Lessons from Alibaba, Tencent and iQIYI in Entertainment Strategy (Tech Strategy – Daily Article)

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I recently wrote about my visit to iQIYI, the TV and film streaming giant of of China. And I’ve been keeping an eye on Alibaba Pictures and Tencent Pictures for a long time. Chinese entertainment is a pretty interesting strategy topic. And these three companies are well positioned to win big as consumer spending continues to rise. Plus, they are making unconventional moves in an industry that is both emerging and being disrupted at the same time.

Plus, entertainment is just a cool field. Much sexier than many of the sectors I focus on (healthcare, payment). Business trips to Cannes and Sundance are more fun than those to St. Louis and Jacksonville. And to be at the center of entertainment as it emerges in China must be fascinating. Plus the industry parties are probably awesome.

But I also know I would suck at entertainment. Which is exactly what I thought leaving iQIYI. Entertainment seems a business mostly about creativity and incessant networking, both of which I am not too good at. I remain both a pure breed analyst and non-networker at heart. Put me at a networking event and I flounder. Put me in a bar with some annual reports and I am totally content.

On a completely unrelated side note: I did take one acting class many years ago in New York City. I lasted 15 minutes before walking out. It was at the point when the teacher told everyone to get on the floor and pretend to be an animal. I felt like my DNA was going to explode.

Ok. Back on topic.

Looking at Chinese entertainment today, with my analyst hat securely on, my big strategy questions are:

  • What is the right strategy for video entertainment on this rapidly changing landscape?
  • Which of the front-runners (Alibaba, Tencent, iQIYI, Huayi Brothers and others) are most likely to win?

My conclusions about this, thus far, is four points.

Point 1: Product Unpredictability Totally Shapes the Entertainment Industry.

Entertainment (i.e., movies and tv shows) largely defies market analysis. It largely defies data-driven improvements in the user experience. So much of the digital world is about creating a flywheel between data and product improvements. It’s about customization. It’s about demand prediction. This really doesn’t work in entertainment.

It is just really hard to predict what movies and tv shows are going to do well. And tv and movie production companies are forced to spend lots of time and money upfront to create movies and tv programs that then later hit or bomb in a fairly unpredictable way.

And even if the product succeeds, it is usually a short-term success. You have to do it again. Plus, the consumer eventually gets bored of it (note to House of Cards Season 5). Franchises are few and far between. And on top of this, preferences and trends change pretty regularly – both in terms of content and how and when it is consumed. Ten years ago people were watching tv shows with singing competition. Now they’re watching short videos about dancing. Populations and individuals change their interests and preferred media formats pretty frequently.

All this results in products in the situation of significant upfront costs but unpredictable product success. That makes the future cash flows for studios and production companies very hard to manage. Three big hits and your company is flush with cash and glory. Five bombs and your studio is in financial peril. I have always felt sorry for the CFOs of entertainment companies.

So when I look at the long-term successful Hollywood companies, much of what I see is tactics and structures to get around this product unpredictability problem. The most common approaches I see for winning in entertainment long-term are:

  1. Become dominant and diversified in content. Get big. Get some economies of scope. And try to reduce risk per film by diversification. Also try and shift some of the funding requirements to external parties.
  2. Become dominant in distribution, relative to other players. If you control the relationship with the customer (streaming, cable, theatres) to some extent, you have some ability to push content.
  3. Create a secondary source of cash flow that is more stable and predictable. That’s merchandise, licensing and theme parks, although they usually depend on having hit films and characters.
  4. Avoid content creation and just do content sharing. That’s YouTube and TikTok. They don’t have to predict content. The users will keep uploading based on trends. A great strategy but it has winner-take-most dynamics so it’s not open to most.

The first two can result in competitive strength and more predictable cash flows – despite still having fairly unpredictable individual products. I prefer the third. Disney having theme parks is a huge deal.

We see a lesser product unpredictability problem in fashion and apparel. It’s much more manageable with an adaptive strategy.

  • You can predict what clothes will be successful with real-time feedback. Sweaters are ultimately more predictable than films.
  • You can react quickly and create new products in months. Shein, H&M and Zara all have business models to do this.
  • The cost of launching new products is very low.
  • It’s not a hit driven business.

Looking at Chinese entertainment, the competition and product unpredictability problems are even worse. Yes, it will soon be the world’s largest entertainment market. But Chinese consumers change very rapidly in their tastes, their behavior and in where and how they consume entertainment. Everything is just happening much faster. Which is usually what happens in China.

Additionally, the whole Chinese entertainment industry is still developing. The capabilities of production companies – and the specialty technology and services companies they rely on – are still developing. They are not able to create films at the same technical level as Hollywood (yet).

Basically, consumers, competitors, capabilities, regulations and new technologies are all changing at the same time in China entertainment.

Point 2: The New Default Strategy is To Go Direct and Try to Become Strong in Distribution.

