Mainland China telcos, pay TV operators benefit from ties with streamers

Mainland China pay TV operators and telcos have entered 58 agreements in various formats with over-the-top streaming players as of March 2023, according to our survey. Some partnerships benefited the pay TV operators more than the OTT players due to regulatory restrictions, while others fostered the growth of all partners.

We divided the partnerships into five major categories based on the agreement format. Specifically, pay TV operators and telcos can provide OTT streamers (1) billing services; (2) subscription promotions via bundled packages or discounted products; (3) unlimited data or customized data services; (4) set-top box integration; and (5) mobile or streaming stick offers. The "Other" category includes the companies' strategic investments in each other and other infrastructure-sharing partnerships.

The most popular partnership formats in the market were telcos' data packages for OTT players and the integration of OTT services into operators' set-top boxes. Unlike other Asia Pacific markets, there were no partnerships on billing through telcos and partnerships on mobile and streaming stick pre-installation of OTT apps in mainland China because mobile payment tools are prevalent in the market, and telcos and pay TV operators do not provide OTT-bundled mobile or streaming stick products.

TV or set-top box integration benefits pay TV operators

Some 28% of partnership agreements in mainland China were under the category of set-top box integration of OTT services, according to our survey. Pay TV operators benefited more from this type of partnership due to the market's license requirement.

Mainland China requires two types of licenses for IPTV or OTT streaming on TVs and set-top boxes: the integrated broadcasting license, held by seven media companies including four cable TV operators, and the content service license, held by the same seven companies plus nine local TV stations. Content service license holders censor the content and approve it before integration license holders integrate the content and distribute it to set-top boxes and/or TV operating systems.

Major OTT players in mainland China, such as Tencent Video, iQiyi, Youku and Bilibili, were not able to secure the licenses before Chinese regulators announced a suspension on the issuance of new licenses in 2014. The OTT companies must therefore set up joint ventures or partnerships with license holders to stream their content on TVs and set-top boxes.

An example of this kind of partnership is the agreement between Tencent Video, an OTT streamer, and Guangdong South New Media Co.Ltd. (SNM), a media management company holding the required OTT and IPTV licenses. In 2015, Tencent Video partnered with SNM to launch and operate its "Cloud Aurora" app for connected TVs and set-top boxes. Since then, Tencent Video has been the only source of content for the TV app. SNM shares subscription and advertising revenues derived from the app with Tencent Video and charges the OTT streamer a commission for "content management."

Revenues from the partnership accounted for 39.4% of SNM's total for the first half of 2022 and drove the company's overall revenue growth due to its much higher yearly increase compared to other business segments. The partnership business' gross margin also reached 55.8% in the same reporting period. In comparison, OTT streamer iQiyi's gross margin in the first half of 2022 was just 19.5%. In other words, the partnership created a new profit stream for license holders such as SNM but not necessarily for streamers such as iQiyi.

We estimate that joint ventures holding the required licenses, such as CIBN and GITV, have similarly benefited from OTT partnerships as their partner streamers held similar subscription market shares in mainland China as of year-end 2022. Stakeholders of the joint ventures split revenues with the OTT streamers based on their shares in CIBN and GITV, according to local media reports. Therefore, we believe China Broadcasting Network — the controlling holder of CIBN — received most of the revenue derived from CIBN's OTT partnership businesses. We believe CIBN and China Broadcasting Network faced similar distribution and management costs as SNM and therefore saw high profitability from the venture as SNM did. China Broadcasting Network is the central cable operator in mainland China, owning provincial cable operators across the market.

OTT players without the required licenses hardly benefit from set-top box integration. To compensate for the revenue split with license holders, OTT operators charge high prices for set-top box and TV services. For example, Tencent Video in 2022 charged a monthly fee of 15 yuan (US$2.16) for its basic-tier membership, which lets users watch Tencent Video content on mobile devices, tablets, and web browsers. Adding connected TV and set-top box integration services to the package would triple the monthly fee to 50 yuan ($7.21). Kagan estimates that Tencent Video's average revenue per user in 2022 was 16.16 yuan ($2.33) per month, nearly the same as its basic-tier monthly fee, which indicated that the integration did not add significant value to Tencent Video's subscription revenue stream despite higher fees charged for set-top boxes and connected TVs. Considering the extra commission fees Tencent Video must pay to license holders, the profit that connected TV or set-top box services generated for the streamer was nearly the same or even lower than its own browser or mobile streaming services (basic tier).

Some license holders in the market own both cable TV and OTT businesses, such as Oriental Pearl Group (BesTV); Wasu Digital TV Media Group (Wasu TV); and Hunan Broadcasting, Film and TV Group (Mango TV). They see higher financial advantages in integrating OTT content in their cable set-top boxes and TVs due to lower commission and partnership costs.

Indeed, among OTT operators, BesTV, Wasu TV, and Mango TV in combination made up 75% of all set-top box integration deals in the market as of February 2023. On the telco and pay TV operators side, China Broadcasting Network formed the most set-top box integration deals with a 37.5% share overall. It was the only type of partnership that the company has formed as of February 2023.

Mobile partnerships to expand

The most popular type of OTT partnership was telcos' provision of mobile data packages specifically for OTT streaming. These partnerships arose when mobile and OTT operators were in subscription expansion, which successfully fostered the subscription growth of both sides.

The rise of data package partnerships aligned with the fastest growth of mobile subscriptions and OTT subscriptions in the past five years.

For telcos, this type of partnership attracts customers for 5G packages with value-added video services. For OTT operators, the partnership helps spur subscription growth, but can potentially depress ARPUs due to lower-priced or free promotional offers.

Despite potential ARPU declines, partnerships with mobile operators remain attractive to OTT players as streamers can rapidly increase their subscriber bases, which can be monetized later. Mobile subscription penetration in mainland China exceeded 100% at the end of 2022, compared to 81.6% fixed broadband penetration and less than 60% OTT penetration.

Global Multichannel is a service of Kagan, a media research group within S&P Global Market Intelligence's TMT offering.

Global Multichannel is a service of Kagan, a group within S&P Global Market Intelligence's TMT offering.