February 14, 2018 / 3:41 AM / 6 months ago

Breakingviews - Baidu follows right script with video spinoff

HONG KONG (Reuters Breakingviews) - Baidu is following the right script with a video spinoff. On Tuesday, the $78 billion Chinese search engine operator confirmed it plans to list the Netflix-like iQiyi, which could be worth $8 billion or more. Outside investment will help as the unit burns cash on shows and battles rivals for viewers. Lessening the financial burden on Baidu also means more time to deliver on its bets in artificial intelligence.

A Baidu sign is seen during the fourth World Internet Conference in Wuzhen, Zhejiang province, China, December 4, 2017. REUTERS/Aly Song - RC18F6823C60

Details of the initial public offering were not disclosed. The video-streaming service aims to raise $1 billion, IFR said last month, citing people familiar with the deal. And Bloomberg has reported it wants an $8 billion to $10 billion valuation. A recent Breakingviews analysis suggested it could be worth $7 to $8 billion, based on 2016 revenues and the price-to-sales multiple at which Alibaba bought rival Youku Tudou in 2015.

New cash will be critical for the loss-making iQiyi to stay ahead of rivals backed by Tencent and Alibaba. Baidu has invested huge sums to produce series such as last year’s hit reality contest, “The Rap of China”. That is paying off, at least in viewer numbers. The app is China’s most popular video-streaming service, with 463 million monthly active users as of the end of December, according to QuestMobile, although for now it relies heavily on advertising revenues and only a small fraction of viewers pay anything.

That has been costly for Baidu. The parent company has been retreating from unprofitable businesses such as food delivery and beefing up its main search and newsfeed apps. The renewed focus helped drive revenue in the three months to December up 29 percent from a year earlier to 23.6 billion yuan. Yet iQiyi knocked a third off the company’s adjusted operating margins.

The trade-off will be diluting Baidu’s shareholders in what could be a hugely valuable business if it comes to dominate online video in China, and Chinese viewers come round to paying for content. Yet as Baidu eyes growth in areas like autonomous driving and AI, this is a useful way to make its resources go further. 

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