Author: Alain

Source: deep ring

Gong Yu, founder and CEO of iQIYI, Inc., said with great certainty that iQIYI, Inc. wants to be China's online Walt Disney Company. He is 50 years old. According to the standard of retirement at 60, he hopes to build a basic business structure like Walt Disney Company for iQIYI, Inc. within 10 years.

People don't seem to be interested in this statement, but they still keep using "China's Netflix" as a metaphor for iQIYI, Inc.. Even, in the US stock market, the share prices of iQIYI, Inc. and Netflix are "divine synchronization".

Today, iQIYI, Inc. released 2018Q4 and full-year results. Although content costs still put short-term pressure on profits, iQIYI, Inc. believes that original popular content and diversified operational measures have contributed to the strong growth of subscription members. According to data, 36.6 million new subscribers were added in the whole year, and the total number of subscribers exceeded 87.4 million. In addition, in addition to the same member income as Netflix, iQIYI, Inc. 's ecological business income has doubled and the trend of revenue diversification is obvious.

From the perspective of the whole financial report, iQIYI, Inc. is not very much like Netflix, but the content ecology under the "apple orchard" mode is really more like Walt Disney Company.

Let's take a look at which figures in the financial report reveal the difference between iQIYI, Inc. and Netflix:

Difference 1: income composition

According to the financial report, iQIYI, Inc. 's annual income in 2018 is divided into four sectors-member service revenue, advertising revenue, content distribution income and other income.

An obvious trend is the continuous growth of revenue, of which the growth of member income is the strongest. In the fourth quarter of 2018, member service revenue was 3.2 billion yuan ($465.6 million), up 76 per cent from a year earlier. Full-year revenue from membership services was 10.6 billion yuan ($1.5 billion), up 72 per cent from 2017.

In the past, Chinese video sites adopted "Internet thinking" with Chinese characteristics-providing services free of charge, attracting traffic and cashing in through advertising. The core of everyone's competition is to expand the overall scale of users. But after a circle of burning money and grabbing content, it is difficult for users to adhere to the stickiness of the platform for a long time. Users follow more "content loyalty" and go to see where there is good content.

With rising prices upstream and limited growth in downstream advertising revenue, the simple and brutal membership revenue model used by Netflix on the other side of the ocean has become the envy of Chinese platforms as an excellent way to make money.

Since 2011, iQIYI, Inc. has begun to explore video membership services. In June 2016, the number of members exceeded 20 million; at the end of 2016, the number of members exceeded 30.2 million, and at the end of 2017, the number of members exceeded 50.8 million. At the end of 2018, according to the data disclosed in this financial report, the number of iQIYI, Inc. members exceeded 87.4 million.

Today, member income has exceeded advertising revenue to become iQIYI, Inc. 's largest source of income. But unlike Netflix, which only has member income, iQIYI, Inc. has several other sectors of income in addition to members.

A few years ago, iQIYI, Inc. put forward the "apple tree" model, the trunk is the IT technology platform support, there are a lot of Apple Inc, each Apple Inc represents a business type. There are film business, variety shows, anime, novels, comics and so on.

At this year's iQIYI, Inc. World Congress, Gong Yu talked about iQIYI, Inc. 's ecosystem from the "apple tree" to the "apple orchard". In addition to the most important videos, there are literature, comics, live streaming, games, sports, and even online movie tickets.

The strong performance of various vertical business lines and the integration of mutual entertainment with celestial phenomena pushed up other income to 1.1 billion yuan ($160.1 million) in the fourth quarter, up 129% from a year earlier and accounting for 16% of total revenue.

On the other hand, Netflix,98% 's income comes from its members, if it is a start-up company, it may be said to be focused, but as an "old store", a single revenue model will always be the bottleneck of its development.

The growth of Netflix members in the United States has slowed this quarter, while in overseas markets, although the number of members has increased, its ability to pay is far less than that of American users, who have very different preferences for content. The cost of single-user content can be high.

