China sports streaming: Match of the day
Private capital entering China’s sports streaming space is gravitating to platforms backed by the incumbent internet giants. But how long will it be before the big content bets pay off?
The future of sports broadcasting in China appears to be a three-way fight between Baidu, Alibaba Group, and Tencent Holdings. The three internet giants have backed three separate streaming businesses, with a view to cornering the market for highly prized – and highly priced – events ranging from English Premier League (EPL) football to grand slam tennis.
PE firms have followed their lead. While Tencent Sports remains captive, Suning Sports and iQiyi Sports have spun-out as independent entities and raised third-party funding. The outlook for the segment is far from certain, given the regulatory risks and the fact no one has any idea when these companies will start making a profit.
“The market has become quite condensed and only the biggest players – backed by substantial amounts of capital – will be able to survive,” says Hai Zhu, a managing director at Hina Investment. “In the long-run, I am bullish on the industry. My advice for investors is that it might look like a loss-making, money-burning business for the three or four years, but eventually there should be some reward.”
Hina advised on a $600 million Series A round in July for Suning Sports, the sports division of Chinese consumer electronics retailer Suning. The round, which valued the business at approximately RMB1 billion ($146 million), was led by Alibaba and Goldman Sachs. Other participants included Yunfeng Capital, Lion Rock Capital, property developer Evergrande Group, and artificial intelligence specialist SenseTime.
The next month iQiyi Sports was launched by iQiyi, a Baidu-backed video streaming platform, and Super Sports Media. A RMB800 million Series A was provided by the likes of IDG Capital and China Sports Capital, an investment fund established by Sequoia Capital China and CMC Capital Partners. The deal reportedly values iQiyi Sports at RMB3.4 billion.
The two rounds created a sensation in the Chinese media, with a number of headlines proclaiming the beginning of a race to become “the ESPN of China.” An intense battle for the local rights to top sports events will surely follow.
Opening the gates
The business of sports broadcasting in China is a comparatively recent phenomenon. State-owned China Central Television (CCTV) used to be the exclusive broadcaster of most events, but four years ago the State Council eased the rules as part of a wider effort to encourage private investment in the domestic sports ecosystem. Independent broadcasters would be allowed to show events, with the exception of the Olympic Games, FIFA World Cup, and Asian Games.
Basketball and football account for 60-70% of sports events watched online in China, while the EPL alone has around 174 million viewers. These sports have inevitably attracted the most interest from broadcasters.
The EPL rights have been contested by independent operates for nearly a decade, but it is only in recently that the pricing has escalated. In 2012, Super Sports Media paid around RMB1 billion for rights to stream the competition in mainland China and Macau for six seasons from 2013. Four years later, Suning-owned streaming platform PPTV won the three-season contract for 2019-2022 with a bid of RMB5 billion.
The company is said to have prevailed in the auction over Super Sports Media, Tencent Sports, and short-lived rival LeSports, a unit of Chinese technology giant Le Eco. LeSports had more luck in Hong Kong, where it paid $400 million for the territory’s EPL rights for 2016- 2019, twice what Now TV forked out for the previous three years.
Meanwhile, in basketball, Tencent Sports secured a $500 million, five-year deal with the US-based NBA to carry games and other content on its digital platforms.
But just as a regulatory relaxation gave the segment its initial big break, a new round of tightening could have the reverse effect. China’s National Radio & Television Administration published draft rules last week stating that all radio and TV stations, as well as internet video providers, should not air more than 30% of foreign content on their platforms. While it remains to be seen how readily these guidelines will be enforced, the impact could be huge.
“Right now domestic sports simply don’t have the same appeal as international sports. Although many industries can be controlled by Beijing’s regulatory hand, popular sentiment is harder to rein in. In the near term, the industry may wobble a bit between what the people want and what Bejing wants for the people,“ says Brock Silvers, a managing director at China-focused Kaiyuan Capital.
Suning at least has China’s domestic football league in its portfolio. Tencent Sports and iQiyi Sports, however, chiefly rely on foreign content.
Racking up losses
Another concern is how long it will take for bets on sports content to pay off through increasing subscriptions and advertising revenue. The sports businesses don’t disclose financial statements, but related statistics are not encouraging.
IQiyi, the parent of iQiyi Sports, had 67.1 million subscribing members for its overall streaming services as of June, up 75% year-on-year, while the number of paying subscribers was 66.2 million. Revenue for the second quarter reached RMB6.17 billion, a 50% gain on the same period in 2017, with membership and online advertising services each accounting for about 40%. However, the company’s net loss widened from RMB953.2 million to RMB2.1 billion.
A Tencent executive told Chinese media earlier this year that the company had never expected its sports business to be profitable in the first few years. Rather, the goal was to cultivate a loyal user base through quality content.
“The industry remains in a ‘money-burning’ stage. They need to diversify their revenue channels or dig deeper into sports streaming sub-sectors,” says Meng Shen, an executive director with boutique investment bank Chanson & Co. The question for investors is should they back a mainstream player, look for nascent streaming opportunities, or avoid the space entirely.
“Markets today seem to prioritize attachment to major names over notions like profitability,” says Kaiyuan’s Silvers. “For investors, it’s tempting to look for new winners, but it’s also hard to overlook the massive amounts of capital being deployed by current players.”
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