By Raynor Yeo (Singapore Management University)
Overview of the Deal
Acquirer: Tencent Target: iFlix Estimated Value: Undisclosed (USD10m – USD100m) Announcement Date: 25th June 2020 Acquirer Advisor: Latham & Watkins LLC Target Advisor: Undisclosed
iFlix is a Malaysia-based streaming platform, poised as the Netflix of the SEA Emerging Markets. Through the acquisition, Chinese gaming giant Tencent will emerge as the leading Asian online Video-On-Demand (VoD) platform by regional footprint. The acquisition follows the entry of Tencent's own international VoD platform into Thailand as Tencent embarks a strategy of becoming the dominant Asian VoD platform.
"This is in line with our strategy to expand our international streaming platform, WeTV, across Southeast Asia and provide users with international, local and original high-quality content in a wide range of genres and languages."
Tencent Holdings
Company details (iFlix)
iFlix is an Online VoD platform with a tailored content strategy according to the respective South East Asian markets it operates in. The VoD Platform operates in 13 SEA markets and a subscriber base of about 17 million subscribers. iFlix has three core revenue streams, Corporate Channel Sales, Direct Customer Sales and Advertising Sales. Previously a subscription-reliant business model, the VoD platform has pivoted towards a freemium model that is reliant on advertising sales.
Founded in 2015, headquartered in Kuala Lumpur, Malaysia
President & CEO: Marc Barnett (Mark Britt had stepped down in 2019)
Number of Subscribers: 25 Million (Primarily Corporate Sales)
Raised Capital: USD348m
Revenue (2018): USD28.7m
Expected Valuation: USD1b
Company details (Tencent)
Tencent is an internet conglomerate offering a suite of internet products and services. The company is considered one of the largest video game and social media companies globally. Tencent's business segments are split into Social Media, Online Advertising, Digital Content, Online Gaming, Fintech and Cloud & Digital Services. Under these umbrellas, it owns some of China's largest internet brands such as QQ, WeChat, Riot Games and Tenpay. The company runs an international VoD platform, WeTV, under its Digital Content arm.
Founded in 1998, headquartered in Shenzhen, China
President & CEO: Ma HuaTeng (Pony Ma)
Number of employees: 63,000
Market Cap: USD630b
EV: USD650b
LTM Revenue: USD57.2b
LTM EBITDA: USD20.4b
LTM EV/Revenue: 11.4x
LTM EV/EBITDA: 30.9x
Market Overview
The South East Asian Streaming OTT market performance has been perpetually languid since the origination of first comers in the early 2010s. Bogged by weaker infrastructure, piracy, price-sensitive consumers and generally weak customer stickiness, this sector has struggled to see profits despite the addressable market in excess of 600 Million.
Monetisation has been a challenge to Online-VoDs in South East Asia with entrants having found little success utilising a subscription VoD model. Players that have been bullish on such a model have slashed subscription fees and built complex channel strategies to remain competitive and scale fast. Most players have pivoted, to varying degrees, to advertising-supported models – to which generally better success has been seen across SEA.
Short Term Consequences
Tencent's acquisition of iFlix is a bolt-on for its WeTV platform - a particularly necessary move in giving itself a seat at the SEA VoD table. Considering the target's library, footprint, commercial agreements, Tencent will be able skip steps in firmly rooting its presence across SEA. It is likely Tencent's strategy to cement market share in SEA by leveraging its own library of content and iFlix's existing subscriber base.
Witnessed in a significant number of competitors' strategies, penetration into SEA is particularly difficult due to the region's fragmentation into multiple markets. Each market presents unique network infrastructure challenges, wealth and consumption habits. Without the acquisition, WeTV would have needed to tailor go-to-market strategies, product offerings and content offerings in accordance to each nation's characteristics. The difficulty in doing so is evident in the contention over how Indonesian VoD, Genflix, has chosen to forgo regional scalability in favour of developing a stable domestic base.
