BEIJING — Key Chinese tech company Baidu stands at a crossroads around what to do with its video clip streaming unit iQiyi, a linchpin of its advancement strategies that is below investigation by U.S. economic authorities about accounting tactics.

The probe arrives as Baidu endeavors to change iQiyi from a cash burner into a income cow as it attempts to retain rate with the two other conglomerates that make up China’s “Massive 3” tech corporations. If traders sour on the streaming system, Baidu could be compelled to give up basic principle ownership to domestic rival Tencent Holdings.

On the floor, Baidu seems to be carrying out effectively. Just-launched next quarter outcomes display net financial gain gained 48% on the year to 3.5 billion yuan ($504 million). The figures display the company has staged a restoration, stated Chairman and CEO Robin Li. But value reductions and the very low baseline in the yr-previously time period are mainly dependable for the rise in black ink.

Profits in the next quarter dipped 1% to 26 billion yuan, which is alarming given that online-related corporations have been logging swift development usually.

The decline in company ad submissions amid the coronavirus epidemic harm Baidu, which is identified for its search engine. The on line marketing and advertising segment, which revolves all-around research ads, saw earnings drop by 8%.

What offset the slump in search engine advert income was the contribution by iQiyi. Membership charges at the on line online video portal drove the “other revenues” portion of the quarterly report, serving to the section bounce 18% on the 12 months.

Baidu launched iQiyi in 2010 as the Chinese remedy to Netflix. The provider drew viewers with youth-oriented dramas and other written content, and the membership rely now exceeds 100 million.

iQiyi operates on the very same plane as Tencent Online video, as effectively as Alibaba Team Holding’s streaming assistance, Youku. iQiyi debuted in the U.S. Nasdaq industry in 2018.

Despite the fact that income at iQiyi has risen continuously, the unit has struggled to make a financial gain. At any time given that the Nasdaq float, iQiyi has practically always been in the red, creating a 1.4 billion yuan internet decline in the next quarter.

Yu Gong, founder and CEO of iQiyi, and Robin Li, CEO of Baidu, ring the opening bell at the Nasdaq to celebrate iQiyi’s initial general public offering in New York on March 29, 2018.

  © Reuters

The performance is the result of fielding higher-quality material in the grueling race to capture a wider spending audience. iQiyi burned by means of 22.2 billion yuan previous year on content expenditures, and these expenses rose 2% in the just-ended quarter.

The biggest problem dealing with iQiyi is how to command paying out on information.

It was discovered that Tencent approached Baidu with an provide to again iQiyi and acquire above as the major shareholder. The overture looks promising considering that it would ease pressure off the online video rivalry concerning the two tech firms.

“If equally corporations cooperate, the rewards would be substantial considering the fact that they will be in a position to help save on written content costs,” mentioned an analyst for a Chinese brokerage.

The money infusion offers a dilemma for Baidu, even so. Along with Alibaba and Tencent, Baidu is one particular of the so-called Massive 3 providers that have thrived in China due to the fact the early times of the world wide web period.

But Baidu’s market place worth is considerably less than a tenth of Tencent’s and Alibaba’s. Even though the two rivals have attained development by means of social media and e-commerce, Baidu has still to produce a important company outdoors of its search engine.

Despite its recent hiccups, iQiyi is thought of to be Baidu’s long term gold mine. That designation has manufactured Baidu hesitant to take Tencent’s offer you.

At the very same time iQiyi launched its most current quarterly final results on Thursday, it explained the U.S. Securities and Exchange Commission has requested data from the enterprise courting back to January 2018.

The probe is in relationship to an April report issued by Wolfpack Research, a U.S. shorter seller business, that alleges iQiyi inflated revenue and consumer quantities, iQiyi explained in a assertion. The video clip streamer has employed advisers to conduct an inside investigation.

“We do feel owing to the sound and disciplined internal manage system and the company governance” that the effects of the investigation “will be really favourable to the enterprise,” explained Wang Xiaodong, main financial officer of iQiyi.

Chinese providers that checklist in the U.S. have occur underneath heavier scrutiny following the fraud scandal at Luckin Espresso. That dynamic possible factored into iQiyi’s stock dropping by 19% at just one place during after-hour buying and selling Thursday. Baidu’s shares had been off as properly.