Price hikes saved Gong Yu but not iQiyi

This week, iQiyi announced a new round of membership price increases, with this round of increases reaching an all-time high of 50 yuan. The annual price of the Star Diamond VIP membership card has increased from 398 yuan to 448 yuan. This also means that iQiyi fans like Cuihua, whose families are not well-off, will be hit even harder.

Since iQiyi took the lead in raising prices at the end of 2020, video platforms such as Mango TV, Migu, and Tencent have all raised their prices. In fact, foreign streaming media such as Netflix, Disney+, HBO, etc. have also raised prices many times.

Compared with foreign streaming media, any price increase in China will be criticized, but there seems to be no better way to get out of the predicament of continuous losses except relying on price increases. After all, if the price is increased, the boss can give an explanation to the capital market, but for the platform, it is still a drop in the bucket. Domestic streaming media is facing a difficult profit crisis.

Stills from "The Richest Man in Xihong City"

The reason why streaming media companies have raised their prices is simple: they are losing money. According to iQiyi's annual report, iQiyi suffered a net loss of 6.17 billion yuan in 2021. Although the losses have narrowed compared with previous years, iQiyi has never made a profit since its establishment, and this is the 12th consecutive year of losses.

Its main competitor, Tencent Video, is included in the business of the entire Tencent Group. It does not have an independent financial report, so it is difficult to see the specific data. However, from Tencent's 2021 financial report, it can be seen that the number of paid members of Tencent Video increased by only 1% year-on-year. At the same time, Tencent mentioned in the financial report that it is taking measures to optimize costs and reduce the financial losses of Tencent Video.

Another giant, Youku, was incorporated into Alibaba in 2015. Therefore, we can see from the data of Alibaba's digital media and entertainment sector where Youku is located that the digital media and entertainment business had an adjusted loss of 6.178 billion in 2021, with a profit margin of -20%.

The three giants are no exception. Some media have reported that "iQIYI, Youku and Tencent Video" have lost 100 billion in ten years. So where did the 100 billion go?

According to iQiyi's financial reports in the past three years, the total revenue was 29 billion, 29.7 billion and 30.6 billion yuan respectively. Its revenue mainly comes from membership income. In 2021, membership income was 16.7 billion, an increase of 1% from 2020 and 15.7% from 2019.

In addition to membership income, another major revenue contribution comes from online advertising services. In 2021, advertising revenue was 7.1 billion yuan, a decrease of 14.5% compared to 2019. It is not difficult to see the business model of my country's long video platform from iQiyi's revenue structure.

That is, by purchasing copyrights or producing self-produced dramas to reserve content, thereby attracting user traffic and advertisers, and then realizing monetization through content payment and advertising services. However, in this traffic model, the cost of adding content is very low, and the difference between revenue and cost is enough to cover the fixed costs, so profitability is naturally not a problem.

But for long video platforms, the traffic model of light content is a false proposition. This is because the growth of membership fees and advertising fees, the two major sources of revenue for long video platforms, are the result of members "voting with their feet". Members only pay for good content, and although advertising revenue comes from advertisers, it seems to be increasingly difficult to get advertisers to pay.

High-quality content has become the top priority of everything, because only high-quality content can attract more users and bring more potential consumers to advertisers. So when high-quality content is scarce, long video platforms will experience "involution", touting traffic stars, piling up big IPs, and cost snowballing.

The high costs have naturally become a problem for long video platforms to make profits. It is not difficult to see from iQiyi that the company's annual investment in content costs exceeded 20 billion yuan from 2018 to 2021. Although membership income has continued to increase and the gap between the two has narrowed, it still cannot reverse the loss-making situation.

The imbalance between content costs and membership income has forced iQiyi to increase advertising revenue to improve overall revenue. This has led to the current situation where even VIP members are forced to watch advertisements, which is quite speechless.

However, under the impact of short videos, advertising revenue of iQiyi, Tencent and Youku has tended to decline. Tencent’s annual report in 2021 stated that media advertising revenue fell 8% to RMB 3.2 billion, mainly due to the decrease in advertising revenue from Tencent video services.

Therefore, only by increasing membership income can the company's revenue be better increased. As the Internet enters an era of stock competition, the growth rate of membership slows down, and digging deep into the value of single users becomes the key to profitability. In other words, there are only so many sheep, and we can only get some wool from them.

This is why the price keeps rising to increase the ARPU value. It is the same situation of fleecing the sheep, so why don’t the sheep abroad cry out, but the sheep in China keep crying out?

