Baidu Tackles Internet TV, Youku Next?

Baidu, TCL in reported Internet TV tie-up

In the latest signal of the growing popularity of Internet TV, leading search engine Baidu (Nasdaq: BIDU) is reportedly preparing a tie-up in the space to promote its iQiyi online video service with top domestic TV maker TCL Multimedia (HKEx: 1070). The rapid growth in this area over the last year has been quite interesting to watch, as a number of major private companies have been piling into the space with new Internet-based offerings in a bid to challenge China’s notoriously slow and uncreative traditional TV sector.

Internet TV works much the same way as conventional cable TV. The big difference is that signals for Internet TV are sent directly over the public Internet, whereas cable TV signals are carried over networks that are privately owned by the cable TV company. In both instances, a modem, often called a set-top box, is required to interpret the incoming signals and make them intelligible to a TV, which can display them as programs, menu screens or other items.

Internet TV companies have the big advantage of far lower costs to deliver their signals to people’s homes, since those signals travel over public infrastructure. Their big disadvantage is their dependence on the public Internet to deliver their signals, which is far less reliable than the private networks used by traditional cable TV companies.

According to the latest reports, Baidu has scheduled a news event next week in Beijing to announce its new tie-up. There’s no additional detail, but I would expect that TCL will provide specially equipped TVs for the service, and perhaps the pair will set up a joint venture to produce the necessary set-top boxes or other technologies. Baidu’s iQiyi would almost certainly provide most of the programming for the venture, though perhaps 1 or 2 other video partners could also be announced.

Baidu arrived relatively late to online video, but has been quite aggressive in the space over the last year. Last November it bought out its partner in iQiyi, which was the country’s third largest player at that time. In May, Baidu paid $370 million for the online video sharing business of PPS, the nation’s fourth largest player. That deal created a major new online video company with around 17 percent of the market, second only to industry leader Youku Tudou’s (NYSE: YOKU) 30 percent.

Baidu’s entry into the space follows similar Internet TV initiatives by a number of other firms. One of the oldest is Shenzhen-listed LeTV (Shenzhen: 300104), which has recently found modest success with its offerings. Media recently reported that LeTV controlled more than a third of the China market for large 70-inch “super TVs” in July, and was also the market leader for smaller 39-inch models with about 11 percent of the market. (Chinese article) PC giant Lenovo (HKEx: 992) and up-and-coming smartphone maker Xiaomi have also moved into the space, though neither has found big success there so far.

This new Baidu-TCL tie-up looks promising to me because it’s one of the few so far to combine a major online video company with a top TV maker. In addition, Baidu, as China’s third most valuable Internet firm, also has the vast financial resources needed to develop and properly promote these new TVs.

Following the Baidu move, it will be interesting to see if Youku Tudou follows soon with a similar announcement. That company also recently announced its own major push into Internet TV by creating a separate division dedicated to the project. (previous post) Obviously a major component of such a campaign would be the development of a similar Internet TV product, and I would expect we could see an announcement of such an initiative within the next year.

Bottom line: Baidu’s move into Internet TV with TCL looks like a smart pairing to promote its iQiyi video service, and could be followed by a similar play by Youku Tudou in the next year.

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This article was first published in the online edition of the South China Morning Post at www.scmp.com.

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