iQiyi is experiencing its biggest crisis since its inception
Text | Gao Honghao
Edit | Huang Junjie
At the end of 2021, Ge Hong, senior vice president of iQIYI and head of instant short video, brought together the heads of each level of the department and announced that iQIYI would no longer invest money in this department, and he himself would leave in the near future. A person familiar with the matter told LatePost.
Instant is iQIYI's short video product launched in April 2020. It was born with its own aura and is seen as iQiyi's new growth curve. In May 2021, iQIYI CEO Gong Yu also juxtaposed it with the iQIYI app in a shareholder letter, saying that they are "the two video types that Qiyi mainly focuses on."
Outside the conference room, unsuspecting employees are still advancing business as usual.
In early November, some departments of iQIYI began to lay off employees, but many iQIYI employees have become accustomed to it. In the past few years, iQIYI has contracted to varying degrees: in mid-2019, due to the decline in iQIYI's performance, the number of recruits in various businesses has been reduced; in the second half of 2020, due to the impact of the epidemic, iQIYI's advertising revenue has been seriously frustrated, and the new consumer business group responsible for commercialization has become the hardest hit area for layoffs.
It was not until the beginning of December, as important departments such as the content business group, the new consumer business group, and the strategy department began to lay off employees in a large proportion, and almost all the departments such as iQIYI Research Institute and iQIYI Game Center were laid off, and the wind that was about to be merged at any time began to come out, and iQIYI's employees realized that this time was different, this time it was an earthquake.
According to wind-aggregated data, iQIYI's cash flow from operating activities has been negative since the fourth quarter of 2019. Their pre-tax losses narrowed due to the home-based epidemic prevention policy in the first half of 2020, but then widened again. In the third quarter of this year, iQIYI's net outflow from operating activities was 2.081 billion yuan and its pre-tax loss was 1.698 billion yuan.
At the end of September 2021, iQIYI had a total of 10.9 billion yuan in cash and short-term investments on its books. On December 1, iQIYI was required to redeem 4.88 billion yuan of convertible bonds, which were about 6.147 billion yuan in cash on iQIYI's books after redemption, and 4.647 billion yuan of debt that needed to be repaid within a year.
iQiyi's main revenue has been hit hard this year. The sudden halt in China's Internet advertising growth accelerated the crisis, with iQiyi's advertising revenue falling by 10% in the third quarter. According to the data disclosed by iQIYI in its financial report, iQIYI had a total of 103.6 million paid members as of the end of the third quarter of this year, which was lower than the second quarter and the same period last year.
Financing has also become more difficult than in the past. Whether a listed company issues bonds or fixed increases in stocks, it needs the support of market value. But year-to-date, iQiyi's stock price has fallen by 60%, the total market value is less than $4 billion, and the company's shares are worth only $2.3 billion.
According to the current operating conditions, iQIYI needs to inject new funds, such as the help of major shareholder Baidu, or seek other strategic investments. Without foreign aid, iQIYI would have to drastically reduce operating expenses, reduce copyright purchases, lay off personnel, and abandon growth before it could survive 2022.
Eleven years of chasing growth at any cost
Since 2015, China's long-form video competition has become a game for big companies. iQiyi, Tencent Video and Youku are backed by Baidu, Tencent and Alibaba respectively, and they have offered sky-high prices to compete for film and television rights, invest in industry teams and production companies, and the cost of competition in the industry has been continuously raised.
"LatePost" once reported that in 2014, iQiyi invited Youku's number one IP Gao Xiaosong and his self-made team of program "Xiao Shuo" for a price of more than 10 million yuan. A year earlier, the appearance fee negotiated between Youku and Gao Xiaosong was only 5 million yuan; almost at the same time, the popular web drama "Notes from the Tomb Robber" also issued a copyright fee of 100 million yuan to Youku, but Youku was difficult to bear. In the end, iQiyi took it down at a cost of 5 million yuan per episode.
Baidu, Ali, Tencent do entertainment, no one can end the war by burning money, and as a result, the cost of video copyright and production is high. The long video service itself is like a "pipeline": users only care about what they watch, not where to watch, and whoever pays for popular programs can rob users.
"There are a lot of episodes that don't necessarily have a good amount of broadcasting, but the cost is in the level of 100 million yuan, but the top management feels that this is not too much of a problem." An iQiyi employee in charge of copyright business said, "In their eyes, as long as the quality of the drama is up to standard." ”
iQiyi has been the first in the industry to propose self-made content and emulate Netflix, because the cost of self-made content is more controllable.
