As iQiyi celebrates its tenth birthday, when will streaming media make money?

On April 22, iQiyi celebrated its tenth birthday. Compared with the ninth anniversary, the tenth anniversary celebration was kept simple under the epidemic. There was no background board for clocking in, no dessert table filled with cakes and fruits, and no internal letter from the CEO to all employees. Instead, there was an online meeting where employees could watch the speech of Gong Yu, the founder and CEO of iQiyi, through live broadcast, which was only for internal use, not for external use.

But gifts are still necessary. Many employees posted the iQiyi 10th Anniversary Diamond Annual Cards they received. Green is still the background color, and the stock code "IQ" is printed on a green planet full of laughter and joy. It is the ecology and achievements accumulated by iQiyi in the past ten years, and contains Gong Yu's vision and imagination of building an online entertainment kingdom.

The decade of iQiyi's development and growth is also the decade of accelerated reshuffle in China's video industry, from free access to paid viewing, from copyright competition to original self-production, from advertising to membership... The grassroots melee has become a three-legged tripod, but there are fewer princes. Under the smoke of gunpowder, the competition is still there. Today, iQiyi has started the next decade. While rushing towards a larger membership scale, more high-quality content, and higher revenue goals, it also has to face continued losses, the reshaping of user habits, the risk of uncertainty, and a series of impacts caused by the epidemic on the entertainment industry. But the arrow on the front of the card still points to the future without hesitation, with eight words written on it: All the past is a prologue.

We can’t stop even if it exceeds 100 million, hold on to that member!

The financial report shows that as of December 31, 2019, iQiyi had 107 million subscribers. The scale of membership is not achieved overnight. Yang Xianghua, President of iQiyi Membership and Overseas Business Group, once broke down the growth of iQiyi's membership business into the following stages:

The first phase was from 2013 to 2015. Driven by copyrighted film content, iQiyi achieved its first 5 million members, which Yang Xianghua called the foundation of iQiyi's membership business. The increased crackdown on piracy created a foundation for shortening the window period. In 2014, "Beijing Love Story" was released on iQiyi the same day it was taken off the theaters, achieving a "zero window period".

The second phase was from 2015 to 2017, when the number of iQiyi members grew to 20 million. High-quality dramas contributed greatly to this, with a representative example being "Grave Robbers' Chronicles". Five minutes after the 12 episodes were released at once, there were 160 million playback requests and over 2.6 million payment order requests for membership. The influx of users paralyzed iQiyi's servers, which were largely restored after an all-night repair. During this period, "The Legend of Shushan" was also broadcast in a "first online, then offline" mode, with one season per month, and members were able to watch the entire series exclusively.

The third stage is from 2017 to now, when original self-made exclusive content has become the main driving force, including dramas, movies, variety shows, animation and other vertical categories. In recent years, idol talent shows, subculture variety shows such as rap and street dance, Youku's exclusive "Guardian", iQiyi's exclusive "Story of Yanxi Palace", Tencent Video's exclusive "The Untamed" and so on all belong to this category. Of course, this has also led to a fierce competition for exclusive broadcasts and a great homogeneity of original self-made content.

On the one hand, it is the stimulation of content, and on the other hand, it is the pull of the joint membership model. For one dollar, you can get double membership benefits. The three video platforms "Youku, iQiyi and Tencent Video" are all involved. JD.com/Ctrip/Zhihu/+iQiyi, Meituan/Suning.com/Himalaya+Tencent Video, and "88VIP" covering various services of Alibaba's Youku, Tmall, and Ele.me are all available. For users, the purchase threshold is lowered and the added value of use is increased; for platforms, cross-ecological cooperation takes less time and has lower risks to attract new users.

However, it has not been clearly disclosed how many members this model has contributed to the video platform. Wolfpack Research raised doubts in its short-selling report on iQiyi, saying that the latter double-counted its joint members and included the shares of its partners, thereby exaggerating the number of members and revenue.

A video industry insider told Sina Technology that joint membership authentication is difficult and there is no unified confirmation standard. Each company calculates the entire number, which results in a lot of inflated numbers.

This also fully reflects the anxiety of video platforms about membership - the era of market scramble is over, and the next growth must be harvested in every gap. So what if there are over 100 million users? It is not easy to acquire customers, so we must grab that member in any possible way.

