Say goodbye to burning money for growth, and turn a new chapter in long videos

Looking back a few years later, 2021 may be a turning point in the history of China's video industry.

Although from the external environment, the pressure on the industry is still obvious to all - the epidemic has led to uncertainty in film and television production and publicity, short videos are pressing step by step, robbing users of online time, supervision by all parties has been tightened repeatedly, and advertising is still sluggish, but the report card handed over by the head player of long video has made the market see new hope.

On March 1, iQIYI released its unaudited financial results for the fourth quarter and full year of 2021. According to the financial report, in fiscal 2021, iQIYI's total revenue was 30.6 billion yuan, and the non-GAAP (non-GAAP financial indicator) operating loss was 3 billion yuan, and the operating loss ratio narrowed from 15% in the same period last year to 10%, reaching the lowest point in three years.

The change in the financial report of the head player also officially announced that China's long video industry has changed from burning money for market share and growth in the past 10 years, and has entered a new stage of efficiency, quality and profitability.

The occurrence of transformation is the result of the combination of multiple factors. In addition to the macro-control of the top-level design by the regulatory authorities through salary limits and anti-water injection dramas, it is also inseparable from the transformation of the long video head players themselves.

01

Reduce costs and increase efficiency

After a decade of high growth, the size of mobile Internet users is further approaching the ceiling of the national population: QuestMobile data shows that as of September 2021, China's mobile Internet users reached 1.167 billion. In this context, for players in any subdivision track of the mobile Internet, stock revitalization has become extremely important.

According to the financial report, in the fourth quarter of 2021, iQiyi's revenue reached 7.4 billion yuan. Among them, the membership service revenue was 4.1 billion yuan, an increase of 7% year-on-year, and this part of the growth was due to the mining of the value of individual users. According to the data, iQIYI's ARM (monthly average single member income) in the fourth quarter was 14.16 yuan, an increase of 14% year-on-year and 4% month-on-month. This is the fourth consecutive quarter of the indicator's continuous improvement.

Different from other Internet platforms, the winner or loser of the competition of long video platforms is content creativity, production and reserves, so the level of control of content costs is not only related to the user acquisition of long video platforms, but also affects its operational efficiency and profitability.

In the previous 10 years, due to fierce competition, upstream content copyright resources can be inhabited, star artists have high salaries, and long video platforms have to burn money for market and growth in order to rob users, and the results are overwhelmed, resulting in delays in profitability. However, under the macro-control of the regulatory authorities, the industry wind direction has changed, and the salary limit of celebrities and the improvement of the quality of dramas have become the general trend. Long-form video players are also following this trend, optimizing costs, improving efficiency, and achieving significant loss reductions.

In a conference call after the release of the earnings report on March 1, Gong Yu, founder and CEO of iQIYI, said that in order to reduce losses, iQIYI has taken measures to reduce open source and reduce expenditure. A number of measures have been taken to reduce costs and expenses. First, the optimization of the organizational structure, while saving the cost and expense of human resources, makes the organizational structure more flat, thereby improving the efficiency; the second is in the largest cost - content, through refined investment and operation, improve the quality of content investment and production, improve the cost structure, without reducing the premise of high-quality content, reduce "bad content"; third, strengthen the operation and publicity of long-tail content, create more advertising inventory or more membership income; fourth, improve the degree of industrialization of film and television production through technical means. Increase efficiency and costs, while also improving the predictability of future broadcast results of projects.

Change is paying off. In the fourth quarter, iQIYI's revenue cost fell by 4% year-on-year, of which content cost fell by 5%. Sales, operating and management expenses also decreased by 17% year-on-year during the same period, driving iQiyi's loss at the non-GAAP operating level in the fourth quarter fell by 45% year-on-year and 52% sequentially. For the full year of 2021, iQIYI's non-GAAP operating loss ratio was 10%, the lowest point in three years.