But in order to give the creative team plenty of space, Gong Yu hardly sets any KPIs for the self-made team. He promised the team at the time that the first year was the research and development period and did not necessarily produce content, and it did not matter if the first two projects lost money. From the third project onwards, throw away all the cost earned money proportionally as an incentive for the studio.
According to iQiyi's earnings report, its content cost rose from 5.3 billion yuan to 20.9 billion yuan from 2015 to 2021.
"The entire Internet industry is burning money, from the Thousand Regiments War to the Taxi War, no one feels that there is a problem." A person from iQIYI's strategy department said that especially before and after the listing in 2018, most of iQIYI's employees were scrappy and rarely considered whether they could make a profit.
iQIYI was the first Chinese video site to launch membership payments, believing that this can support the long-term development of content platforms more than advertising.
A middle-level iQIYI recalled that at first, iQIYI only charged for movies on the platform, and the pricing strategy referenced pirated CDs. That is, assuming that a pirated CD is 5 yuan, each user will most likely only watch movies on four weekends per month, so the membership price is set at 19.8 yuan / month.
In 2015, iQIYI had 5 million members. The team also thought that they could use the TV series as a "sneak peek" model to pull new ones. The effect was unexpectedly good, on the night of iQIYI's first paid web series "Notes from the Tomb Robber", the influx of members directly crushed iQIYI's server, and the number of members was directly increased again.
Yang Xianghua, senior vice president of iQIYI, asks the most frequently asked question: What is the ceiling for our membership. The membership team used a lot of methods to find the answer, and the result was 160 million to 200 million. "The boss was happy with this conclusion." An iQiyi business leader recalled. But the reality is that as of 2019, iQiyi's membership has rarely increased significantly after reaching 100 million.
At that time, some iQiyi executives put forward a discussion on "whether to increase prices", but everyone was playing drums in their hearts: the consumption habits of domestic consumers have not yet formed, is the price increase a little too early? More critically, if iQiyi's price rises and competitors do not rise, will users leave?
"No one dares to make a decision." Said the above-mentioned business leader.
Under the siege of fierce competition, the discussion about price increases lasted only a short time and did not continue. Since then, price increases have not even been on the agenda, and user growth has become the most important task: the team first developed a continuous monthly payment model, and struggled to convince the Alipay and WeChat Payment teams to build a system for them. In 2018, Gong Yu also personally negotiated cooperation with Liu Qiangdong, the founder of JD.com, and the two companies launched joint members. JD.com's membership fee is lower than iQIYI's, and the joint membership is equivalent to iQIYI's downward adjustment of the membership fee.
In 2019, iQIYI's paid membership finally reached the milestone of 100 million, so iQIYI also held a small celebration ceremony at 5 a.m. on the same day.
But in order to get this 100 million users and 14.4 billion yuan in membership fees, iQiyi spent 22.2 billion yuan to buy or produce content, setting a new high.
Under the pressure, iQIYI only raised the price of the council member fee at the end of 2019, eight years after iQIYI's first pricing.
50 vice presidents with Apple Tree
iQIYI has constantly tried to explore new business models.
Gong Yu originally set the strategy for iQIYI as "Apple Tree": an IP (trunk) was developed in the whole chain of film and television, variety, animation, literature, live broadcasting, games (branches) and so on, in order to get more revenue and share costs.
But Douyin and Kuaishou will push entertainment into the era of short videos, and iQiyi's goal has changed from "apple tree" to "apple orchard", that is, from a super application to a product matrix composed of several applications.
But for a company whose core business has an overwhelming advantage in revenue, innovation is difficult and requires extraordinary investment. "It's like far water can't quench your near thirst." A leading Internet company's content business director said.
In 2017, the team gave Gong Yu a report on the Chinese animation market, and the results showed that most of the production companies in the market already had close working relationships with competitors, which led to severe limitations in iQiyi's production capacity. An iQiyi person recalled that Gong Yu immediately ordered the investment department to find the acquisition target.
"LatePost" once reported that the game was once regarded by iQiyi as the most important branch business. In 2014, iQIYI acquired the video site PPS and founded iQIYI Games based on the latter's shanghai-based game team.
A former mid-level executive of iQiyi Games told LatePost that the executives once hoped that the game revenue could account for 20% - 30% of the total revenue. However, iQiyi ignores that building game research and development capabilities requires a lot of upfront investment.
At that time, one of iQiyi's main strategies was "film-game linkage", that is, it required that the development and launch of each game must cooperate with the progress of film and television dramas, which obviously violated the normal logic of content production. Hollywood studios had similar hallucinations years ago, but games that were released with blockbusters rarely succeeded.
iQIYI's financial pressure is also destined to cause it to not give so much patience in the business of non-main channels, and after continuing to make no achievements, the corresponding resources will be invested less and less. "When I heard (former Ali Game President) Shi Cangjian say that they would spend a billion yuan and build a game system in three years to earn future money, everyone was very envious." The above-mentioned middle-level person said.
