MEDIA: China Online Video Zooms, Challenges HK Elite

By newsdoug on April 16, 2015

Bottom line: More Chinese online video companies could soon follow LeTV onto the global stage as their home market soars, providing competition in smaller markets to locally entrenched players like Hong Kong’s PCCW and TVB.

China is generally considered a technology follower rather than a leader, but new data are showing an exciting trend that could see it finally emerge as a global innovator in Internet-connected video services. The factors behind this movement are uniquely Chinese, and stem from a huge pent-up demand in China for quality video services. Such services are finally starting to come from a growing range of private companies led by names like LeTV (Shenzhen: 300104), Xiaomi and Youku Tudou (Nasdaq: YOKU), which are far more innovative and nimble than the stodgy state-run firms that dominate the traditional broadcasting sector.

Those newer companies are showing early signs of trying to go global, using Hong Kong and other Southeast Asian markets as their stepping stones onto the world stage. Such markets are relatively small and rely heavily on western content, making them particularly fertile ground for some of these Chinese firms that can create and distribute content more suitable for Asian audiences.

China’s huge potential to innovate in the Internet TV space is reflected in the new data that show sales of Internet-connected TVs more than doubled in the country to a record 2.5 million units in the first quarter of the year. (Chinese article) That figure far outpaced a much slower 13 percent rise for total color TV sales in China during the 3 months. It also means that Internet-connected TVs now account for about a fifth of total new TV sales, a far higher rate than most other global markets.

As a consumer living in China I can easily explain why Internet TV has taken off in China, and also why it’s showing early signs of traction in nearby Hong Kong. Here in China the traditional cable TV industry is highly fragmented, with most provinces and even major cities often having their own operators that are all local monopolies.

That means service is often quite basic, and program offerings are also limited due to government rules that require all such channels to be state owned. By comparison, cable TV operators in most developed markets consolidated long ago, and have the resources and geographical reach to offer a wide range of programming and other video-on-demand services that consumers want.

China has no such strong national cable TV companies, though Beijing is trying to create one such firm by consolidating the many regional operators into a single firm. The nation’s 2 main broadband operators, China Telecom (HKEx: 728; NYSE: CHA) and China Unicom (HKEx: 762; NYSE: CHU), are also trying to enter the fray with their own Internet TV products, though their background as big state-run behemoths has kept their progress slow to date.

That ineptitude among the big state-run players has created a vacuum just waiting to be filled, which is what LeTV, Youku Tudou and Baidu’s (Nasdaq: BIDU) iQyi are trying desperately to do. One of the earliest players in the space was LeTV, which is now reaping rewards as its profits have risen on a business model that sees it sell Internet-enabled TVs at low prices if consumers agree to subscribe to its service. The company’s success has ignited a fire under its stock, which has tripled this year, making it China’s most valuable online video company with a market capitalization of more than $12 billion.

LeTV is now looking to take its business model abroad, beginning with Hong Kong. Its foreign sales team told me the company has already signed up 15,000 local subscribers for its service since recently entering the market, and it is aiming for many more this year. That’s not too surprising, since Hong Kong’s own paid video services are still quite limited due to the market’s small size. Accordingly, I wouldn’t be surprised to see LeTV ultimately pose a serious challenge to local rivals all the way up the food chain to giants like TVB (HKEx: 0511) and PCCW (HKEx: 8).

LeTV told me it also plans to expand into Taiwan by the end of this year, and from there is eying markets as far afield as Southeast Asia. Such a move looks shrewd and even has a good chance of success due to the company’s unique expertise gained at home, and I wouldn’t be surprised to see Xiaomi and perhaps even Youku Tudou or iQiyi test out Hong Kong either this year or next. This crop of companies started off mostly as imitators of US pioneer YouTube; but unique constraints in their tightly controlled home media market mean they could soon break out as true innovators in the emerging area of Internet-based video services.