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China’s Answer To Netflix Is About To Go Public

China’s Answer To Netflix Is About To Go Public

Baidu-backed iQiyi—the Netflix of China—is ready for Wall Street.

Late Tuesday, Baidu Inc.’s (NASDAQ: BIDU) Netflix-style video streaming service iQiyi filed for a U.S. IPO on the Nasdaq with the ticker “IQ.” The company plans to raise $1.5 billion in its offering, but the final amount raised could be much higher.

The paperwork revealed a company experiencing tremendous growth but also incredible losses that have come from competing against Chinese internet giants Alibaba (NYSE: BABA) and Tencent (OTC: TCEHY).

iQiyi said the $1.5 billion figure was just an estimate for regulatory filing purposes, and it’s likely to change as the Beijing-based tech company gauges investors’ reception to its debut. The company is said to be aiming for a public market valuation of as high as $10 billion, though an analyst at investment bank Jefferies, Karen Chen, told CNN that her team pegs iQiyi’s valuation at just over $17 billion.

Search giant Baidu owns roughly 70% of the company, which is China’s most-viewed video service – outdoing Alibaba’s Youku streaming service and Tencent Video. The company says its paid and ad-supported content gets 420 million monthly viewers, and as many as 126 million viewers tuning in daily.

iQiyi’s costs are rising as it competes to buy and produce movies and shows for Chinese consumers’ increasingly voracious streaming appetites. In 2017, it’s net losses rose 22% to 3.74 billion yuan ($591 million), and the company has warned of uncertainty about their bottom line.

But revenues have been growing rapidly as iQiyi capitalizes on the growing number of Chinese consumers willing to pay for high-end content over free streaming content that relies on advertising. iQiyi has managed to attract 50.8 million paying subscribers to its service, and the company posted revenues of 17 billion yuan ($2.7 billion), up 55% from a year ago.

iQiyi’s biggest rivals are Tencent Video and e-commerce company Alibaba’s streaming platform, Youku. They are all competing against each other to offer premium content, the biggest factor in attracting paying subscribers.

“It’s a highly competitive sector and the celebrity and content production fees continue to rise,” said Shawn Yang, executive director at consultancy firm Blue Lotus. “Tencent’s management has said they don’t expect this sector to reach a break-even point in the short term and we think that is true.”

All three of China’s largest streaming platforms are loss-making and are considered to still be in the development stages. They are all investing heavily in acquired content and, increasingly, original content while also spending heavily on marketing.

Still, Baidu’s founder Robin Li said on an earnings call Wednesday that iQiyi was “No. 1 in terms of number of paying subscribers, and we are No. 1 in terms of profitability, although it’s not profitable yet. But we lost a lot less than the competition.”

In an effort to entice consumers to sign up for subscriptions, iQiyi struck a deal with Netflix last April to give its Chinese subscribers access to Netflix’s popular original series like “Stranger Things,” “Black Mirror,” and “Mindhunter.” The Chinese streaming giant has also inked deals with Lionsgate, Warner Bros, Fox, and NBCU.

However, winning subscribers burns quite a bit of cash and while Baidu does own a substantial stake in the company, it doesn’t have the deep pockets that rivals Tencent and Alibaba have, according to a note from Global Equity Research. Listing iQiyi on its own will enable the streaming company to raise funds directly from the market and will be a positive move for Baidu as it focuses more on core products.

“iQiyi is another step along that streamlining process and for Baidu’s investors it’s a positive thing for the stock,” Ryan Roberts of MCM Partners said. “I don’t think this is going to be the last fundraiser for iQiyi because they’re going to need to buy more content, because in this business content is king.”

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