Netflix's financial report illuminates the future of China's online video industry - Going global to Southeast Asia

Lost in one place, gained in another. An epidemic "killed" movie theaters on the other side of the ocean, but it also allowed the online video platform Netflix to establish a complete business closed loop.

Netflix's fourth-quarter 2020 financial report shows that the company's revenue for the quarter was US$6.644 billion, with profits up 108% year-on-year. Most importantly, Netflix's current cash flow is US$1.9 billion, while in 2019 this figure was -3.3 billion.

1.

Similar to the e-commerce, food delivery, and taxi-hailing industries, the nature of streaming media that charges viewers directly means that traffic and payment rates are the foundation for the platform’s survival.

However, with the decrease in the number of new population and the impact of short videos and games, the demographic dividend of China's online video industry has actually disappeared. According to the "China Mobile Internet 2020 Half-Year Report" released by QuestMobile, the user scale of China's online video industry was only 860 million in mid-2020, a year-on-year decrease of 7.9%.

Just as has been played out in countless industries, in a stock market, industry oligarchs have to attract users through involutionary competition in terms of content and rates in order to seize more market share.

From the perspective of content, in 2015, iQiyi launched variety shows such as "The Rap of China" and "Running Man" in a "short, flat and fast" manner. After successfully crossing the threshold of tens of millions of paying members, it has invisibly set an example for the industry for variety shows based on the "star-centered system".

According to the data of the 2020 Tencent Entertainment White Paper, the number of online variety shows in China increased from 105 last year to 127 in 2020, a year-on-year increase of 20%. It can be said that while our peers on the other side of the ocean are shooting hit dramas that influence the global entertainment trend, we are still using several cameras to talk about the "variety show personality" of traffic stars who may burst into tears one day.

The content has already fallen behind, and the price has lost its upward momentum. In order to attract members to recharge, major platforms have repeatedly launched "price wars" in an attempt to exchange traffic at low prices. According to media statistics, in 2019, the industry held no less than 8 VIP half-price activities, with the lowest annual VIP fee being only 89 yuan.

Judging from the numbers, the number of subscribers of China's leading video platforms has exceeded 100 million, but unfortunately, the growth of subscribers has not brought about a fundamental change in the financial data of streaming platforms. The 2020 Fortune China 500 list released by Fortune Chinese website shows that iQiyi ranks second on the loss list and has been on the list for two consecutive years, with a total loss of more than 20 billion yuan.

The reason for this problem, in addition to the impact of the "price war", is actually largely due to the "star-oriented" content strategy. In early 2019, at a financial meeting, iQiyi CEO Gong Yu admitted: "Previously, the salary of top actors exceeded 150 million yuan."

The platform doesn’t make much money to begin with, and celebrities take the bulk of the revenue. How can it not suffer losses?

Back to the United States across the ocean. According to the development rhythm of China's video industry, North American streaming platforms should be trapped in the dilemma of traffic depletion, but Netflix's latest financial report completely overturned this assumption.

The financial report shows that in the fourth quarter of 2020, Netflix's net new subscriptions were 8.51 million. As a result, Netflix's total number of users also exceeded the 200 million mark for the first time, reaching 204 million.

Research data released by MoffettNathanson showed that in Q1 2020, the streaming penetration rate in the United States reached 74%, of which Netflix accounted for 72% of the share.

Against this backdrop, Netflix was still able to gain a relatively high number of net new subscriptions in the fourth quarter of 2020, largely due to its ability to attract users on a wider scale. According to Statista data, more than 80% of users subscribe to Netflix while subscribing to other streaming platforms.

In comparison, data from the "Internet's First Battlefield: 2019 Pan-Content Consumption Trend Report" released by Penguin Think Tank shows that in China's streaming media market, users who subscribe to only one video platform account for nearly 70%.

From a regional perspective, Netflix's net new subscriptions in North America have indeed been unstable in recent quarters, but Netflix has found a strong driving force in overseas markets. The financial report shows that in the fourth quarter of 2020, EMEA (Europe, Middle East and Africa) became the main battlefield for Netflix's net new users, with a net increase of 4.5 million, a month-on-month increase of 542%.

2.

Netflix also has traffic anxiety, but Netflix does not let this anxiety dominate and use celebrities as the basis for "short, flat and fast" assembly line content. Instead, it adopts a dual-wheel drive based on insight into user needs, with high-quality content and high membership fees complementing each other.

Similar to iQiyi in 2015, Netflix, which has just transformed into a streaming media model, also leveraged the growth of paid members through differentiated content. In 2013, Netflix spent $100 million on "House of Cards", which was a blockbuster upon its launch, gaining 3 million new users.

