Yu Gong (center), founder and CEO of China-based iQiyi (IQ), rings the Opening Bell at Nasdaq MarketSite in Times Square with employees and investors in celebration of its initial public offering (IPO) on March 29, 2018 in New York City.
Often compared with Netflix, Beijing-based iQiyi became the biggest Chinese company since Alibaba’s public offering to list in New York last year. The video streaming company offers both paid and free content — preceded by advertisements that can last nearly a minute or far longer.
The $15.2 billion company has expanded from being a popular platform for streaming video to a brand known for its own drama series, variety shows and other content. But that development comes at a cost. Last year, iQiyi said it nearly quadrupled operating losses to 3.3 billion yuan ($483.5 million), while its margin of loss jumped to 47% from 19%.
CEO Gong Yu told CNBC in an interview last week that the company’s near-term priorities are producing original content and incorporating artificial intelligence. And in that drive for original material, iQiyi is focusing on movies, he said.
“We plan to spend the next two to three years to see whether we can innovate in this industry,” Gong said in Mandarin, according to CNBC’s translation. “In other words, in the future, the leading top movies on iQiyi will be original productions by iQiyi. The first window of opportunity is still to screen them in movie theaters. The second window of opportunity is to show them on iQiyi, so as to maximize the total revenue.”
China has rapidly grown into one of the largest markets for movies in the world, raking in $9 billion last year and placing second only to North America at $11.9 billion, according to the Motion Picture Association of America.
But just as growth in China’s overall economy is slowing and movie theaters face challenges from online entertainment, the country’s box office earnings have tapered off. Data from ticketing website Maoyan showed earnings grew 9% to 60.7 billion yuan last year, down from 23% growth a year ago. In the first quarter, Maoyan data showed box office earnings fell 7% from a year ago, despite release of blockbuster film “The Wandering Earth.”
On the other hand, the market for online videos is still growing.
In the next five years, the so-called over-the-top subscription economy in China will be nearly as big as that of pay TV within the next five years, Wangxing Zhao, associate research analyst, S&P Global Market Intelligence, wrote in a report for 2019 published by the Asia Video Industry Association.
“By 2022, China’s aggregate (subscription video-on-demand) revenue will amount to an estimated 94.8% of its multichannel revenue, indicating an almost evenly divided pie between traditional incumbents and internet heavyweights,” Zhao said.
iQiyi, which is majority-owned by Baidu, ranks second in China’s video streaming market, with Tencent’s video platform taking first place and Alibaba-backed Youku in third. As of March, iQiyi’s app ranked eighth in China, with a penetration of 44.5%, slightly more than ByteDance’s local version of TikTok, Douyin, according to a report from app data company Aurora Mobile.
Tencent Video and iQiyi have just over 530 million monthly active users each, according to Questmobile data cited by Jefferies analysts Karen Chan and Ken Chong said in a May 10 report. They have a “buy” rating on the stock, and their base case projects iQiyi will break even on an operational level by fiscal year 2021, driven by a “meaningful addition of paying subscribers” — to 153 million next year — and lowered costs from a mix of originals and less spending on licensed content.
The analysts pointed out that, during iQiyi’s annual conference in Beijing last week, the company announced more than 80 new dramas and 50 variety shows for 2019 and 2020.
Perks of a tech native
While Alibaba and other Chinese corporate giants entered the film industry several years ago, iQiyi’s background as a video streaming company gives it an edge, CEO Gong said.
He said a movie that does well in theaters and online doesn’t need costly wide-range shots or special effects, since the value of such features would be less apparent on smaller screens. What is most important for a dual-format movie, according to Gong, is a strong lead actor, who can then make ordinary street and office settings appear more vibrant.
Using artificial intelligence is another way the company can reduce production costs and improve monetization, the CEO said.
In addition to raising $2.25 billion at its IPO last March, iQiyi has since held two convertible note offerings, for a total raise of about $4 billion. The company is set to report first-quarter results this Thursday.