The fundamental problem is not with the sheep, but with what they are fed. Sheep abroad eat green grass, and the high-quality content provided by streaming media brings users much greater satisfaction than the dry grass eaten by domestic sheep. One is forced to be plucking, so naturally users have different attitudes towards price increases.

There is nothing wrong with the price increase. The key is whether it is worth it, and the key to whether it is worth it lies in the quality of the content. Good content is the lifeblood of long videos. As of the end of last year, the number of TV series and movies on Netflix reached 6,021, with 623 new ones added last year alone, and Netflix's self-produced dramas accounted for 45% of the total film library.

Although iQiyi's content library includes more than 40,000 film and television dramas, TV series, variety shows, etc., the number of new dramas released in 2021 is only 214. Although it is higher than Tencent and Youku's 165 and 162, there is still a huge gap compared with Netflix. Self-produced dramas and some dramas with exclusive rights purchased account for 43% of the new dramas, which is also lower than Netflix.

In terms of quality, among Netflix's top 10 global hit dramas in 2021, Douban scored the highest 9.4 points and the lowest 6.7 points, with an average of over 8 points. For iQiyi's top 10 hit dramas in 2021, Douban scored the highest 7.5 points and the lowest 3.7 points, with an average of less than 6 points. The quality is mixed and polarized.

Since Netflix quickly broke through the circle with its self-produced drama "House of Cards", which became popular all over the world, it has led the 72nd Emmy Awards with 160 nominations and also performed well in the Oscars. In 2022, it not only received 27 nominations to become the biggest winner at the Oscars, but also was shortlisted for three consecutive years and received the most nominations.

Last year, the movie "Squid!" made huge profits around the world, directly boosting Netflix's third-quarter revenue by 16% year-on-year and an increase of 4.38 million paying users worldwide. Netflix's high-quality content output provides subscribers with "value for money."

In contrast, after iQiyi launched the high-scoring suspense trilogy "The Bad Kids", "The Silent Truth" and "Proof of Innocence" in the Misty Theater in 2020, the reputation of its 2021 works on the same theme, "Who is the Murderer" and "Eye of the Storm", plummeted. In terms of awards, except for the representative web drama "Ice Breaking Operation" which won the Magnolia Award in 2020, only a few works such as "River God" and "Proof of Innocence" have received international recognition.

Continuously raising prices with such content has resulted in a loss of subscribing members. Of course, there are objective reasons why domestic long video platforms have been criticized for raising prices.

Netflix started out as a DVD rental company. Americans had already developed the habit of paying for content during the era of home movie watching with limited television. Netflix subsequently developed DVD rental and streaming media platforms, which was a good way to take over the migration of limited television users.

Users think it is natural to pay for a larger content library. In the era of cable TV in my country, you can watch various channels at will as long as you buy a TV. In the era of DVD rental, pirated discs are rampant and cheap. In the embryonic stage of later video websites, various platforms rely on free videos to attract traffic.

Users have long been accustomed to getting things for free. As long video websites enter the era of legitimate PGC and have to collect subscription fees from members, and there are so many free websites where users can watch dramas at will, their willingness to pay is even weaker.

In addition, the difficulty of exporting domestic film and television dramas also limits the profitability of long video platforms. Compared with Netflix's global expansion speed, which has covered more than 190 countries and regions around the world, domestic long video platforms are affected by cultural, linguistic and other factors and can only focus on the domestic market, while domestic Internet users are close to their ceiling.

Although iQiyi started its "going global" plan in 2019, the road ahead is still difficult and dangerous. If domestic long-form video platforms want to avoid the dilemma of continuous losses, in the short term, larger-scale investment in content production is a top priority for the development of long-form video platforms. After Netflix's transformation to self-produced dramas, its cash flow was once very tight, and it could only make up for the high cost gap through long-term debt financing.

Therefore, the debt-to-equity ratio has remained high. Before my country's long video platforms can achieve positive growth in internal investment and user growth, they still need to increase their content investment to incubate more high-quality content, and low-cost financing must continue.

In the long run, going overseas with long videos is the only way to break through the user ceiling. Although it currently faces obstacles such as cultural background and language communication, my country's 14th Five-Year Plan has clearly defined the long-term goal of building a cultural power by 2035. In the future, as my country's economic strength and national discourse power continue to increase, Chinese culture will have more and more international influence, and these content platforms will also open up a new world as the country's soft power increases.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.