A quick reading of the financials of companies like Viacom, Comcast and Liberty Media shows lots of cash flow and competitive strengths coming mostly from their strength in distribution. When Warren Buffett invests in Liberty Media, that tells you where some of the competitive power and predictability lies. I don’t think he has ever invested in entertainment production.

In the US, dominance in distribution has historically meant control of broadcast television and/or cable television (and to a lesser degree satellite broadcast). The original three broadcast TV networks (ABC, CBS, NBC) had a long period of this type of dominance, although it decreased in the 1990’s (around the same time Fox made its clever break into their oligopoly).

The rise of the “cable cowboys” in the 1980’s and 1990’s was the next version of this distribution play. The deal history of John Malone in cable is worth studying in detail. I highly recommend the book Cable Cowboys.

Cinemas are another distribution channel. But this has been less of the distribution story in Hollywood than it is in China today. This is somewhat due to an anti-trust case in the 1940’s that prevented Hollywood studios from owning cinemas.

And now in the US, we are seeing the rise of over-the-top (OTT) streaming by pretty much everyone. The tech companies (Amazon and Netflix) started it. But everyone is now going for this, which mostly has meant lots of financial losses and dubious holds on consumers. But most are all in on this strategy because they have no other choice.

The new default strategy is to go direct to consumers and go for market dominance. Or at least enough scale for survival.

I used to think this sort of direct relationship would enable data-driven product development in entertainment for the first time. Lots of data on what people liked would enable the creation of films and tv shows with less unpredictability. It made sense in my head. But talking with the Oriental DreamWorks and Alibaba people basically disabused me of that idea. The data doesn’t help that much. This is not engineering. It’s creativity and lots of artists.

Today in China, we can see a lot of players scrambling for strength in distribution on a changing landscape. This is the clearer path and it’s why I pay attention to Alibaba Pictures, Tencent and iQIYI. Broadcast TV is a focus but few licenses are available in China as this is pretty State controlled. There are also tons of DVDs on street corners and pirated downloads, but nobody really controls any of this.

So it comes down to achieving dominance or at least strength in streaming and/or cinemas.

Wanda was the most aggressive in going after cinemas – including internationally with their purchases of AMC Theaters in the USA, Odeon-UCI in Europe and Nordic Cinema Group in Scandinavia. Wanda Chairman Wang Jianlin said (at the time) his goal is to own 20% of the world’s movie screens. Later financial concerns and government actions related to Wanda changed all this.

Outside of cinemas, much of the focus on Chinese distribution is on online video and streaming. And that’s where I am watching the most closely. Who is getting consistent attention on smartphone screens? How many subscribers? How much engagement and screen time? And the companies that are doing well are (unsurprisingly) combinations of entertainment and technology companies.

Point 3: Diversified Dominance in Content Is Harder in China Than in the West

In the US, content strategies have been a lot about:

  • Getting to negotiating scale against powerful distributors
  • Having lots of IP
  • Creating popular TV networks and creating or buying popular franchises.

Basically, by bundling lots of content under one studio or tv network, companies are in a stronger position to negotiate with distributors (particularly cable companies and cinemas) and can diversify their product risk. The right diversification of content is still king (sort of).

TV networks like ESPN and the Disney Channel were traditionally good examples of this. A quick reading of the 10-Ks of 21st Century Fox and Disney show (historically) a lot of cash coming from their ownership of certain television networks. In movies, strength in content has been more about creating franchises where possible (Star Wars, Marvel, etc.). Having a big IP library also helps. But overall, the film studio divisions of the entertainment companies have traditionally been much less predictable and are a much more difficult business than television networks.

In China, these content strategies and core creative capabilities are still being developed. The revenue streams have been smaller and there is a legacy of free content (pirated DVDs). It’s still kind of the Wild West.

So local production companies and studios are struggling to build their own development capabilities and creating content at a frantic pace. Achieving “creative excellence” and getting to international levels of quality has been more difficult than many anticipated. Plus there is the usual crazy competition of a new China industry. And all this is driving a lot of the partnerships with foreign studios. Competition in content in China today is currently a pretty brutal free-for-all between local production companies, local studios and Hollywood studios.

Last Point: iQIYI, Alibaba Pictures and Tencent Pictures Are Starting to Look like Cool Combinations of Hollywood and Silicon Valley.

Looking at iQIYI, Alibaba Pictures and Tencent Pictures, I see classic attempts to become dominant in still emerging Chinese entertainment (per the above points). But I also see attempts to solve the product unpredictability problem through technology, data and digital business models. They are both creative enterprises and technology companies. Lots of artists and directors. But also lots of software engineers.

These are the three companies I am most optimistic about and paying attention to. Plus, this is a good strategy topic. We’ll see.

Cheers and thanks for reading, Jeff

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Related articles:

From the Concept Library, concepts for this article are:

  • Entertainment

From the Company Library, companies for this article are:

  • iQIYI
  • Alibaba Pictures
  • Tencent Pictures
  • Huayi Brothers
  • Wanda

Photo by Claire P on Unsplash

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

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