02

Expand the frontier

Although the demographic dividend is peaking, it means that the pattern of the mobile Internet industry has settled. When the market in first- and second-tier cities is saturated, the sinking market is still a vast world, and overseas is also promising. Therefore, we have also seen the collective sinking of mobile Internet companies in the past few years, as well as the internationalization wave of enterprises such as smart phone manufacturers.

iQiyi is no exception. In addition to deeply cultivating China's first- and second-tier cities, iQIYI has penetrated into a wider range of regions and groups of people through iQIYI Express Edition and International Edition, so it has also gained a lot of incremental users.

Let's start with overseas business. In the past 2021, iQIYI's overseas business, user scale, influence and revenue have achieved significant growth year-on-year. As early as Q2 2021, the paid membership scale of iQIYI's overseas version has exceeded 1 million. Throughout the year, the average number of daily active users (DAUs) of iQIYI International Edition reached three times that of the previous year. Among them, Thailand is the fastest year-on-year market, with an increase of nearly 700%, while in the United States, South Korea, Australia and other countries and regions in Southeast Asia, the growth rate is also more than 100%.

Driven by the growth of the entire overseas user base, iQIYI International's membership service revenue and advertising revenue achieved month-on-month and year-on-year growth in the fourth quarter and throughout the year: in the fourth quarter, membership revenue increased by more than 40% month-on-month and more than 80% year-on-year; advertising revenue increased by about 10% month-on-month and more than 100% year-on-year for the whole year.

The rapid development of overseas business comes from the promotion of high-quality content and the improvement of operational efficiency. In the analyst conference call, Gong Yu said: "The continuous successful release of popular dramas has been recognized by overseas users, driving the continuous improvement of user scale. Since the beginning of this year, a variety of Chinese mainland content such as original and copyright dramas and original variety shows have achieved hot trend rankings in 14 countries, including Malaysia, Thailand, Japan, South Korea and the United States. ”

In 2022, with iQIYI's expansion of cooperation with local partners and the launch of overseas advertising platforms, iQIYI's monetization ability will undoubtedly be more worth looking forward to.

Look at the sinking market business. At the beginning of 2021, iQIYI launched the iQIYI Express Edition App, which was new in the form of user sharing fission, and then promoted by personalized recommendations, simple and convenient interactions, and the ability to adapt to low-performance and low-cost mobile phones. A year later, iQIYI Express Edition has grown rapidly, reaching a peak of 5 million DAU in the fourth quarter.

Due to the completely different target users, product positioning, and operation strategies, the user overlap rate between iQIYI Express App and iQIYI App is low. In other words, the former is a good way to help iQIYI penetrate its business into third- and fourth-tier cities. Coupled with the rapid development of iQIYI's interest community, the consumption time of iQIYI's film library content has been improved. The data shows that in 2021, the consumption time of instant users will account for 17% of the total time of the whole platform.

Looking back on 2021, despite the many uncertainties in the macro and industry environment, the content of popular dramas such as "Son-in-law", "Wind Rises Luoyang" and "Who is the Murderer" launched by iQiyi is still very popular. Yunhe data shows that in 2021, iQiyi will rank first in the market share of dramas, movies, variety shows, animations and other categories.

03

Widen the moat

Content is the moat of long video platforms, but different content, the value is not the same. Content purchased from outside, while there is no shortage of high-quality episodes, also means a high cost. The massive amount of high-quality exclusive self-made content not only represents a better content cost structure, but also brings more high-viscosity paid members, ultimately improving the sustainable profitability of the platform. Good quality content is the strategic focus of the platform's more long-term value.

As the world's largest film and television streaming platform, Netflix's membership scale, revenue scale and profitability have risen all the way, thanks to the wide moat built by high-quality self-made content, a steady stream of blockbuster masterpieces, and a continuous contribution to incremental users.