Revenue diversification and controversial advance on-demand streaming

After all, membership is iQiyi's main source of income. According to the financial report, iQiyi's membership service revenue in the fourth quarter of 2019 was 3.9 billion yuan, a year-on-year increase of 21%. The annual membership service revenue was 14.4 billion yuan, a year-on-year increase of 36%.

Gong Yu has mentioned many times that iQiyi has nine major IP monetization methods, including e-commerce, advertising, games, payment, brokerage, rewards, publishing, distribution, and authorization. Through this, iQiyi has built its "one fish, many meals" business model, which represents a diversified commercialization method of IP that is sustainable and healthier.

Membership income and advertising income are growing and declining, and the original motivation for users to purchase membership is to remove advertisements. Of course, advertisements are also constantly evolving. In addition to front-end advertisements, there are also patch advertisements, creative mid-insert advertisements, and bullet screen advertisements... However, Gong Yu said that iQiyi remains cautiously optimistic about the advertising business. He explained that although brand advertising has long occupied the top position in iQiyi's history, its ceiling is low and the growth rate is slow, and the space is relatively limited compared to performance-based advertising. More importantly, the growth rate of advertising has slowed down under the influence of the macroeconomic environment, and "iQiyi hopes to create income from other aspects."

The financial report shows that in addition to membership and advertising, iQiyi's other business revenue in 2019 reached 3.7 billion yuan, a year-on-year increase of 30%, and the annual content distribution revenue was 2.5 billion yuan, a year-on-year increase of 18%. The two together accounted for more than 21% of the total annual revenue. In terms of subdivisions, e-commerce, games, and distribution have made breakthroughs, but under the nine IP monetization methods proposed by iQiyi, the revenue it leveraged is just the tip of the iceberg.

The seeds of revenue diversification have been planted, and more efforts need to be made in the future. After Tencent Video implemented advanced on-demand viewing with The Untamed, iQiyi also tried it with Joy of Life: members can get the privilege of advanced on-demand viewing by paying another 50 yuan, and will always watch 6 more episodes than members. As a top series, Joy of Life has a relatively impressive popularity and audience base, making it a good choice for testing the waters. However, the real market reaction is user dissatisfaction, pirated copies leaked, and the platform apologized.

This does not dilute the enthusiasm of video platforms for advanced on-demand viewing. Recently, many works such as "I Am Yu Huanshui", "Ghost Blows Out the Light: The Cave of Dragon Ridge", "The Sideburns Are Not Begonia Red", "The Republic of China Detective", "Rebirth", and "Three Thousand Crows" have promoted advanced on-demand viewing. This also means that starting with Tencent Video, iQiyi and Youku have all joined the advanced on-demand viewing camp. Except for Tencent Video's "The Untamed" at 6 yuan per episode and "You Are My Secret" at 2 yuan per episode, 3 yuan per episode is almost the standard for advanced on-demand viewing.

Gong Yu said at an analyst meeting after the release of the fourth quarter and full-year financial report of 2019 that advance on-demand will be the norm. "We believe that it will become an important way to increase ARPU (average revenue per user) in the future." At least from the current perspective, as an exploration of content payment, advance on-demand is irreversible.

Rely on yourself for everything, go out to sea and build ecology

On the occasion of iQiyi's ninth anniversary, Gong Yu emphasized iQiyi's independence from its competitors. He said that iQiyi is independent in spirit and resources, and it is not easy to get to where it is today. The implication of this sentence is that compared to competitors who can rely on big trees for shade, iQiyi has to rely on itself for everything.

The various economies of Alibaba Group can form an overall linkage with Youku, covering food, drink, entertainment and shopping; Tencent Video not only has the group's traffic and advertising, but also has the support of Yuewen, Xinli, TME and film resources, covering the entire chain of IP creation, film and television production, content distribution and broadcasting. As for iQiyi, Gong Yu mentioned during the listing connection that Baidu provided financial and resource assistance, and the collaboration between the two was mainly focused on AI technology, marketing, computing and storage resources.

However, Baidu's search engine position is facing a threat from Toutiao, and the two sides are fighting each other in information flow and search. In addition, iQiyi's dilemma also lies in the lack of new transaction scenarios. The content stays at the content itself and cannot form a synergistic effect. It is precisely based on this that iQiyi must expand into a broader commercial dimension, such as short videos, knowledge payment, reading, e-commerce, etc., to promote user consumption. The iQiyi App is at the center of the matrix as a traffic pool. This is not a single-point battle, but an ecological linkage of the entire platform. However, Baidu can not provide much support to iQiyi in the above areas. If the "Apple Orchard" wants to flourish, it urgently needs nutrients.

