China's Baidu: Hollywood Ambitions For iQiyi Unit Well-Funded, Says Chief

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iQiyi wants to buy overseas content and co-produce with Hollywood

iQiyi, the online video unit of China's search giant Baidu, believes the $300 million partnership with smartphone maker Xiaomi will be a major boost to its ambitions in the film and TV business, including expanding relations with Hollywood.

"We really hope to have more cooperation with Hollywood in the future, in two ways – purchasing good content – mostly movies, but also TV shows, and we also want to discuss the possibility of co-producing content, such as adaptations of U.S. content for Chinese market," iQiyi CEO Gong Yu told THR in an interview.

Baidu has reportedly also put another $300 million into iQiyi, which means the group is well funded for expansion.

Anyone attending American Film Market will have seen the lanyards sponsored by iQiyi, while its execs have been popping up all over Los Angeles, from the U.S-China Film Summit to Santa Monica to the Loews in Santa Monica.

iQiyi has only been in the business since July, but since then it has announced that it plans to make seven local films and one Hollywood- style film next year, and buy distribution rights to over 1,000 U.S. movie titles next year.

Over one million users took part in iQIYI's crowd-funding program for The Golden Era, the recently released film by Ann Hui, raising nearly $3 million in three minutes.

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Alongside Alibaba and Tencent, iQiyi's owner Baidu is one of the three big firms known as "BAT" revving up for major moves in the China market, as possible studio buyers, content acquirers and distribution outlets for Hollywood fare in the world's second biggest film market.

"Xiaomi came to us. Baidu has been our main stakeholder for a long time and we didn't have that much need, but we had a conversation over the last four months and decided it would be good for both sides," said Yu.

Xiaomi, the third largest smartphone manufacturer in the world after Samsung and Apple, currently sells a Xiaomi TV, Mi TV, and a set-top box, Mi Box, and hopes to replicate the success of its hardware business in the TV industry.

"Xiaomi has a huge advantage on the mobile side and the TV side. Their users are high end and active Internet users. Xiaomi's investment of $300 million will be great for production and technology development," said Gong.

The competition for content is set to become intense in China as demand outstrips supply, which is good news for Hollywood.

For the moment, the competition is particularly intense for TV shows, because the online streaming market for movies is relatively small, but that is bound to increase dramatically in coming years, said Gong.

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There are five major players in China buying expensive content right now, Gong said -- iQiyi, Youku Tudou, in which Alibaba has a stake, Tencent, Sohu and LeTV.

Of these the three biggest are iQiyi, Tencent and Youku Tudou.

"In the future there may be more consolidation, but it's hard to say when that will happen," he said.

iQiyi is interested in investing in Hollywood movies, but the company has strict criteria for what the investment should involve.

"Our strategy is to focus on movies with a Chinese archetype, that Chinese people want to watch. We are not interested in movies that won't have a market here. Secondly, we will invest only a small amount, 10 to 15 percent of total production. And we also need to get online rights and online distribution rights, as well as e-commerce rights for commercial products related to the movies," said Gong.

"We have been in contact with the six major studios over the past few years but recently we notice more and more good content produced by the independents like Lionsgate and TWC, such as Crouching Tiger, Hidden Dragon 2, is coming from there. So we'll probably work more those studios," said Gong.

Asked if iQiyi will buy into studios themselves, Gong said it wasn't really the right time.

"Right now our movie business is only five percent of our revenues, whereas advertising is 80 percent. The rest of the revenue comes from content production and gaming. We hope in a few years we'll start talking about M&A with the American studios," said Gong.

A key concern for Hollywood studios is intellectual property. Gong believes the industry has made great progress in cleaning up piracy. In April, a lot of peer-to-peer (P2P) content sharing sites were shut down and the largest piracy provider, Kuaibo, which makes the largest online pirate QVOD, was shut down.

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"This is a great opportunity for the whole industry. It's difficult to find a pirated version of a new Hollywood movie online now. Our total subscriber number has increased significantly since this crackdown," said Gong.

Against the background of expanding mutual interest and greater protection of IP, Gong is optimistic on the future of co-productions.

"Both sides might have different demands – we always want the online rights, for example. Overseas companies often don't understand the Chinese market, and we can help with online distribution and promotion," said Gong.

This is important when you consider that 60 percent of Chinese consumers watch TV and movies on their cellphones or tablets.

Right now, iQiyi charges five yuan ($0.82) for Chinese audiences to watch new releases online, the same cost for a pirated DVD, but the window between theatrical release and online needs to narrow in China.

"Our problem is that by the time Hollywood movies are streamed in China, the window period has been really long. It's an old movie by the time it gets played in China. It's unnecessary in China, as we don't have a DVD market," he said.

"Hollywood pays a lot of attention to box office, especially when it comes to market growth, but I want to tell the Hollywood studios that while online business is much smaller right now, in the future it will catch up with box office and be bigger in five to seven years. Eventually it will bring great revenues to Hollywood studios," said Gong.