China's Top Netflix-Style App Deepens its Bets on In-House Shows

(Bloomberg) -- IQiyi Inc. shows no signs of slacking off on its content binge. China’s largest Netflix-like service intends to keep up spending on original video to ward off perennial rivals Tencent and Alibaba and upstart Bytedance Ltd.

Investors will zero in on content costs when the U.S.-listed company, a spinoff of search giant Baidu Inc., reports third-quarter results on Tuesday. They’re worried about exorbitant production expenses -- iQiyi shells out roughly three-quarters of its revenue on content.

Chief Technology Officer Wenfeng Liu said it will prioritize in-house productions, especially short-form shows designed for smartphones, as it competes with Tencent Holdings Ltd. and Alibaba Group Holding Ltd. plus rising social video apps. IQiyi this month unveiled more than 200 new shows for 2019 -- from reality programs such as “The Rap of China” and “Idol Producer” to anime and movies.

“In-house production helps us differentiate and build a brand,” Liu told Bloomberg News at the Asia Society’s China-U.S. Cultural Investment Forum in New York. “If there’s no differentiation, it will be very challenging.”

The company was late to short-form video -- a burgeoning format popularized by Bytedance’s Douyin and Kuaishou that’s taken China by storm --- but wants to become a major player within one to three years, Chief Executive Officer Gong Yu said in May. To differentiate, it’s betting on high-quality shows of two to five minutes per episode, with a total of about 10 episodes, Liu said.

“Short-form videos are mostly consumed by users in fragmented time slots, but we believe users’ demand for high-quality short-form videos is strong,” Liu said. To reduce production time, Liu is leading the platform’s effort to apply artificial intelligence in casting, editing and ad placement.

China’s internet firms have long bristled over ballooning content production costs -- a consequence in part of intensifying competition. That’s pressured margins at services run by iQiyi, Tencent Video and Alibaba’s Youku. To compete, they often offer discounts and subsidize new customers in stark contrast with Western markets, where users are more willing to pay full-price for services like Netflix. Beijing has gone so far as to impose talent salary caps. IQiyi, which debuted in March, has lost half its value since peaking in June as concerns grow about its spending spree.

iQiyi is reporting Tuesday around the same time as controlling shareholder Baidu. The streaming service’s content costs in the third quarter could climb to about 80 percent of sales from 76 percent in the previous three months, according to Bloomberg Intelligence. Analysts on average expect an adjusted loss of 2.81 yuan per American Depositary Receipt, and a mean price target of $33.03.

“IQiyi will continue to ramp up content investment to attract viewers to its platform,” Vey-sern Ling and Tiffany Tam, analysts with Bloomberg Intelligence, wrote last week. “The hefty costs involved mean the company is unlikely to generate any operating profits.”

©2018 Bloomberg L.P.