Elinor Leung, head of Asia telecom and internet at CLSA, said in a May 6 report that she expects iQiyi’s operating losses will fall to 2.3 billion yuan in the first quarter. She also expects the cost of content to decline to 88%, and drop further to 75% this year with a slew of new original content and a cap on celebrity salaries due to regulation.
She projected that subscription revenue will increase 60% year-on-year to 3.4 billion yuan, and that the company will gain 14 million new paying users, bringing the total count to 96 million.
For Gong, iQiyi is the fourth internet company he has overseen. During the dotcom boom of the late 1990s and early 2000s, Gong founded and led real estate search engine focus.cn, which was then sold to search engine Sohu. He held executive roles, including that of chief operating officer, at Sohu until 2008. Gong was also president and chief officer of mobile internet solutions company umessage.com, before founding iQiyi in 2010.
The tastes of Chinese consumers haven’t changed much over the last 10 years, Gong said. Rather, he emphasized their greater desire for quality entertainment, as exhibited in faster-than-expected growth of paying members in roughly the last 12 months.
It’s still unclear how quickly iQiyi’s efforts to build different revenue streams can offset the company’s cash burn.
“The bigger question will still be when content costs can fall, and we do not expect that to happen in 2019 as shows purchased last year were still expensive, and costs will be amortized this year,” David Dai, senior analyst at Bernstein, and his team said in a May 6 report. They rate the stock as “underperform.”
Whether in its push into movies or other channels, the biggest challenge for iQiyi in the future will be its ability to produce original content, said Gong, who downplayed piracy as no longer being a major problem. The company is already testing ways to use artificial intelligence, augmented reality and virtual reality to make interactive content – and releasing hardware such as VR headsets.
But Gong said he expects it will take more than five years in order for the technologies to produce content that is clearly different than what is available today. “Deep learning allowed AI technology to explode commercially at one go in 2017, so we have just started AI technology,” he said. “Maybe in the next 8, 10, 15 years, we may enjoy the changes brought by AI technology.”
— CNBC’s Michael Bloom contributed to this report.
Italy’s finance minister plays down the idea of a parallel currency
Giovanni Tria Italian Minister of Economy and Finance attends during Festival dell’ Economia in Trento on May 30, 2019.
NurPhoto | NurPhoto | Getty Images
Italy’s finance chief does not see ongoing talks over a parallel currency materializing.
Market players have been wary of parliamentary discussions in Rome regarding an alternative for government debt repayments. Lawmakers are considering a proposal that would see the Italian Treasury issue securities — so-called mini-BOTs (short-term treasury bills) — that could be used by recipients to pay taxes or to buy goods or services from state-owned companies.
However, Giovanni Tria, the country’s finance minister, said Tuesday at a conference in London that he does not think mini-BOTs will be introduced. “We do not need this kind of instrument,” Tria said, according to Reuters. He also added that the introduction of a parallel currency is not on the agenda.
Tria, a technocrat without political affiliation, sounded more moderate than some of his government colleagues.
“We don’t want to create problems in Europe. We have to reinforce the trust in investors in Italy’s finance situations,” the finance minister told the audience.
Supporters of the idea, including one of Italy’s ruling parties, Lega, believe the short-term securities would help the government reduce its outstanding bills. On the other hand, critics argue that it would lead to higher public debt in a country that already has the second-largest debt pile in the euro zone.
The mini-BOTs discussion has also resurfaced fears about Italy’s commitment to the single currency. Prior to the general election in 2018, both coalition parties — the leftist Five Star Movement and the right-wing Lega, spread doubts about the country’s membership of the euro zone.
Since then, both parties have toned down their euroskepticism but one of the main economic minds from Lega, Claudio Borghi, is still openly hostile to the idea of the common currency.
“There are a number of economists, including influential ones close to the Italian government, who believe the euro is a key reason for Italian underperformance, and the leaders of the coalition have never fully put this idea to bed,” Erik Nielsen, group chief economist at UniCredit, said in a note last week.
