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Staying tuned

20 November 2014 By Robyn Mak

China’s tech giants are racing to build a great wall of content. Smartphone maker Xiaomi and e-commerce group Alibaba have channeled billions of dollars into programming for internet TV. It could be more than a fad. If viewers pay up, content can bring in revenue streams more stable and lucrative than ad dollars and one-off hardware sales. For investors, that’s something worth tuning in to.

Xiaomi’s $300 million investment in online video site iQiyi, announced on Nov. 18, is the latest installment of a $1 billion planned investment in internet TV content. Just a week earlier, the company sealed a separate alliance with another popular video site, Youku Tudou. Alibaba is similarly stretching its business model. The company and its chief executive have splashed out some $3 billion dollars this year in entertainment alone.

Watching online shows on a television is a new idea for China’s 618 million internet users, many of whom use smartphones. Sales of internet-connected TVs and set-top boxes were just 24 million in 2013, according to iResearch. In contrast, Youku Tudou has over 500 million people streaming shows for free at least once a month. While Goldman Sachs reckons the audience for internet TV could hit 77 million by 2015, it has so far been hard to pin down a decent business model.

Yet there could be more to this content craze. The loss-making Youku Tudou relies on advertising for almost 90 percent of its revenue. As users move from desktops to smaller screens, it gets harder to make advertisers pay. TV makers like Xiaomi are facing competition from companies like Alibaba and search engine operator Baidu flooding the market with smart TV sets boasting exclusive content. For all of them, charging for content is a way of locking in more predictable revenue streams – which investors should in theory support.

The big question is whether viewers will pay. Achieving a victory over consumers’ wallets like that of U.S.-based Netflix is easier said than done. Enticing viewers with content could also backfire and rile the country’s unpredictable censors. The race for who gets a slice of the lucrative internet TV market is getting dramatic, but there is still time for spoilers.

 

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