Bottom line: iQiyi’s establishment of a new sports joint venture and the venture’s subsequent 500 million yuan in funding point to a measured expansion for its premium content business, which will be key to its future success.
I’m being just a bit coy with today’s headline by suggesting that a new sports programming joint venture by online video site iQiyi (Nasdaq: IQ) resembles a similar expansion by disgraced former rival LeEco (Shenzhen: 300104). But the fact of the matter is that these two particular moves do look somewhat similar, even though I have far more respect for iQiyi than LeEco, for reasons that I’ll detail shortly.
Let’s begin by jumping right in with the news, which has iQiyi, whose main backer is online search leader Baidu (Nasdaq: BIDU), announcing the formation of a sports programming joint venture called Beijing Xin’ai Sport Media. (company announcement) iQiyi is partnering with Super Sports Media, a sports marketing company set up in 2010. As part of the deal, Super Sports Media will change its name to iQiyi Sports, implying this company is basically throwing its lot in with the larger iQiyi.
The gist of the announcement seems to be that the new joint venture will use its iQiyi connection to boost its content by becoming a specialty provider of premium sports content to iQiyi, which is one of China’s top 3 online video platforms. That’s actually a relatively key development, since sports is one of the few forms of premium content that people are willing to pay for.
The announcement specifically mentions some of that premier content that will be carried by the joint venture, including English Premier League and UEFA Nations League soccer, and the Australian Open, ATP Tour and WTA Tour from the tennis realm. Both soccer and tennis are highly popular among average Chinese sports fans. The other big sport here is basketball, specifically from the NBA, though that’s not mentioned in this deal.
A day after that announcement, the joint venture said it had received its first official funding of 500 million yuan ($73 million), which looks like a reasonably sized chunk of change to get its operations going. (English article) A significant factoid within that announcement is that venture capital investor IDG is providing the lion’s share of the funds, 400 million yuan to be exact, for 13.3 percent of Xin’ai Sport.
That’s important because I have quite a healthy degree of respect for IDG, which is one of China’s oldest and most savvy venture capital investors when it comes to media and high-tech. The other major investor is Huiying Borun, a company I’m unfamiliar with, which is putting in the other 100 million yuan for 3.3 percent of the joint venture.
This particular joint venture announcement comes just over four months after iQiyi made its trading debut following an IPO on the Nasdaq. Since then the money-losing company has seen its stock rise 67 percent from the IPO price, which is quite a good performance.
Anyone familiar with LeEco is likely to see several parallels in this latest iQiyi joint venture. LeEco, which started out life as LeTV, was China’s earliest major online video player, carving out a nice place for itself in a greenfield industry by delivering video over the internet. Its only rivals were traditional state-run broadcasters, whose regional focus and slow-moving nature made them easy targets for viewer poaching by LeEco and later other rivals including iQiyi and video services operated by Tencent (HKEx: 700) and Sohu (Nasdaq: SOHU).
LeEco was hugely successful in its early days, and supposedly earned big profits, at least at its listed arm. During a jet-fueled expansion that began around 3 or 4 years ago, it also launched a sports video unit, among many other new areas it entered, and did some major fund-raising for that unit. But the company later came crashing down after taking on too much debt took quickly, and is now a shell of its former self, as its current owners try to salvage things.
All that said, there are a few major differences between iQiyi and LeEco that lead me to think the former could stand a much better chance of success with steps like this new sports joint venture. For starters, iQiyi is a standalone entity and therefore has to admit it’s losing money and can’t play the kinds of shell games LeEco did to appear profitable. Secondly, iQiyi does seem to have a real business model, which will rely increasingly on income from the kinds of premium programming it will roll out with this new joint venture.
As I’ve said above, IDG’s participation in the new joint venture is also a good sign for anyone watching iQiyi. The company’s rising stock price points to investor confidence as well, though here it’s important to note that LeEco’s stock also posted huge gains at a similar stage in its development before finally collapsing. At the end of the day I would say a LeEco-like crash looks unlikely at this point for iQiyi despite any similarities in their expansion strategy, mostly due to the latter’s more transparent nature and measured expansion. Accordingly, I would say this could be a good company to watch over the longer term.