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Tencent Buying iQiyi Smells a Lot Like That Uber Deal

(Bloomberg Opinion) — The idea of Tencent Holdings Ltd. buying a stake in Chinese video service iQiyi Inc. looks good on paper. Their current rivalry in the content-streaming market undercuts both companies, depressing their earnings.

In reality, though, a tie-up between the social media giant and the subsidiary of Baidu Inc. is more likely to look like Didi Chuxing’s buyout of rival Uber Technologies Inc.’s China division. A short-term detente may turn in to an opportunity for other players,  which would leave the merged entity back at square one, facing fresh competition.

Tencent has approached Baidu about purchasing shares in iQiyi in a deal that would displace the search-engine provider as its biggest shareholder, Reuters reported Tuesday, citing sources it didn’t identify. That would be a big deal, literally, given that Baidu owned 56.2% of the Nasdaq-listed company as of mid-February.

IQiyi and Tencent Video are currently the largest long-form video providers in China (as opposed to short form, such as Douyin/TikTok), with around 500 million monthly active users apiece. Alibaba Group Holding Ltd.’s Youku trails with 324 million, Credit Suisse Group AG notes, citing data from researcher QuestMobile.

That means there would definitely be synergies if iQiyi and Tencent Video hooked up, notably on content costs, Credit Suisse analysts Tina Long and Ashley Wu wrote. More importantly, iQiyi’s debt and cash burn mean it needs new capital by no later than next quarter, the bank notes.

Significantly, there’s a large amount of customer crossover, with about half of each service’s audience using the other, Nomura Holdings Inc. wrote, again citing QuestMobile. Nomura’s skepticism is warranted: After rivals Youku and Tudou merged (now simply called Youku and since acquired by Alibaba), the popularity of the Tudou platform dropped, likely due to overlap. 

This brings to mind the exit of ride-hailing service Uber Technologies Inc. from China in 2016. The American company’s local business was bought out by Didi in what was widely seen as a win for the Chinese player. The expectation was for market consolidation and a steady flow of profits. Uber left the country with a 20% share in Didi, which is now one of the world’s largest unicorns by value. The move allowed the U.S. firm to stop bleeding money while enjoying the upside of owning a stake in the business it surrendered to.

Fast forward, though, and Didi is still struggling to get real pricing power — the key to boosting profitability. On a few occasions, it’s tried to raise prices in a city, only to have rival Meituan Dianping decide to open up ride-hailing there, forcing fares back down.

This’s likely what would happen to a Tencent Video consolidation with iQiyi. They could merge their services completely, allowing deep cuts in content costs yet still taking a hit on subscription numbers. Or, they could divide and conquer (one covers sports and animation, the other drama and variety), but that would require almost as much video to be produced to keep the combined user base. Or, services could be bundled with a discount to users taking both; that would entail a loss of revenue.Even if the companies manage to pull off the technical, management and financial aspects of a merger, they still might not be able to control the market enough to assert power in the long term.

The remaining entity would not only be competing with Alibaba’s Youku. It would also be squaring off against any provider of content that grabs the attention of consumers. Bytedance Inc.’s Douyin (the domestic version of TikTok) is gaining traction, while Tencent’s own gaming titles continue to eat up user time. Then there’s the very real possibility that a new entrant would come along and start things up all over again.

Both Tencent and iQiyi might win the video-streaming battle by calling a truce with each other, but remember that the real winner of China’s taxi wars was the one that’s no longer in the fight. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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