Netflix, which has tasted the sweetness of differentiated content, has continued to increase its content investment. It is understood that in 2008, Netflix's content costs were only about 30 million US dollars, and by 2018, this figure had grown to 13 billion US dollars. According to data released by research organization Bankr, Netflix's content costs are expected to increase to 19 billion US dollars in 2021.

Similar to "House of Cards", the growth of Netflix's subscribers in the EMEA region in Q4 2020 was mainly due to the launch of differentiated series such as "Money Heist", "One Night in the Sky", and "House of Flowers" for users in these regions. In this regard, Netflix Chief Content Officer Ted Sarandos said: "We are committed to becoming the spokesperson for the European entertainment industry."

Netflix is ​​a commercial company, and the pressure of high content investment must be transferred to the consumer market. At the end of 2020, Netflix increased its subscription price for the fifth time, with the monthly fee for the Premium version increasing to US$17.99 (approximately RMB 119), an increase of 13%.

In comparison, as mentioned above, iQiyi’s annual fee during the promotion was only 89 yuan, which is even cheaper than the monthly fee of Netflix’s Premium version. This actually highlights the weakness of domestic platforms in terms of pricing power.

Of course, the weakness of domestic streaming platforms in pricing power is also due to the lack of scarcity of content. The high homogeneity of content has reduced the value of the platform. For example, music variety shows were very popular in 2019, and in 2020, we saw several online variety shows with the same content, such as "Singer: The Year of Fighting", "The Voice of God", and "I'm the Host of the Band". This highly homogeneous content obviously cannot help the platform further increase prices.

3.

To this day, the main theme of China's online video industry is still to produce content around the "star-centric system". However, we also need to see that in addition to this, there are actually some leading platforms trying to develop in the direction of "Netflix".

In mid-2020, iQiyi quietly launched its self-produced drama "The Bad Kids", which instantly exploded the market and became the "top stream" of the summer. Subsequently, iQiyi launched "Extreme Witness", "The Escape", "The Silent Truth" and other content in the Misty Theater, all of which gained good reputation and traffic.

According to data from Guosheng Securities, iQiyi's Misty Theater was watched by 68 million VIP members in 2020, generating over 460 hot search topics. The average Douban score of the series was over 8 points, making it a critical and commercial success.

The impressive performance is largely due to iQiyi's high investment in content. In 2019, at the iQiyi iJOY Joy Conference, iQiyi Chief Content Officer Wang Xiaohui said: "In 2020, iQiyi will invest more than 20 billion yuan to support its strong original capabilities and rich content reserves."

Interestingly, it was after the Misty Theater became popular that iQiyi announced a price increase for VIP membership fees, adjusting the previous 19.8 yuan/month to 25 yuan/month. As the "three brothers" who kept pace with each other, Tencent Video and Youku did not take the step of raising prices even three months after iQiyi raised its prices. Considering that the latter two do not have content reserves comparable to the Misty Theater, it seems to explain why Tencent Video and Youku are hesitant to raise prices.

Just like Netflix actively expanding its overseas presence, when the dividends of the domestic market peaked, China's leading video companies also began to look for new growth points in overseas emerging markets. And this may be the decisive place for future success.

In 2019, iQiyi International Station reached a strategic cooperation with Astro, Malaysia's first media brand, shortly after its establishment, trying to meet the content needs of local Malaysian audiences more quickly with the help of Astro. Interestingly, perhaps in order to learn from Netflix's advanced experience in operating overseas markets, in June 2020, iQiyi also recruited Kuo You-Chuan, former Netflix vice president and managing director of Asia Pacific, to be responsible for iQiyi's international market strategic planning, market development, public affairs and other work.

iQiyi has been operating its overseas business steadily, and with its current focus on the Asian market, it has achieved impressive results in less than half a year. According to data released by Media Partners Asia, in mid-2020, the weekly viewing time of iQiyi in the four major Southeast Asian markets of the Philippines, Indonesia, Singapore and Thailand increased by more than 500%.

Although from a broad content perspective, China's video industry has not yet broken away from the constraints of the "star-oriented system", beyond this, the leading streaming platforms have actually begun to explore a two-way positive cycle of content and traffic, and have achieved remarkable results.

Once upon a time, we dominated the screens in the Southeast Asian market with Chinese dramas such as "My Fair Princess", "Journey to the West" and "Romance of the Three Kingdoms". In time, when we break away from the existing pattern and actively explore overseas markets like Netflix, especially the Southeast Asian market with which we have many intersections, China's online video platforms and the Chinese cultural values ​​they advocate may present a new look.

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.