencent could consolidate control of the market while also reining in its spiraling content costs. The union would improve its bargaining position when negotiating for programming, while also decreasing the marketing costs the companies spend competing for viewers.