Baidu spun off iQiyi in an IPO in 2018 but retained a majority stake in the company, which still generated 28% of its total revenue in fiscal 2020. In the past, that relationship was beneficial because iQiyi's stronger revenue growth offset the ongoing declines in Baidu's core advertising business.
Unfortunately, iQiyi's growth gradually fizzled out due to competition from similar platforms like Tencent (OTC:TCEHY) Video and Alibaba's (NYSE:BABA) Youku Tudou, as well as short video platforms like ByteDance's Douyin (known as TikTok overseas) and Kuaishou.
As a result, iQiyi is becoming more of a liability than an asset for Baidu and the company should divest its remaining 56% stake in iQiyi. Here are four simple reasons why.
1. iQiyi's growth has peaked
iQiyi's number of paid subscribers declined 5% year over year to 101.7 million in the fourth quarter of 2020. Its revenue dipped 1% to 7.5 billion yuan ($1.1 billion) due to declines in both subscription and advertising revenue.
iQiyi's revenue rose 2% for the full year, but that growth mainly occurred in the first half of the year when the pandemic sparked a temporary jump in stay-at-home subscribers. After hitting 118.9 million subscribers in the first quarter, that figure declined sequentially over the following three quarters.
iQiyi attributed its slowdown to a shortage of new content during the pandemic and believes the production of new shows and movies will bring back subscribers. Unfortunately, iQiyi still expects its revenue to slide 2%-8% year over year in the first quarter of 2021.
Meanwhile, Baidu's online marketing business, which generated 62% of its revenue from ads in 2020, just posted its seventh straight quarter of year-over-year declines. iQiyi's growth offset those declines throughout 2019 and early 2020, but it probably won't do any more heavy lifting this year.
2. A dead weight on its bottom line
iQiyi was dubbed the "Netflix (NASDAQ:NFLX) of China" when it went public. But that's a lazy comparison that glosses over two key differences between the companies.
First, iQiyi is a "freemium" platform that provides both ad-supported videos for free users and premium content for subscribers, while Netflix only offers premium content. Second, Netflix is consistently profitable, but iQiyi isn't.
iQiyi's inability to generate a profit after all these years -- due to high cloud hosting, content licensing, and production costs -- is troubling. Its net loss narrowed from 10.3 billion yuan in 2019 to 7.0 billion yuan ($1.1 billion) in 2020, but that was partly because it was producing and licensing less content during the pandemic.
If iQiyi was sacrificing its margins to generate robust revenue growth, it might make sense for Baidu to hold on to its stake. But right now, iQiyi is simply a dead weight on both Baidu's top and bottom lines -- and it would make sense to jettison the unit to focus on its higher-growth businesses.
3. Baidu owns more promising businesses
Baidu's revenue rose 5% year over year in the fourth quarter, marking its second straight quarter of growth even as its online marketing and iQiyi segments floundered. That's because the growth of Baidu's cloud business, which is included in its "others" segment, offset those declines.
It largely attributed the 52% growth of Baidu Core's non-marketing services to its "cloud and other services" during the fourth quarter. During the conference call, it noted Baidu's AI cloud revenue rose 67% year over year, with an annualized run rate of 2 billion yuan ($310 million), or 12% of its top line.
But Baidu is still an underdog in this market. It only controlled 7.1% of China's cloud platform market in the third quarter of 2020, according to Canalys, putting it in a distant fourth place behind Alibaba (NYSE:BABA), Huawei, and Tencent.
So instead of diverting more of its cash and resources to iQiyi, which already tried to stem its own losses with new debt and stock offerings last year, Baidu should simply sell the unit and expand its higher-growth cloud business instead.
That divestment could also free up more resources for Baidu's upcoming integration of YY Live, the live video platform it plans to buy from JOYY (NASDAQ:YY), or its various AI, driverless technology, biotech, and chipmaking ventures.
4. There are plenty of potential buyers
Baidu was reportedly in talks to sell its stake in iQiyi to Alibaba and Tencent last year, but the government's antitrust probes postponed those efforts.
However, China's antitrust probes mainly focus on Alibaba's e-commerce business, its fintech affiliate Ant Group, and Tencent's WeChat Pay instead of streaming video platforms like iQiyi, Tencent Video, and Youku Tudou. Therefore, Baidu could restart those talks if the regulatory headwinds wane.
If Alibaba and Tencent walk away, Baidu could still potentially sell iQiyi to Xiaomi (OTC:XIACF), which took a stake in the business back in 2014. In other words, there are plenty of potential buyers if Baidu finally realizes that iQiyi isn't a crucial part of its sprawling business.