From the perspective of income composition, iQIYI, Inc. and Walt Disney Company are more like each other, with more uniform distribution and stronger anti-risk ability.

Difference 2: membership composition and growth rate

The picture below shows the paid members of Netflix over the past four years, and the blue column represents the number of paid members in the United States. It is clear that the growth of paying members in the United States is gradually slowing.

Netflix has entered a bottleneck period for domestic users. Although the growth of overseas users is good, according to deep ring calculation, the monthly ARPU value of Netflix domestic users in the United States is 11.38 U.S. dollars in the fourth quarter, while that of international users is only 8.69 dollars, and it is still declining.

Netflix takes member income as the main source of income, which means that users are not willing to spend more on membership fees, let alone increase profits by raising prices in the future.

However, Chinese video platforms, such as iQIYI, Inc. and Tencent Video, have not yet encountered the user ceiling.

Deep ring has done a very superficial calculation, the United States currently has about 85 million households, if each has a subscription, then the penetration rate of Netflix in the US market is now 58.5 million / 85 million, which is about 69%.

Calculated on the basis of iQIYI, Inc. 's 87.4 million members, according to the China Family Development report of the National Health and Family Planning Commission, there are about 430 million families in China. If each household has a subscription, iQIYI, Inc. 's China market penetration rate is 87.4 million / 430 million, which is equal to about 20.3%. There is huge room for domestic growth.

According to iQIYI, Inc. 's membership trend chart, its growth slope has not continued to level off, and the domestic market is far from reaching the flat period.

Difference 3: content cost

After talking about revenue and users, let's take a look at the "old problem" of the video platform-- cost.

Take a look at the content cost of Netflix:

Since 2014, Netflix's budget has grown rapidly at a rate of $1.5 billion a year, reaching $6 billion by 2016. The total content expenditure of Netflix was US $8.9 billion in 2017 and US $12.04 billion in 2018. Goldman Sachs Group predicts that Netflix will invest as much as $22.5 billion in content in 2022.

Its chief content officer said: "We have been increasing the content budget, and we also know that diminishing returns will occur at some point, which means that we keep investing money but no new revenue is generated." Now it means that the marginal cost of overinvestment is not that high. We don't want to withdraw the investment quickly to examine which program's investment is unnecessary. I think this is the trade-off in the business. "

Obviously, Netflix doesn't want to control the cost of content.

In this regard, iQIYI, Inc., like Netflix, is willing to "spend a lot of money" for good content. IQIYI, Inc. 's fourth quarter operating cost was 8.523 billion, of which content cost was 6.5 billion, and content cost accounted for 92.5% of revenue. In today's financial report, iQIYI, Inc. wrote: "We invest more resources in the production of high-quality original content. In the long run, we believe that investment in high-quality content is very valuable and will enable the company to achieve long-term growth."

However, objectively speaking, the general environment of iQIYI, Inc. 's content input is improving.

"Deep ring" learned from a number of sources that the purchase price of the show has dropped significantly across the industry. In the analyst conference call, iQIYI, Inc. CEO Gong Yu also confirmed this situation:

"after August 2018, the cost of content procurement and production began to decline significantly, and the cost of purchasing copyright fell by less than 8 million per episode from more than 15 million per episode. With regard to the salary limit for star actors, the government is more of a guiding opinion in principle, and the industry is already forming a new way of market pricing. A large number of new actors and actresses have increased in popularity and commercial value, and a large number of new actors have emerged. They are bound to become the backbone of the market, the commercial value will be improved at the same time, and less than 50 million young stars will become new forces. Remain optimistic about content cost control in the future. It is beneficial to the development of the industry. "

However, this good news is not reflected in this season's financial report, because the broadcast of TV dramas is usually postponed, copyright dramas are usually 6-12 months, homemade dramas are 12-18 months, so the impact on financial reports lags behind.

Difference 4: content strategy

Although both attach importance to content, the content strategies of Netflix and iQIYI, Inc. are still different.