Both the European Central Bank (ECB) and the International Monetary Fund have sounded skeptical about the mini-BOTs discussion. Christine Lagarde, the International Monetary Fund’s managing director, told CNBC last Thursday: “On this strange financial instrument that has been developed in Italy, we think that there are many better ways to deal with the payment of arrears. It does not require the creation of such instruments. Italian bonds could absolutely do the job … why bother?”
Egytian billionaire Nassef Sawiris isn’t worried about trade war
Billionaire business tycoon Nassef Sawiris heads a company that serves, among others, agricultural clients all over the world. But despite the U.S.-China trade war and all the uncertainty it’s wreaked on his customers, the OCI N.V CEO says he’s not deterred from investing.
“Trade is not helpful, but at the same time it’s manageable. I think people worry too much about the trade wars, I think the world can live with some trade friction, it’s not the end of the world,” Sawiris, who is ranked by Forbes as the world’s fourth-richest African, told CNBC’s Hadley Gamble in Abu Dhabi.
The Egyptian CEO’s company, OCI, produces and exports natural gas-based fertilizers and industrial chemicals to customers across agriculture and industry sectors.
“It creates some uncertainty for our customers, our farmers in North America had a tough time deciding what to plant, corn or soybeans — it had a lot to do with weather but more so with whether they can sell soybeans to China or they will be handicapped by some tariffs,” Sawiris described, referencing the mounting tit-for-tat tariff battle being waged between the world’s two largest economies.
“That created some added complexity in the minds of our customers and our farmers in the U.S.”
Early last month, President Donald Trump unexpectedly accused China of reneging on a deal and announced that tariffs on $200 billion worth of Chinese goods would increase to 25% from 10% on May 10. Beijing retaliated, raising levies on $60 billion worth of U.S. products. Trump has now said he’s ready to hit the remaining $300 billion of Chinese imports with tariffs if a trade deal isn’t reached.
OCI N.V Chief Executive Officer Nassef Sawiris at a plenary session of the 9th VTB Capital Russia Calling! annual investment forum.
Mikhail Metzel | TASS via Getty Images
The developments have hit the American agriculture sector particularly hard, and the Trump administration had to introduce a $16 billion aid package for farmers hurt by reduced sales to China.
“Trade creates challenges and opportunities. Vietnam for example is benefiting from the trade war with China, the uncertainty is not welcome by the customers or the investment decision makers,” Sawiris said. “At the same time, I think it’s manageable.”
Asked if the uncertainty — from either the trade war or regional tensions in the Middle East — would ever stop him from investing in a given region, he replied with a laugh, “Uncertainty is our middle name, so we’ve gotten used to that.”
On Monday, the company announced a joint venture with the Abu Dhabi National Oil Company, ADNOC, to create the world’s largest exporter of nitrogen-based fertilizer and expand market access.
Sawiris’ net worth is estimated at more than $7.5 billion. He also serves as executive chairman of British football club Aston Villa FC.
A U.S. recession on the horizon?
Looking at markets, the CEO sees Europe as potentially undervalued, but is not holding out hope for a major uptick in growth from developed markets anytime soon.
“From a valuation perspective, you could argue that Europe continues to be discounted vis-a-vis North America,” he said. “But the whole market looks to be running out of steam, not just in terms of trade issues, but the growth in the U.S. has been going on for 11 years and all good things have to come to some slowdown at one point.”
Asked if he predicted a U.S. recession, he replied, “Not necessarily, but a slowdown I think is more realistic to be expected than continuous growth for another ten years.”
Sawiris was one of the biggest shareholders of LafargeHolcim, the world’s largest cement maker, before selling most of his shares — worth $67.5 million — at the start of this year. He announced he would not run for re-election to the company’s board in May.
