ENTERTAINMENT: Qiyi Eyes Music, Qihoo Goes Video

Bottom line: Qiyi’s new tie-up with Universal Music could presage its purchase of Baidu’s music unit, while Qihoo’s new video campaign is likely to stumble due to intense competition from existing players.

Qiyi ties with Universal Music

A couple of new reports are casting a spotlight on the rapid colonization of the video and music spaces by new media companies. The most intriguing of those has Qiyi.com, the online video site affiliated with search leader Baidu (Nasdaq: BIDU), taking a major step into the music space through a tie-up with global entertainment giant Universal Music. The second has the aggressive Qihoo 360 (NYSE: QIHU) making a late but big push into the online video space via a major new hire.

Both of these stories reflect the big challenge that private companies are now posing to traditional TV and radio stations, as they rapidly challenge a state-owned establishment that held a monopoly on China’s entertainment sector for decades. The resulting boom in video and music services has been great for consumers. But in usual Chinese fashion the explosion has sparked another cycle of hyper-competition that has pushed everyone deeply into the red, and is almost certain to end with the typical bust in a few years.

Let’s begin with the news about Qiyi, which was previously known as iQiyi and has been undergoing a rapid transformation as it prepares to make an IPO, most likely in China later this year. The headlines say the new alliance will see Qiyi offer Universal’s music through a premium service, in an attempt to get Chinese consumers to pay for music that most are accustomed to getting for free. (Chinese article)

This particular announcement isn’t too unusual from a licensing perspective, since many global film and music companies have signed similar tie-ups with Chinese websites over the last few years. What’s more noteworthy is the fact that Qiyi was traditionally a video site, and wasn’t known for its music services.

At the same time, Baidu was reportedly in talks last year to sell its own separate music business, which had been problematic for years due to presence of trading of pirated songs on some of its sites. (previous post) Other recent reports have also indicated that Baidu is in the process of spinning off most of its non-core units into separate companies, with plans to separately list many of those. (previous post)

It made a move in that direction last month, when it announced it was selling Qiyi.com to a group led by Baidu founder Robin Li. (previous post) Thus this latest report hints that Qiyi may soon become the buyer of Baidu’s music business, which looks like a logical move that would make the site a more diversified provider of both music and video products.

Entering Crowded Field

Next there’s the Qihoo news, which is quite brief and simply says the company has made a key strategic hire for its video services. That hire will see Li Xiang become the head of Qihoo’s video unit, following her recent departure from the main state-owned TV operator in the southern boomtown of Shenzhen. (Chinese article)

In this case, what’s most significant isn’t the actual hire, but what it reflects. The message seems to be that Qihoo plans to make a major move into online video, which would bring it into direct competition with a crowded field that includes not only Qiyi, but other more established players like Alibaba’s (NYSE: BABA) Youku Tudou and industry veteran LeEco (Shenzhen: 300104), formerly known as LeTV. State-owned giants Shanghai Media Group (SMG) and Hunan Broadcasting are also making big pushes into the area.

Qihoo began its life as a provider of security software, but has more recently pushed into smartphones and online search services as it tries to become a more diversified Internet company. Against that backdrop this latest move into video is certainly logical, though its late arrival could put Qihoo at a significant disadvantage to the many rivals it will quickly encounter in the crowded space.

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