The Zhitong Finance App learned that Huaan Securities released a research report saying that although there are many players in the skit industry, the platformside's business model will be healthier. At this time, players with both content production capabilities and platform operation capabilities will have less voice in the industry chain. This brings two notable investment opportunities: 1) the short drama app itself (that is, the platform side): related companies include Tianwei Video (002238.SZ), Chinese Online (300364.SZ), Yingyu (03700), and 2) the content review party for the short drama app (new characters added): Related companies: Huashu Media (000156.SZ).

The views of Huaan Securities are as follows:

Industry situation: The rise of mini-programs and skits, the emergence of independent apps, and the gradual development of skits to boutique

1) Supply side: Under the latest definition of the State Administration of Radio, Film, and Television, the types of skits can be divided into four categories: short video platform skits, short video platform skits, applet skits (based on Douyin, Kuaishou, and WeChat applets), and skit apps (tomato skits, hippo theaters, starbud skits, etc.). The number of short drama filings exploded in 2022, with a year-on-year increase of 252.19% to 3,293. In 2023, the number of short drama filings increased 8.53% year-on-year to 3,574. The average number of episodes per episode increased from 23 episodes in 2022 to 27 episodes in 2023.

2) Demand side: Short drama market space = user payment+advertising+platform division. According to data from Ai Media Consulting, the market size of short dramas in '23 was 37.39 billion, an increase of 267.65% over the previous year. Short drama market space = user payments+advertising+platform division. According to our estimates, the paid skit market size is 20.74 billion (mainly user recharges), and the free skit market size is 16.65 billion (mainly platform split+advertising). Of these, the overall market size of split skit is about 800 million yuan, and the advertising market size is about 15.8 billion yuan. The market size of short dramas is estimated to be 505.6/634.3/749.9/85.65 billion in 24-27, with a CAGR of 23.0% in 23-27.

3) Policy side: Currently, short dramas promoted on demand on long video platforms and short video platforms have been incorporated into the effective management of online audiovisual by radio and television departments at all levels. The implementation of administrative supervision responsibilities and platform principal responsibilities is strong, showing a trend of specialization and quality. However, due to its obvious decentralized nature, mini-programs have not yet been included in the supervision of the radio and television departments. Online video platforms only have information on the founders and accounts of the applets. Beginning on November 14, 23, the State Administration of Radio, Film, and Television launched a three-month special rectification. In addition to complying with national regulations on application providers and application distribution platforms, the State Administration of Radio, Film, and Television should also obtain a license to broadcast audiovisual programs on the Information Network and be included in the General Administration's pre-filing management according to regulations.

Short analysis of applets: low threshold, short cycle, costs are mainly deposited in the distribution process

1) Industrial chain: The mini program short drama industry chain includes upstream copyright parties (Reading Group, Palm Reading Technology, Chinese Online, Youzu Network, etc.), midstream producers (information streaming companies, traditional film and television companies, MCN companies, and some IP copyright companies), and downstream content distributors (distributors+distributors).

2) Production cycle: The production cycle for mini programs is short, and it takes about 2-3 months from the beginning of production to receiving split revenue. Among them, the script creation cycle is 15-25 days, 6-15 days for production, and about 14 days later. You can see the split account within the second month of launch. The production cycle is far shorter than that of movies and TV series.

3) Cost decomposition: The cost structure of an applet skit mainly includes five parts: 1. Screenplay fee: guarantee 1-100,000+ recharge flow account 1%-2%; 2. Production cost: 400,000-600,000+ recharge flow account 2%-8%; 3. Advertising costs and distribution costs: if the ROI is 1.2, self-running advertising costs account for about 83%-85% of the recharge flow; if distributed by a distributor, then the distributor will receive an additional 2-5% revenue share; 4. Video CDN cost: users need an additional NCD to recharge and watch the short drama technical support for the program, Video CDN costs account for about 2-3% of recharge transactions; 5. Mini program technical channel fee: On August 15, '23, the WeChat Mini Program began charging, and 10% of the recharge transaction will be charged, 5% of which will be returned as advertising money; currently, the technical channel fee for the Douyin Mini Program is 0.7% of the recharge transaction.

Future Product Trends and Market Space Research and Judgment: Mini Program to App

1) Necessity analysis — do you want to switch from an applet to an app?

First, switching from an applet to an app means higher user retention and a healthier business model. The net interest rate for skit apps is 23.4%, and the net interest rate for short programs is 0.7%. Mini program skits are single-product logic. They only stream a single series. Since users can watch and go, every time a new drama is produced, it must be re-streamed, which is a huge waste of distribution costs.

Second, to raise the jump threshold for third-party applets, short drama applets must choose between continuing to rely on Dike Kuai or setting up their own apps. The skit side is limited by the platform side, and the added value has been greatly reduced, and the small program side that already has a certain size is likely to leave the platform.

2) Feasibility analysis — can you switch from an applet to an app?

First, we agree that at present, users spend a relatively long time online, and there is a competitive relationship between existing applications. However, apps that help users stimulate their needs without understanding their own needs have a certain foothold. Because of this, after Douyin became popular in '19, they lost at least one-third of Wang Zhe's players' time. “Users don't know what they want until you put the product in front of them.”

Second, with the continuous accumulation of content, the platform is strong enough to handle private traffic, and the product form will transition from an applet to an app.

Finally, product value = new experience - old experience - migration cost. The new experience is the experience of skit products, and the old experience is the experience of other entertainment apps on the market. The content “storage” barriers brought about by more clear content positioning, more clear user transmission, and long-term accumulation of quality and compliant content are poor experiences with skit products; at the same time, compared to social networking products from acquaintances, the migration cost of content products is less.

3) Short drama app market space estimation:

We judge that starting in '24, skit apps will gradually be launched. The competitive pattern for future skit dramas is Doukue+ content producers (including traditional crews and MCN) vs. skit apps (leading applets are formed). We expect the 24-27 short drama market to be 505.6/634.3/749.9/85.65 billion, with a CAGR of 23.0% in 23-27. Due to Doukuei's larger public domain traffic, assuming that Douku+ content producers and skit apps each occupy 60%/40% of the market size, the market space for skit apps in 24-27 was 198.0/248.4/293.6/33.53 billion.

Investment advice

Although there are many players in the skit industry, the platform-side business model will be healthier. At this time, players with both content production capabilities and platform operation capabilities will have less voice in the industry chain. As a result, there are two investment opportunities to watch out for:

1) The skit app itself (that is, the platform side): After switching to the app, the skit side's business model is healthier. According to our calculations, the net interest rate for skit apps is 23.4%, and the net interest rate for mini-program skits is 0.7%. Leading applets and skit apps that already have a first-mover advantage are expected to continue their advantage. Related listed companies include: Tianwei Video (002238.SZ), Chinese Online (300364.SZ), and Yinguniverse (3700.HK).

2) Short drama app content review party (new role): From a mini program to an app, the content review work and responsibilities that the skit player needs to take on will become heavier. At this time, the short drama app may see a large-scale cooperative model of China Radio and Television Media+ Dianzhong Technology. The skit party is responsible for application development, program production, terminal operation and traffic distribution, and the other party reviews and checks the product content and divides the platform's revenue. The role is similar to that of a broadcast controller in OTT products. Related listed company: Huashu Media (000156.SZ).

Risk warning: the risk that the popularity of skit products will decline; the risk of stricter regulations; some entities involved in the skit industry are listed as unlisted companies, and the operating conditions of the skit players will not have a significant impact on the company's operations and financial situation