OCI N.V.’s predecessor Orascom Construction Industries was the parent company of Orascom Cement, previously the Middle East’s largest cement maker, and was bought by Lafarge for $10 billion in 2007.
Nassef Sawiris is the youngest of the three Sawiris brothers, all billionaire business heavyweights who as a family own the Orascom conglomerate, which spans construction, telecommunications, tourism, industry and technology. Forbes in 2008 estimated the family’s collective wealth at $42 billion.
Facebook announces Libra digital currency, Calibra digital wallet
Facebook is unveiling an ambitious plan to create a new digital currency and financial system to transform the way money moves around the world, and not just on its own apps.
It’s leading a consortium to create an open-source digital currency called Libra, set to launch in the first half of next year. The goal is for developers to create services for consumers to send money around the world easily and for free — with the same convenience as sending a photo or a message.
The Libra currency will not be run by Facebook, but rather by a nonprofit association supported by a range of companies and organizations. But Facebook does have a plan to profit from it with a new subsidiary, Calibra, which is building a digital wallet of the same name for storing and exchanging the currency.
The financial information from your digital wallet will not be used for ad targeting on Facebook’s platforms because the two divisions will be kept totally separate, the company said.
Michael Newberg | CNBC
“We’ve seen internet change the game for everything that could be digitized, except for money,” said David Marcus, the leader of Facebook’s Calibra division.
“The numbers really speak for themselves. There’s 1.7 billion people around the world that are unbanked, the same number are underserved by financial services,” said Marcus, who before taking over Facebook’s blockchain initiatives ran its Messenger division and was previously president of PayPal. “Now, anyone with a cheap smartphone has access to all the info they want in the world for free with a basic data plan. Why doesn’t money work the same way?”
The announcement comes after Facebook has faced a slew of privacy issues, raising real questions about whether people will trust the social platform with their financial information. Marcus says that’s why it’s so important that Facebook not be in control of the currency.
“It may sound super controversial but there’s no better way to demonstrate the evolution of our thinking, what we know we should control and what we should not and can not control,” Marcus said. “A network that enables billions of people to move money around the world should not be something we can or should control.”
What is Libra?
The new digital currency is set to launch in the first half of 2020. It will be run by a nonprofit, the Libra Association, based in Geneva, Switzerland. Its goal is to be broadly accessible, stable and secure.
Unlike bitcoin and other cryptocurrencies, which can be hugely volatile and speculative, Libra will be backed by relatively stable government-backed money.
“If you buy $50 of Libra, your $50 makes its way to the Libra Reserve,” said Marcus. “It’s designed to be stable and confer values on Libra that makes it more like a traditional currency than any of the digital currencies are now. This is the way paper money was created.”
The fact that the Libra blockchain is open-source means that anyone can build a service or app that uses the currency. The wallets that are developed to use the service will be interoperable, so you’ll be able to send money from Facebook’s Calibra wallet to any other system that accepts Libra.
Consumers will not interact with the Libra Association, but will only interact with Libra through a digital wallet or an operator. For people who don’t have the ability to digitally purchase Libra with a credit card or digitally linked account, Marcus says he expects companies in emerging markets to create locations where people can exchange Libra for cash.
Who’s involved in this digital currency?
Facebook is joined by 27 other companies and organizations that are founding members. The goal is to have at least 100 companies and organizations on board for its launch next year. Each member of the association will manage one of the “nodes,” or locations where transactions involving Libra are validated.
Founding members include companies in the payments space: Visa, Stripe and PayPal, which will be able to help merchants accept Libra. Some tech companies are also on board, including eBay, Lyft, Uber, Spotify, and Latin American payments platform Mercado Pago, which could drive adoption of acceptance of the currency. Two European telecom companies are also involved, Iliad and Vodafone.
Venture capital investment companies involved have experience with digital payments: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, and Union Square Ventures. Nonprofit and academic organizations on board are focused on helping people who don’t have access to banking: Creative Destruction Lab, Kiva, Mercy Corps, and Women’s World Banking. And four blockchain companies are involved: Anchorage, Bison Trails, Coinbase and Xapo Holdings.
