Can Baidu’s Shareholders Benefit From The Qiyi Spin-Off ?
Baidu (NASDAQ:BIDU) announced recently that it has received a non-binding proposal from its Chairman and CEO Robin Li to acquire all the outstanding shares of its online video platform, Qiyi, at a valuation of $2.8 billion. The company currently owns 80.5% of Qiyi’s total shares. [1] While Baidu mentioned that the company has formed a special committee to respond to the proposal, it stated that Qiyi would remain a strategic partner even if the company decides to accept the proposal. In Q3 2015, Baidu’s content costs increased to 5% of its total revenues compared to 3.7% in the corresponding period of the previous quarter, primarily due to Qiyi’s increased content costs and Qiyi also reduced its non-GAAP operating margins by 5.4 percentage points in that quarter. [2] We believe spinning off Qiyi would reduce pressure on Baidu’s margins and increase its cash reserves, which can be used for other strategic initiatives and allow the company to focus on its core search advertising business thus benefiting the shareholders in the long term.
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High Content Costs Make Qiyi A Drag On Margins
According to Selerity Global Insight, Qiyi commands a nearly 20% market share in the Chinese online video market, second only to Alibaba’s Youku Tudou. [3] However, after Alibaba’s acquisition of Youku Tudou, competition for Qiyi will intensify, especially as Youku Tudou aims to capture its market share. This intense competition is leading to a significant increase in content costs as companies spend heavily on developing original content. This is putting pressure on margins, which was reflected in Baidu’s Q3 2015 results. The online video market in China is expected to rise 39% annually to reach $14 billion by 2018. [4] Yet the profitability of the business is dependent on capturing a higher market share while keeping content costs in control. While Baidu does not report Qiyi’s financials separately, we believe the cash burn is high, despite the growing market. Ihters agree. According to Summit Research, Qiyi as a standalone business had a negative 40-50% of operating margin in 2015. [5]
We believe though Qiyi might have the potential to capture the growing online video advertising market in China, its high negative margins are putting a pressure on Baidu’s profitable search advertising business. A strategic partnership would enable Baidu to gain from the growth in this space without any pressure on its margins. With competition from companies such as Alibaba who have deep pockets to sustain the high content costs, Qiyi might not be a viable option for Baidu and hiving this division will benefit the company’s shareholders in the long run.
Notes:- Baidu Announces Receipt Of Preliminary Non-Binding Offer To Acquire Qiyi.com, Inc., Baidu Press Release, February 12, 2016 [↩]
- Baidu Q3 2015 Earnings Release, October 2015 [↩]
- Competition in China’s Online Video Market Intensifies, October 19, 2015 [↩]
- 2015 China Online Advertising Report (Brief Edition), iResearch, May 2015 [↩]
- Baidu Says China Execs Have Offered To Buy Video Wing For $2.8 Bil, Investor’s Business Daily, February 12, 2016 [↩]