As a pioneer in the field of long video, iQIYI has led the development and change of the industry for many times, such as the first to launch paid memberships in 2011 and the first to break 100 million members in 2019. Today, in the exploration of self-made content, iQiyi is also at the forefront and continues to widen the moat. In the summer of 2020, iQIYI launched the Mist Theater, which enhances the user experience with a distinct type of high-quality short episode content and a new theater operation model.

In the first year of its launch, "The Hidden Corner" and "The Silent Truth" produced by the Mist Theater quickly became popular and became phenomenal IP. At the 3rd Asian Content Awards at the Busan International Film Festival 2021, "The Silent Truth" won the "Best Streaming Original Drama Award". This is the second consecutive year that iQIYI has won the award after "The Hidden Corner" won the second edition of the Asian Content Awards.

In the fourth quarter of 2021, the "Mist Theater" still maintained a strong momentum, with a number of online dramas, all of which had excellent performances, while the overall advertising revenue of the "Mist Theater" doubled compared with 2020. For example, "Who's the Murderer" became the theater's largest contributor to membership. For another example, the first work of the "iQIYI Huaxia Ancient City Universe" series, "Wind Rises in Luoyang", on the second day of broadcasting, the popularity value of iQIYI's content exceeded 9,000.

In order to help establish a win-win situation between creators and platforms, in the past year, iQIYI has continued to deepen the cloud cinema and explore the establishment of a new online movie distribution ecosystem. This year, Cloud Cinema launched a total of 9 online single-film pay-per-view (PVOD) movies, covering different genres such as comedy, action, suspense, and thriller. The new model increases the supply of high-quality content and provides a greater display platform for excellent content creators.

Although the industry faces many uncertainties in 2021, iQiyi ranks first in the market share of dramas, movies, variety shows, animations and other categories.

In view of the 2022 that has arrived, iQIYI said that it will continue to tap the brand value of subdivided circle content, take quarterly broadcast measures for high-quality dramas and theatricalization of short episodes, and extend the IP life cycle. The "iQIYI Huaxia Ancient City Universe" series, "Mist Theater", "Love Theater" and comedy-themed "Little Comedy Theater" will continue to launch new works. In terms of movies, 6 to 9 iQIYI original movies are expected to be launched in 2022. In terms of variety shows, in addition to fan variety, comedy, music, and emotional programs, sports competition and competition variety shows will be innovatively developed.

In March, the reality-themed contemporary drama "The World of People", produced by iQIYI and broadcast exclusively on the Internet, exceeded 10,000 in the peak of content popularity in iQIYI station, becoming the first national hit in the beginning of 2022, and the third drama with content in iQIYI station after "Yanxi Raiders" in 2018 and "Son-in-law" in 2021.

Write at the end

2022 is the third year of covid-19. The epidemic has changed the trajectory of social operation, changed people's lives, and also affected the process of business, bringing unprecedented challenges to operators.

Business has always been turbulent, the market is changing rapidly, business operations have never been easy, any commercial organization wants to build a sustainable business, it must learn to embrace change and cope with difficulties. It is precisely because of the baptism of difficulties and the review of challenges that those excellent enterprises that persevere have a stage to show themselves.

In the past year, the strategy of reducing costs and increasing efficiency, improving quality and efficiency has achieved initial results, which has helped iQIYI continue to maintain its market leadership and has also made it full of confidence in the future. Gong Yu said that iQIYI strives to achieve break-even at the non-GAAP operational level for the whole of 2022 and achieve a break-even at the quarterly non-GAAP operational level as soon as possible.

This is a goal that has been unimaginable for long video platforms in the past decade or so, but after being driven by internal and external factors in 2021, it has become no longer out of reach. In 2021, the entire industry has bid farewell to the route of burning money for growth and entered a new stage of paying more attention to quality and efficiency and financial health. If iQIYI, as the industry leader, can achieve the set goals in 2022, it will undoubtedly be another commemorative milestone for the industry.

*The above content is a third-party product announcement, does not constitute investment advice, does not represent wall street views, please make independent judgment and decision-making.