To iFlix, the acquisition presents the potential to deepen their library of content and strengthen its brand stickiness. Deep acquirer pockets and existing WeTV infrastructure may also mean being able to enjoy economies of scale when self-producing content. A challenge faced by online VoD players is the need to cultivate a loyal subscriber base through content strategy. Global players have leveraged investments in a mix of curated domestic content and self-produced content as a key component of developing customer loyalty in APAC and other EM markets.
It does stand to note that iFlix had been plagued by a slew of difficulties that paint a likely picture of a fire sale. The business had USD378m of accumulated losses in 2018 against total funding of USD348m. With maturity debt obligations, the business was nearing the end of its runway. Other flags included the departure of co-founders Marc Britt and Patrick Grove in 2019 and the deep discount to the acquisition, relative to the business' anticipated IPO.
Long Term Consequences
Two consequences may stem from the acquisition: the consolidation of more SEA VoD players as other non-SEA VoDs try to break into the SEA market; and the formation of a new dominant VoD model for Asia markets.
Tencent representatives have indicated that the iFlix brand will remain for at least a year post-acquisition. The staggered integration likely occurs as a result of misalignment of customer perception of value between the WeTV and iFlix brands. WeTV currently utilises an Advertising-supported VoD model at USD4.40 per month for ad-free access and miscellaneous perks. Comparatively, iFlix also utilises an Advertising-supported model at a lower price of USD2. At the point of iFlix's folding into WeTV, Tencent will meet a crossroads of either determining the ideal balance between advertising revenue and subscription revenue.
The acquisition marks the beginnings of Tencent's plan for VoD dominance in Asia. Aside from the launch of WeTV in Thailand the year before, Tencent is also in talks for the acquisition of majority stake in iQiyi, a Chinese subscription VoD with a 118 million subscribers. While iQiyi may not be profitable yet, it has shown improving cash flows (barring CFF) and a declining level of Net Losses each year. Leveraging on this tailwind and the scale of Tencent's Online VoD play, we may expect it to be the first to show a sustainable VoD model for the Asia markets as it strikes the prior mentioned balance in advertising and subscription revenues.
The acquisition also further establishes the demand for distressed SEA VoD assets. The bid for iFlix assets occurred as a competitive bid between Tencent and the Australia-based Crown Media and Entertainment. The recently liquidated Hooq also had its assets purchased by the Softbank-backed Coupang. While there may have been interest to enter the market, larger internet and media players may not have found the investments needed to establish themselves organically to be justified. As a reflection of this, as more SEA VoD players show signs of distress, more acquisitive activity may be seen.
Risks & Uncertainties
Graph: Monthly Average Revenue per User of major VoD Platforms
As much as economies of scale may be able to drive down costs, the business case of VoD platforms in SEA has yet to be fully justified. Paying for premium generally arises beyond a certain wealth threshold whereas the bulk of the addressable population lies in the mid income bracket which is highly price sensitive and generally unaccustomed to subscription services. A highly priced Subscription VoD like Netflix is performing well due to its targeting of a smaller demographic that lies within a higher income band whereas low fee advertising-supported models that iFlix, iQiyi and WeTV utilise are still loss making.
The competitive landscape of the SEA VoD market has been saturated; which is surprising when considering that none are profitable. With advertising-supported models being the dominant model, prices have largely been slashed and the perceived value to a paid subscription has largely been eroded. Content wise, consumers are also spoiled for choice. Netflix, Hulu, Disney Plus are but a few of the numerous players in the Asian VoD market that have entered recent years. Even more large entrants in the market will emerge with their deeper pockets and they will seek to attain market share, placing the industry at risk of being flooded with more internally developed content. Players may face a greater challenge in establishing customer loyalty through their curation and library of content. The fight to curate and develop the most appealing content will intensify, potentially further undermine the business case for VoD as content costs drive Cash Flows from Operations further into the red.
Alluded to multiple times, monetisation stands as one of the tallest hurdles to Online VoD in SEA. Moving forward, the greatest challenge to Tencent remains the same one experienced by iFlix - whether they have an effective monetising strategy.