By Zhang Yan and Julie Zhu
BEIJING/HONG KONG (Reuters) - Tencent Holdings Ltd (HK:0700) aims to become the biggest shareholder in video streaming rival iQIYI Inc (O:iQ), said two people familiar with the matter, to lower costs and counter competition in a sector boosted by stay-at-home virus policies.
The Chinese social media and gaming leader has approached iQIYI's 56.2% owner Baidu Inc (O:BIDU) to buy a stake of as-yet undetermined size, one of the people said. It was not immediately clear whether Tencent has approached iQIYI or what the full nature of any cooperation would entail.
"A tie-up would improve their bargaining power when producing and purchasing content, and lower marketing costs that would otherwise be spent on grabbing users from each other," the person said.
Plans are at an early stage and subject to change, said the people on condition of anonymity as the information was private.
Nasdaq-listed iQIYI, popularly considered China's equivalent to Netflix Inc (O:NFLX), has a market capitalisation of $14 billion. Shareholder voting power is 92.7% controlled by Baidu.
Search engine firm Baidu, iQIYI and Tencent declined to comment.
The potential deal - reported here for the first time - would join two of China's biggest media forces, with each boasting over 110 million paid subscribers at March-end.
A deal would also take Tencent a step closer to becoming China's dominant online entertainment provider, at a time when cinemas are struggling with a drop in punters since the COVID-19 outbreak while studios are turning online to sell their content.
Both Tencent and iQIYI have seen content expenses increase as they compete with each other as well as operators of user-generated video sharing sites such as Bilibili Inc (O:BILI) and Bytedance, owner of TikTok and domestic version Douyin.
Taken together, China's online video market is set for 2020 revenue of 156.6 billion yuan ($22.1 billion), according to iResearch http://www.iresearchchina.com/content/details7_52897.html.
Tencent Video and iQIYI as well as smaller rival Youku, owned by Alibaba Holding Group Ltd (N:BABA), offer movies, drama series and reality shows - both own-made and bought from content producers.
Tencent Video has made several hit series such as the "The Untamed" and owns the broadcasting rights of HBO's "Game of Thrones", while iQIYI original variety shows "The Rap of China" and "The Big Band" have been major topics on social media.
iQIYI booked an 11% rise in content costs in January-March versus the same period a year earlier, while revenue growth slowed to 9% from 43%. The firm, which has yet to break even in its 10-year life, recorded a net loss of $406 million.
By comparison, Bilibili, which targets a younger demographic with videos of gameplay and anime, enjoyed a 69% revenue rise.
Should there be a need to raise capital to finance growth, iQIYI believes deteriorating Sino-U.S. relations would deter investors, including main backer Baidu, one of the people said.
iQIYI Chief Executive Gong Yu in December said U.S. investors made up of 70% the company's total.
Baidu itself is considering delisting from Nasdaq amid the diplomatic tension and moving to an exchange closer to home to boost its valuation, sources told Reuters last month.