Moreover, industry barriers have already been formed, and it is very difficult for new entrants to catch up. How to continue the story? With the saturation of Internet users in first- and second-tier cities, iQiyi, like most Internet companies, has targeted the sinking market. Yang Xianghua frankly admitted that the payment awareness of users in third- and fourth-tier cities has yet to be cultivated, and plans to promote it through a combination of ground promotion and agents. This is a long process that requires sufficient patience.

At the same time, there is another track - going global. Last year, iQIYI announced a strategic partnership with Malaysian media brand Astro to launch more operations and marketing activities based on the global operation of its international entertainment service (iQIYI App). Gong Yu described iQIYI's "technology + content" approach to going global as "exporting Chinese cultural products and services with a dowry", from simply going global with content to being platform-driven, with the same purpose - finding new development opportunities, starting with the growth of users and usage time, and then monetization.

The role of technology cannot be ignored. Gong Yu also pointed out: "Looking forward to the next decade, we expect that the upcoming commercial use of 5G and the continued innovation of artificial intelligence technology will bring us huge opportunities." 5G may bring new opportunities for the upgrading and technological integration of the entertainment industry. In addition to a better audio-visual experience, VR, AI and other fields will also be further upgraded.

What should video platforms do if they are still losing money?

However, losses are a common pain for video platforms including iQiyi. It has been established for ten years and has been losing money for ten years. According to the financial report, iQiyi's net loss in 2019 was 10.3 billion yuan, a year-on-year increase of 13.4% compared with 9.1 billion yuan in 2018. Tencent and Alibaba also disclosed the operating conditions of their entertainment businesses in their financial reports. The former's video business operating loss in 2019 was less than 3 billion yuan, and the latter's adjusted EBITA loss in the entertainment sector was 3.298 billion yuan. The number is smaller than that of iQiyi, but it still failed to cross the threshold of profitability.

The main reason for the loss is the huge content cost, which has always been a huge burden on video platforms. Take iQiyi as an example. From 2015 to date, its annual content costs have been 3.69 billion yuan, 7.54 billion yuan, 12.62 billion yuan, 21.1 billion yuan and 22.2 billion yuan respectively. In the past five years, a total of 47.15 billion yuan has been burned, accounting for 53.6% of the total revenue in the past five years. After the implementation of measures such as the "salary cap order", Gong Yu stated on many public occasions that the content production and procurement costs have dropped significantly since August 2018. "The copyright cost of TV series has fallen from a maximum of 15 million per episode to less than 8 million. The reduction in the cost of self-made dramas is mainly in the actors' pay. Now the price limit for a top actor to play a drama is 50 million yuan, which used to be more than 150 million yuan."

In 2019, iQiyi's content costs increased by only 6% year-on-year, a single-digit percentage, thanks to the continuous optimization of the content structure - less outsourcing and more self-production on the basis of controlling the budget. Cost reduction has been diligent, but the advertising downturn has made things worse. In 2019, iQiyi's online advertising service revenue was 1.9 billion yuan, a year-on-year decrease of 15%. In addition to the impact of macroeconomic factors, there is also the impact of short video platforms.

In addition to bandwidth and server costs, the greater the traffic, the higher the maintenance cost. Therefore, video platforms have no choice but to rack their brains to increase revenue and reduce costs. However, the premise of reducing costs is to ensure content quality and user experience, and the implementation of diversified commercial methods such as content payment has not been smooth, and users have been slow to recognize the value of the content itself. A person from a video platform who did not want to be named believes that, at least at this point in time, streaming media that relies solely on content is not a profitable business.

What about the future? Ten years is just a stage. Whether iQiyi wants to be "China's Netfilx" or "China's Disney", there is still a long way to go. When will iQiyi get out of losses? This requires the long video industry and even the entire content industry to answer together. In Gong Yu's eyes, the ten-year-old iQiyi "is always a child, always a sunny, happy, confident and energetic child." Can this stumbling child really "let dreams bloom and make happiness simple"? These questions may be answered in the next decade.