Baidu increases stake in iQiyi

Baidu increased its stake in iQiyi Friday, leading some analysts to comment Sunday that business leaders should show caution when investing in network video operation, a capital-intensive sector that continues to lose money.

Iqiyi.com is a Chinese online television and movie portal jointly established by Baidu Inc and US equity investor Providence Equity Partners (PEP) in 2010, with leading domestic search engine Baidu as the controlling shareholder.

Baidu's financial results for the first quarter of this year indicated that its investments suffered losses of $45 million, caused mainly by iQiyi.

The online video provider is a bad asset for Baidu, and has diluted Baidu's profits since 2010, an industry insider told the Global Times Sunday on condition of anonymity.

However, Baidu announced Friday that it would buy an undisclosed number of shares of iqiyi.com from PEP in the fourth quarter of this year. This will consolidate iQiyi into Baidu's financial statements while the former continues "to operate as a separate brand with its existing management team," according to PEP Friday.

The insider claimed that Baidu has no choice but to operate iQiyi mainly on its own, as this hot potato keeps burning money, which is unacceptable to other investors.

Xiao Mingchao, general research executive of Sinomonitor International, told the Global Times that confidence in iQiyi might be justified, given that Baidu is China's top browser by usage and could provide iQiyi with more visitors.

"Online video is a key strategic vertical for Baidu as user numbers and time-spend continue to increase exponentially, underscoring the tremendous potential in the sector," Li Yanhong, CEO of Baidu, said in a press release Friday.

An average 22.71 million netizens each day used iqiyi.com between July 23 and July 29, the second highest number after youku.com, according to consultancy iResearch in August.

"Although this large usage could attract more brands to advertise on iQiyi, which accounts for some 95 percent of its income, this online video provider is still not expected to turn losses into profits, as the income would not offset the large costs in bandwidth and copyrights for hot TV dramas or movies," Xiao said.

The Chinese habit of watching TV dramas and movies for free online also contributes to iqiyi.com's financial burden, Xiao noted.

"Currently the costs of network video operation rank highest among Internet businesses. Therefore, investors had better not try this sector unless they have enough funds and no fear of losing money for an uncertain period," said Zhao Xufeng, an online video analyst from iResearch.

To cope with the high costs, acquisition among peers may become the trend. But the integration of resources after such acquisitions does not seem easy, Zhao noted.