For example, when it comes to iQIYI, Inc., we can immediately think of dramas such as the extended Jubilee Strategy, as well as variety shows such as "Idol trainee", "Chinese New Rap" and "Qifa Shuo". Last year, iQIYI, Inc. set up a joint venture with Xinying Sports, which will further enrich the platform for sports events.

Netflix has only been experimenting with homemade Reality Show shows since 2018 and has been focusing on shows until now. On the other hand, there is no live content of sports events at all.

In terms of content decision-making, there were rumors that House of Cards was based entirely on big data's work, which was later refuted. In fact, the decision-making mechanism within Netflix is called Freedom and responsibility (Freedom and Responsibility), and Netflix allows more people on the team to decide whether to give the green light to a new show or whether to spend a lot of money on a show. According to "deep ring" previously known, some of Netflix's major decision makers' title is even two levels below the chief content officer's "non-executive level employees".

Gao Xiaosong once analyzed the content model of Netflix--

Of course, the advantage of the subscription model is obvious. You hand in the money first, and I'll use the money to shoot the movie. However, the serious problem is that the membership fees paid by users are not linked to the content. In other words, in subscription mode, no matter how many people watch House of Cards, you don't have a penny to share.

"so, everyone in Hollywood understands the Netflix model, which is called Quantity is more important than quality (quantity is more important than quality). If you work for Netflix, because the quantity is important, I shoot ten, and I earn 20% to 30% anyway. "

IQIYI, Inc. 's models are more diverse, some of them are copyright dramas, homemade dramas, and there is also an account-sharing model.

In 2014, iQIYI, Inc. put forward the concept of online big movies and used the pay-on-demand model to share accounts. In 2018, iQIYI, Inc. made a total of 1004 online films, with a box office break of more than 45 million yuan and 25 films worth more than 10 million, all of which are all record highs.

On the other hand, iQIYI, Inc. was the first to put forward the cooperation model of pay-sharing online drama in May 2016. According to the data obtained by Shenxiang up to November 2018, iQIYI, Inc. has launched 116 paid online series in 2018, of which the number of A-level high-quality online dramas has increased by more than 50% compared with the same period last year, and the amount of account sharing of "waiting for smoke and warm Rain" has exceeded 30 million. It is the highest amount of online TV series with the highest amount during the broadcast period this year. IQIYI, Inc. also periodically adjusted the sharing ratio between the platform and partners from 5:5 to 3:7.

In addition, Gong Yu also said a key point: the entertainment of the future is the entertainment of AI. AI technology enables content creators and content distribution platforms to carry out personalized creation and accurate push according to the needs of users.

Difference 5: competitive environment and historical opportunity

The biggest difference may be attributed to the very different living environment and historical opportunities between the two.

For iQIYI, Inc., they do not need to face the pressure of upstream content producers to do their own streaming media. Although it is true that there has been a joint venture between LightMedia and 360 to set up a video platform "watch first", the cooperation has been broken up, and Mango TV once pursued a "solo broadcast" strategy, trying to break through the encirclement by relying on the content of Hunan Radio and Television, but eventually had to give up this strategy.

Netflix is not so lucky. Walt Disney Company, HBO and other content producers have made some moves on streaming media, and once the competitive relationship is formally formed one day, they will not continue to provide content to Netflix.

Streaming HBO NOW of HBO

On the historical opportunity, Netflix grew up in a place where the sense of payment was mature, and the first step of opening up Xinjiang did not encounter the challenge of users' habits, but now he is facing the new problems of the ceiling of the local market and huge differences among users in overseas markets.

IQIYI, Inc. is different. Although China's video platform has only gradually trained some paid members after a long period of user education and market development, once it has opened up the "second pulse" of users, the great potential of the Chinese market will give the member business a stronger driving force.

We can't tell which market is superior, but what is certain is that iQIYI, Inc. is by no means "China's Netflix". They themselves and the world they face are too different.