How Baidu Could Drive Growth At Its Streaming Business
After its search business was hit due to regulations on medical advertisements, Baidu (NASDAQ:BIDU) appears to be looking at alternative sources of revenues. The company recently changed its mission from being the leading search services provider to becoming the leader in artificial intelligence (AI). Baidu has been focusing on AI aggressively for the past few years and has demonstrated the use of this technology in several businesses, including its own products of search, maps and self-driving cars. While AI remains its key focus area, the company’s streaming segment iQiyi recently got a boost from a partnership with Netflix. Regulations in China preclude Netflix from entering the region directly, and the company will now broadcast its original programs through iQiyi’s platform to its paid subscribers. This should increase the premium content on this platform, which according to our estimates, accounts for nearly 15% of Baidu’s valuation.
We expect Baidu to increase its share in China’s online video market gradually from around 19% in 2017 to nearly 21% by the end of our forecast period.
Baidu faces tough competition from Alibaba’s Youku Tudou and Tencent in this segment. However premium content is likely to be a key driver for Baidu to increase market share in the space. Its partnership with Netflix can enable to company to attract and retain more users who are enticed by Netflix’s popular original shows. The Chinese online video market is set for an exponential increase over the next few years, and if Baidu is able to grab a higher market share through its high quality content, there can be an upside to our price estimate.
While online videos are gaining popularity in China, enrolling paid subscribers is a challenge for streaming companies. Providing premium content, such as Netflix’s original shows can help Baidu increase its paid subscribers. In January 2017, the iQiyi app was active on 474 million mobile devices, however the company reported only 20 million paid subscribers as of June 2016.
As Baidu looks to transform itself and identify new growth drivers, we believe the streaming segment holds strong potential. While the company’s expectations around the Netflix partnership are modest, premium content can help drive paid subscriptions in the long term.
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