In 2020, iQiyi pinned its new growth points on overseas markets, and as a series of Chinese products such as TikTok were subjected to strong supervision in the United States, India and other places, the company immediately slowed down the pace of expansion and only maintained basic operations.
Short video is iQiyi's latest big investment in new business. Since 2019, short video has surpassed instant messaging and long video platforms to become the Internet products that occupy the highest user time, and soon it begins to erode the advertising revenue that originally belonged to long video platforms.
According to the financial report, iQIYI's advertising service revenue in 2018 was 9.3 billion yuan, an annual growth rate of 21%. Two years later, only $6.8 billion was left in this revenue.
In April 2020, iQIYI launched a short video on the moment, which is a short video product that it attaches the most importance to. However, at this time, iQIYI's online short video products are obviously difficult to succeed, but it has become a burden.
LatePost learned that in the year since its launch, the number of daily active users has dropped from 3 million at its peak to about 1.8 million. One of the third quarter OKRs of Ge Hong, the head of Instant and senior vice president of iQIYI, is to reduce the daily loss of Instant to less than 100,000 yuan.
iQIYI is essentially a video and content company. Today, the resources allocated to content are already scarce, and emerging businesses can only give way. "The business in the Apple park is basically cultivated in a 10-year cycle, but the premise is that iQiyi must be able to survive for another 10 years." An iQiyi source said.
The only way left
Most of those interviewed by LatePost described Mr. Gong as gentle and modest, rarely seeing him angry. A senior producer at iQiyi said that many decisions and budgets for content creation do not have to go through the CEO, and the studio has a lot of decision-making power. "However, Gong Yu likes to participate in the R&D meetings of the program team, and every time he is like a quiet auditor." He said. Since 2018, iQIYI has established more than 50 in-house production studios.
iQIYI's corporate culture is called "Think simply, do it simply." Employees go to work to implement a punch card system, working nine hours a day to leave work, overtime is not the norm.
iQiyi's corporate organization is also relatively stable, but there are few changes under continuous expansion. According to the incomplete statistics of "LatePost", iQIYI has configured more than 50 heads of vice president level and above, which are distributed in animation, VR, short video, literature, OTT, knowledge and other businesses. By comparison, there are only about 20 executives at Netflix vice presidents and above.
iQiyi's team size was also once comparable to Netflix's, with nearly 9,000 people at the end of 2019. But Netflix's revenue last year was more than 5 times that of iQiyi, and it was profitable.
In the 11 years since its establishment, iQIYI has defined the membership payment model and new form of video advertising model for Chinese video websites, and has also created the era of online drama and online synthesis in China.
At the beginning of iQIYI's establishment, CCTV alone had well-known producers and directors such as Ma Dong, Zheng Wei, Ge Ya, Wang Jianfeng, Jiang Bin, and now iQIYI's chief content officer Wang Xiaohui joined. With the addition of "CCTV's youngest general director" Mou Ping, iQiyi has shaped a new program concept with "Strange Story". It has also incubated variety shows such as "China Has Hip Hop", "Summer of bands", and "Idol Trainees". Mist Theater's self-produced "The Hidden Corner" is one of the hottest and most acclaimed TV series in China in 2020.
At present, iQiyi is still a company that generates nearly 30 billion yuan in revenue every year, and long video is still a business that users are willing to pay for — the three head platforms serve more than 200 million paying users. It's just that the three companies burn money for growth for a long time and can't make a profit.
In the past, in similar situations, platforms may merge, and then use market dominance to drive costs and eventually become profitable, such as Didi. Or several oligarchs reach a tacit understanding, no longer unlimited investment, competing for users, such as takeaway, payment, and bicycle sharing.
The three parties of the long video war have established a certain tacit understanding: no longer unlimited price grabs for film and television dramas, and even content cooperation. iQiyi's content spending has shrunk after 2019. But today's big layoffs show that iQiyi's cost is still too high.
In 2020, iQiyi had a self-help operation. Its majority shareholder, Baidu, once negotiated a sale with Alibaba and Tencent. "LatePost" learned that the parties did not negotiate because of the price. During negotiations with Tencent, Baidu was also dissatisfied with the acquisition of Sogou and hesitated about the transaction.
In the context of Internet anti-monopoly, the road to selling to another big platform has also been blocked.
Without new capital support, there would be no high-priced copyright purchases, no one-stop all long-term video consumption for users, and 200 million paying users. China's long video platforms will have to reduce costs first, make long video a sustainable business, and then consider more and more complex business models.