“The idea is that [Libra] has mass adoption — lots of trusted companies that want to join the journey, so there’s a chance of this becoming mainstream,” Marcus said.
This list of founding members invested a minimum of $10 million to fund the operating costs of the nonprofit association as well as to launch an incentive program to jumpstart the underlying Libra blockchain and to drive adoption of the currency.
Facebook’s Calibra digital wallet
Facebook’s Calibra is a digital wallet that will be accessible as a stand-alone app and integrated into Messenger and WhatsApp. Facebook says it’s designed to enable anyone to securely store money for free on their phone and to allow people to securely send and receive Libra around the world, with no fees for consumers, although Facebook is considering “very low” fees for merchants.
Down the line, Marcus anticipates Facebook will offer other financial services, such as loans, from which it could profit: “If the network is successful, it will be a big opportunity for us to provide lending to all these consumers,” he said.
Facebook’s larger goal is to get people to spend more time on its platforms. This launch will enable the 2.7 billion people who use its various apps every month to more easily make purchases from the 90 million businesses on its platform. The easier it is for these businesses to drive sales on Facebook, the more likely they are to buy ads.
Although Calibra is fully owned by Facebook, it’s operating as a subsidiary kept separate from Facebook’s advertising businesses, so it can be regulated appropriately.
One key use case for Calibra is remittances. Facebook says that every year $25 billion is lost by migrants on fees from the likes of Western Union. Marcus says the current process is antiquated: Immigrants send a photo of their receipt from Western Union to family members via WhatsApp so they can collect the money, minus a fee. Calibra would cut Western Union and other money-transfer services out of the equation.
A key for Calibra’s adoption is making it easy to understand exchange rate and transfer money in and out of the currency, says Kevin Weil, Calibra’s VP of Product who formerly oversaw Instagram Stories, Facebook’s successful attempt to battle Snapchat.
“The easier it is to go back and forth [from the local currency to Libra] the more confidence people will have,” he said. “If you’re banked you can imagine connecting your bank account, if you’re not banked then you can imagine a map that shows nearby money transfer experiences.”
Will this whole thing take off?
Libra is the first new cryptocurrency that has a real opportunity to bring digital currency to the mainstream, according to one of Libra’s founding partners, Anchorage, which acts as an institutional custodian for crypto assets.
It solves some of the underpinning issues that other cryptocurrencies have not been able to, to reach this promise, ” says Anchorage President and co-founder Diogo Monica.
“It’s based on a very scalable, highly efficient blockchain, that can do many thousands of transactions per second. And it’s backed by bank deposits and government securities like the U.S. dollar, so it will have low volatility,” Monica said. “The association has so many big players that already have relationships, which solves the chicken-and-egg problem of adoption.”
Monica says that Anchorage will operate one of the many nodes to handle Libra transactions and could sell its services to other members of the association for safekeeping of their Libra assets.
Marcus says if people don’t want to trust Facebook’s Calibra, there will be other apps to access the currency.
To boost its security, Calibra will have the same verification and anti-fraud processes that banks and credit cards use. To gain access users will have to have a valid government ID and use two-factor authentication, leveraging the likes of FaceID. The service will have built-in fraud production and dedicated live support. And if someone accesses a user’s account, Calibra promises to refund any lost assets.
Launching a whole new system comes with its challenges. “Every direction you look there’s stuff you have to figure out from scratch,” said Weil. “Not everyone is familiar with exchange rates, and even the folks that are, aren’t necessarily familiar with digital currency. I’ll take a lot of time to educate people.”
There’s also the question of regulatory approval. Weil says they’re talking to regulators and are in the process of getting money-transfer licenses, which they expect to have secured for a launch next year.
“People will misunderstand and think this is a Facebook thing, ” said Weil. “We incubated it, but it’s designed to be run in a decentralized way.”
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