Market Insight

iQIYI Q2 2019 results highlight challenging advertising environment in China

August 22, 2019

Kia Ling Teoh Kia Ling Teoh Senior Research Analyst, Advertising and Television Media

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iQIYI reported a 15% increase in revenues for the quarter ended 30 June, totalled RMB 7.1 billion (USD 1 billion).

  • Membership services grew 38% to RMB 3.4 billion (USD 479 million)
  • Online advertising services dropped 16% to RMB 2.2 billion (USD 310 million)
  • Content distribution was down 4% to RMB 0.5 billion (USD 70 million)
  • Others category grew 82% to RMB 1 billion (USD 141 million)

The company attributed the continued overall revenue growth to the solid subscription growth; while admitted that the challenging macroeconomic conditions and delayed content launches had slowed online advertising and content distribution revenue growth. “Others” revenues benefitted from the company’s acquisition of game company Skymoons.

Our analysis

IHS Markit revised China online advertising revenues forecasts following mixed results reported by online media companies. We project online advertising revenues to grow moderately at 8% to RMB 409 billion (USD 58 billion) in 2019, with search growing 6% and display (including video) growing 10%.    

iQIYI’s parent company Baidu reported core marketing services, which mainly consists of search advertising, to have declined 2% year-on-year, due to softening advertising spending from top sectors including healthcare, online games and financial services.

Meanwhile, rivaling online giant Tencent reported online advertising revenues to have increased 16% to RMB 16.4 billion (USD 2 billion). Solid 28% growth in social media advertising offset the 7% decrease in media advertising caused by the delayed airing of content and the absence of FIFA World Cup.

We expect the gloomy macroeconomic conditions in China to slow advertising spending in the short term. As the threat of US-China trade war increases, the country’s consumer spending will reduce and subsequently weaken retail sales. On top of that, the tightening of content regulation in China, including for online video and games, will become an additional hurdle for online media companies’ revenue growth. For example, there is a limit for period drama allowed within a certain time frame; dramas of politically-sensitive and time-traveling theme, which is considered disrespectful to history, will risk removal from the screen. 

The softening of the domestic advertising market has forced China’s online companies to expand into Southeast Asia. Tencent launched freemium streaming service WeTV in Thailand in June 2019, followed by iQIYI’s launch of HD channel on Malaysia pay-TV service Astro in July. iQIYI also launched a joint venture with media company Media Nusantara Citra to operate a freemium streaming service in Indonesia in August.

Despite the current market volatility, we expect the 5G commercial deployment to bolster online advertising revenues in 2020 and beyond, growing at CAGR of 7% in the next five years. Tencent has reportedly partnered with technology firm Intel on 5G cloud gaming service and, separately, iQIYI has collaborated with network operator China Unicom to test application of 5G in AR/VR devices. 

Research by Market
Media & Advertising
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