iQiyi Boss on Netflix Deal, Dominating China's Streaming Video Sector

Tim Yu Gong - 2014 Roskino 71st Venice Film Festival - Getty - H 2017
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Tim Gong Yu offers his take on Netflix's chances in the Middle Kingdom, why AI will transform the entertainment world and how he put hip-hop at the center of China's most profitable TV show ever.

Tim Gong's entertainment business sway is easy to summarize: He's the founder and CEO of the most popular streaming video service in the world's most populous nation, home to about 1 billion internet users. Crucially, it's also a market that Netflix and Amazon have been unable to penetrate. To put a finer point on it: As of September, the iQiyi app had been installed on 541 million mobile devices, with users spending a combined 6.1 billion hours on the service in just a single month. Beijing-based iQiyi has been able to hold a slight edge in subscriber numbers over chief rival Tencent Video and a growing lead over Alibaba's lagging Youku Tudou. And all this despite the fact that its parent company, Baidu, has less than a fifth of the market cap of its fellow Chinese tech giants and a weaker ecosystem of integrated internet services.

Much of iQiyi's success, then, comes down to the vision and stewardship of Gong, 49, who founded the service in 2010. In April, he negotiated Netflix's first major licensing deal in China, bringing a raft of originals from the U.S. streaming giant to the iQiyi service, including Stranger Things, Mindhunter and Ultimate Beastmaster. The platform's innovative approach to its own original programming, meanwhile, not only has created hit Chinese shows, but sheer cultural phenomena. iQiyi's recent 12-episode music contest show, The Rap of China, single-handedly brought hip-hop culture into the Chinese mainstream this year, attracting 2.68 billion views by the night of its season finale on Sept. 9. Now, much like Netflix, iQiyi is doubling down on original programming, with more than 200 series and shows planned for 2018. And that could be just the beginning: iQiyi is tipped to be pursuing an initial public offering in the U.S., with the target valuation pegged at around $10 billion. 

Gong sat down with THR in Beijing to share an update on his Netflix partnership and to explain how iQiyi created China's most profitable TV show to date. 

Is it accurate to call iQiyi the "Netflix of China"?

I don't think it's an accurate comparison, actually. I understand why people make the comparison — iQiyi is the first subscription-based streaming video company with a large subscriber base. But I describe our business model as "an online Disney." Like Netflix, some of our revenue comes from subscriptions, but we also have ad-supported content. We're not building theme parks in the real world like Disney, but we have online games that are developed from our original films and television series. Disney has brick-and-mortar shops; we have our own online malls, where we sell merchandise related to our content. We also have an internet fiction platform, a graphic novels service, and soon we will launch a channel for young adult fiction related to iQiyi’s films, TV series and variety shows. If a user is watching one of our films, they can jump to the graphic novels channel and check out some comics based on the same IP. Some hit internet novels are adapted into film or TV series. It's an ecosystem, not just a streaming video service. ?

What share of your business does each piece constitute?

From the structure of our revenue this year, 40 percent will come from advertising; 33 percent from subscribers; and gaming, e-commerce and the rest make up the remaining 20-plus percent.

Can you share how much you plan to invest in original content?

iQiyi is not a publicly listed company, so some financial details can't be disclosed. What I can say is that the cost for original programming is still a small part of our budget. But the growth rate of our original programming spending is much higher than the budget for licensed content. 

The Rap of China became an enormous ratings phenomenon last summer. What were your takeaways from that success? ?

Well, it began a little earlier, so I'll talk about how we got there. Three years ago we did a talk show called U Can U BiBi. It was the first breakout online show that everyone paid attention to — an event. No other show had achieved the same success online in China. This led us to believe that there could be great potential for online reality shows and talent shows, not just talk shows. But it wouldn't work if we just copied a TV version and pasted it to the web. What we learned first is that we have to bring some innovation when we adapt a successful TV model to the streaming service. Second, we need experienced professionals involved. So, beginning last year, we started hiring a lot of people from the best TV stations in China. When we were planning The Rap of China at the beginning of 2016 — although it didn't have that name yet — we hired a top producer from Zhejiang TV and a very talented young producer from Dragon TV. Each of their reality shows and talent shows had been huge — and we combined them. We also chose a genre of music that wasn't mainstream yet [in China] — rap — because there had already been too many pop music talent shows over the years and the audience was bored with them. ?

How profitable was The Rap of China and how do you plan to follow up on it?

People in this industry had thought that the monetization potential of online video was limited, and that production budgets should be less than equivalent shows on broadcast TV. We have succeeded in achieving rates of return that not only match the best TV stations in China, but exceed them. So, we now know that we can safely invest much more to make the best content. The total investment for the first season of The Rap of China was 250 million RMB ($37.7 million). The last episode earned 40 million RMB ($6 million) from just the last 60 seconds of advertising alone. That tops the record for any form of TV in China. Therefore, the investment for season two will be far, far more than 250 million RMB. We also are planning three other reality contest shows. One is called Hot Blood Dance Crew, based on street dance, a part of hip-hop culture. We're going to invest more than $45 million (300 million RMB) into that spinoff and it will air at the beginning of next year. The second is a show called Idol Producer. We aren't sure of the budget yet, but it will be a big investment. And the third is Clash Bots, a robot contest similar to BattleBots on ABC. Robots alone wouldn't be appealing enough to the young Chinese audience, so we will invite six celebrities to control the robots. 

What can you tell us about your licensing partnership with Netflix so far? How has it gone? 

Our partnership with Netflix is not so different from our collaboration with Disney or Fox, to be honest. It's only perceived as different because of how people view Netflix. We acquire the internet licensing for China and stream [some of their content] on iQiyi. It is only the beginning of the partnership, so the volume of the licensing hasn't been much yet. We hope it will expand in the future. 

Do you think the partnership might become a two-way street? I understand iQiyi is interested in selling some of its own originals overseas and Netflix is always hungry for quality content. 

We are distributing some of our content to overseas TV stations, mainly those targeting overseas Chinese viewers. When we have some content that fits Netflix’s user base, we expect to distribute some to Netflix. We're working with them on that — stay tuned.

Will iQiyi ever go head-to-head with Netflix and Amazon in China?

Foreign companies cannot run a media business within China — it's prohibited. And Netflix is considered a foreign media business. But let's say if they do get in, I think the culture gap would pose a big problem. Any successful streaming company must have a solid base of great domestic content — and that's especially true in China today. They would have a lot of catching up to do.

Baidu, your parent company, is considered a world leader in artificial intelligence research and is said to be on par with Google and Facebook in this area. How will AI power iQiyi in the future? 

iQiyi was founded eight years ago, and from day one we have been using AI technology. Over the past there or four years we have been employing it much more widely. Baidu's extensive experience in AI has provided great help to us in areas such as content filtering, image recognition, voice recognition, semantic recognition and audience forecasting. We're able to predict the box-office potential of a theatrical film release with a pretty high degree of accuracy, which helps us determine how much to spend on licensing before the film has come out. AI is improving the rate of return for our advertisers, and it has raised the efficiency of almost all of our website operations. It allows content creators to better understand user preferences; and it empowers us to push content to individuals according to their individual preferences in a very precise way. But this is just the beginning: AI will dramatically change the media and entertainment industry over the next five to 10 years.

A version of this story first appeared in the Nov. 29 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.