What happened
Shares of iQiyi (IQ -9.15%) surged on Tuesday after news broke that Tencent (TCEHY -0.30%) is seeking to become the Chinese video streaming company's largest investor. By the close of trading, iQiyi's stock was up more than 25% after rising as much as 38% earlier in the day.
So what
Chinese digital payments, gaming, and social media titan Tencent reportedly reached out to Baidu (BIDU -1.78%) -- which owns 56% of iQiyi's stock and controls nearly 93% of its voting power -- to purchase a portion of its shares. The talks are reportedly in a preliminary phase.
Should a deal come to fruition, it would combine two of China's leading streaming services. Like iQiyi, Tencent Video has more than 100 million subscribers.
iQiyi stock rose sharply on Monday on reports of a potential deal with Tencent. Image source: Getty Images.
Moreover, a combination would likely allow Tencent and iQiyi to lower their streaming cost structures, which could help to boost their profitability. "A tie-up would improve their bargaining power when producing and purchasing content, and lower marketing costs that would otherwise be spent on grabbing users from each other," a source with knowledge of the potential deal told Reuters.
Now what
The online video market in China -- and many other areas of the world -- is benefiting from a coronavirus-related acceleration in the stay-at-home trend. Streaming is already a $22 billion industry in China, according to iResearch, and it should only grow larger in the years ahead. Tencent wants to control the lion's share of this rapidly expanding market -- and it's apparently willing to make aggressive moves to do so.
