iQiyi up by 40% in pre-market trading as report says Tencent plans to become largest shareholder

Tencent Holdings plans to become the largest shareholder in iQiyi to cut costs, Reuters said today, citing two people with knowledge of the matter.

Baidu currently owns 56.2 percent of iQiyi's shares. According to one of the sources, Tencent has been in contact with Baidu to discuss the acquisition of iQiyi shares. The scale has yet to be determined.

The report also said that it's unclear whether Tencent has been in direct contact with iQiyi or what their plans are for working together. .

The source said: "The partnership will increase the bargaining power of both parties in producing and buying content, and reduce marketing costs. Otherwise, these costs would be used to steal subscribers from each other."

These sources also said that the plan is still in its early stages and could change. Nasdaq-listed iQiyi, dubbed "China's Netflix," has a current market capitalization of about $14 billion. Baidu owns 56.2 percent of its shares and 92.7 percent of its voting rights.

The potential deal would bring together two of China's biggest media powerhouses. Both parties had more than 110 million paying subscribers as of the end of March this year. The deal would also bring Tencent a step closer to becoming China's dominant online entertainment provider.

Both Tencent and iQiyi are currently experiencing increased spending on content as they compete not only with each other, but also with Beep Ri and iQiyi, respectively. User-created video-sharing site operators such as Beepee and Bytespring compete. Overall, China's online video market will generate revenue of 156.6 billion yuan this year, according to Avery Dennison. ($22.1 billion).

Currently, Tencent Video, iQiyi, and Alibaba's Youku, all offer movies, TV series and reality shows. These are both self-produced and purchased from content producers.

In the first quarter of this year, iQiyi's content costs increased 11% year-over-year, while revenue growth fell from 43% in the same period last year to 9%. With a net loss of $406 million, iQiyi has yet to break even in its 10-year history. In comparison, Beepee's revenue grew 69%.

iQiyi was up by more than 40 percent in U.S. pre-market trading. Now it trades up 24 percent.