Chinese video streaming market: How big can it get?

While the streaming video industry is focused on Netflix’s Q2 data—which was punctuated by the addition of 5.2 million subscribers—it might be a good idea to keep a closer eye on streaming service providers in China.

Today, leading Chinese internet-based streaming services are believed to have more than 500 million active users, according to China Internet Watch (not all viewing is supported by subscription services). Even if this is an inflated estimate, Netflix’s estimated 100 million worldwide subscribers represent a drop in the bucket of the streaming video opportunity in China.

China is not a mature streaming video subscriber market like that of the U.S. and Western Europe, but Chinese consumers are gradually watching more video content online. The rapid adoption of smartphones and growing penetration of broadband internet are serving to make this the largest streaming media country in the world. Established services like Netflix and Amazon have been (mostly) shut out of the Chinese market due to the government’s strict control over media and its distribution. This makes for a huge domestic market worth fighting for. The early dominant players were Youku and Tudou, but competitors such as Tencent and iQiyi are gaining ground.

Not only are new players rising to the top with their tightly integrated customer populations (iQiyi, for example is owned by search-engine giant Baiudu), but they are changing the business models to be more similar to the “Netflixes” of the world. Early on, service providers adopted an advertising-supported business model, but now are modifying that model to gain more profitability in light of a rapid rise in competition. In 2015, they began heavily promoting paid subscriptions to diversify their revenue structure in hopes of moving from a pure advertising model to a one based on both advertising and paid subscriptions.

In order to differentiate their content and offerings, market players are increasing spending on both licensing select content from foreign content providers like HBO and Netflix, as well as producing their own content. For example, some of the big players have signed deals with foreign content providers. Tencent Video signed an exclusive deal with HBO to stream its premium content for Chinese audiences; and Baidu recently signed a licensing deal with Netflix to stream some of its contents on its iQiyi service.

Although exclusive content may generate more revenue by helping service providers gain more premium subscriptions, the high cost of licensing content could negatively impact long-term profitability.

The Chinese services originally held off on making costly, self-produced, content but they are now acknowledging that original content produced for the Chinese and/or Asian markets will help them gain more subscriptions and create new revenue sources. Market-share leaders Tencent, Youku-Tudou and iQiyi have already established film and entertainment companies to produce content. This not only helps them attract new subscribers with exclusive content, but it also allows them to distribute content to movie theaters and other traditional TV service providers, creating brand-new licensing revenue streams.

The impressive number of potential customers makes the video streaming market in China a media powerhouse, but the unprecedented level of ecosystem integration makes it a giant. Chinese internet video-service leaders not only create content and make and sell the devices from which subscribers view these services, but they also own social media platforms to promote their content and services. China’s digital landscape may be gigantic, but that’s only the start of it.