BEIJING, May 18, 2021 /PRNewswire/ --
Dear Shareholders,
In my first shareholder letter to you, I would like to share
some thoughts and views on the online video industry, its
competitive landscape, and our content strategy.
1. The industry and our competitive
advantages
The online video industry in China has more than a decade long history.
There are three common views on the classification of videos.
The first view is to classify videos based on length, by which
videos are defined as either long or short videos, or long-form,
medium- form, or short-form. The second view is to classify videos
from the perspective of the content creators, and can be known as
PPC (professional produced content), PUGC (professional user
generated content) and UGC (user generated content). PPC videos are
produced by professionals such as scriptwriters, directors,
cameramen, actors, and actresses, and the content they produce
includes films, dramas, animations, and variety shows. PUGC
is usually produced by KOL and MCN, which are normally less
professional when compared to PPC but their content can still be
monetized through advertising or other ways. UGC is made by
ordinary users and is generally not considered professional
content.
The above-mentioned are the two most common ways to classify
videos. However, there is also a third view; since content is
made to be consumed by users, why not classify videos based on the
users' purpose, mindset, and how they reflect as they watch the
content? Therefore, we believe that video content can also be
defined as delicious, entertainment, and interest-based video.
Delicious videos are like fast food. Users turn to this kind of
video for simply relaxing and passing time rather than gaining any
form of insights.
Typical entertainment videos are films, dramas, animations and
variety shows. Quality entertainment videos can trigger instant and
continuous in-depth thoughts, impress users, and even impact one's
values and life. Among the different forms of entertainment
content, film was born more than 120 years ago and is one of the
world's most historic, artistic, and influential works. Dramas and
variety shows also have a history of almost 100 years and a mass
influence. While bringing fun and joy to people, entertainment
videos also once changed people's habits, the society, and even the
world. Historically there has always been a demand for romantic,
fictional and artistic works that were created based on reality,
and entertainment content such as movies, dramas, variety shows and
animations is the only video format that effectively meets this
demand. We believe that entertainment video content has
absorbed the essence of literature, painting, music, and other arts
with a longer history, and will have an even larger addressable
market moving forward. We have greater confidence in the Chinese
market as the overall economy keeps developing steadily and
continues to go through a consumption upgrade.
Interest-based videos are videos that were created to meet
users' diverse interests and are generally based on real life
events. The themes of these videos include but are not limited to
food, DIY, product unpacking, travel, pets and so on. The creators
of this type of content range from MCN and KOL, to amateurs and a
small number of professionals. Interest-based content and its
audience are more niche and long tail, and the content is usually
less popular than movies, drama series, animations and variety
shows.
Among the aforementioned video types, iQIYI mainly focuses on
the latter two.
1) Our iQIYI app focuses on entertainment videos. On one
hand, our platform facilitates an easier distribution of
entertainment content while providing users with a better
experience by leveraging technology innovations. Technology
innovation coupled with creative ideas from artists, enables us to
produce higher-quality films, dramas, animations, and variety
shows. While we bring fun and joy to our users, we are also happy
that we can influence users' lifestyles and provide them with
easier access to more thought-provoking stories.
The entertainment video market has extremely high entry
barriers, and it takes time to achieve the economies of scale
necessary to operate efficiently. The overall understanding of the
industry and its talents is also critical to being successful, as
the entire content industry is still in a very nascent stage of
industrialization and talents are scarce. Being the largest
platform for video distribution in China, we have an in-depth understanding of
users' demand for entertainment videos empowered by our technology
and the vast amount of data accumulated over the years. Together
with the industry's capital-intensive nature, our knowledge on the
industry's rules and practices, and our affiliation with directors,
actors, scriptwriters, cameramen, sound engineers, art designers
and other talents, iQIYI has established a solid leading position
in the entertainment video industry in China. We are confident in our ability to
continue driving the healthy growth of the industry and provide
users with more high-quality entertainment content. In the future,
we believe an increasing number of Chinese users will pursue
entertainment content with higher spiritual value and more artistic
quality after fully enjoying the pleasure brought from watching
delicious videos. This is merely a process of a cultural
consumption upgrade.
2) iQIYI's Suike app mainly focuses on interest-based videos
which are also distributed on iQIYI's main platform. Interest-based
content is very diversified and its target users are very
long-tail. It has higher entry barriers but its users are also
stickier. The total addressable market of interest-based videos is
large, but it is difficult for a single player to gain a
substantial share of the market. In our view, future Chinese media
platforms focusing on interest-based content will be decentralized,
as will user demand and content supply. This business model is
still in a nascent stage in China
but we have great potential in this emerging market with the rich
resources we accumulated over the past decade.
Simply stated, iQIYI's core value is the production and
distribution of entertainment content. Entertainment content is one
of the core needs for human beings, and iQIYI is already a leader
in this area and will continue to expand upon it moving forward.
For interest-based videos, we will continue to invest in Suike and
expect that it will contribute to our core entertainment
business.
2. Our approach to current challenges
After 10-year development, it is widely known that our
membership business has become the Company's largest revenue
stream. Although we are currently facing some challenges that
slowed the growth of our membership business or fluctuated the
number of subscribing members, we still firmly believe that the
membership business has huge potential. Two supporting pieces of
data are: 1) As of the end of Q1 2021, the number of accumulative
paid accounts has exceeded 490 million; and 2) In Q1 2021, the
monthly average number of subscribing members who have membership
benefits for any given day has reached nearly 160 million, which
both show that there are a lot of users that are willing to pay for
high-quality content. For the main reason of the slowdown in
membership business growth, the industry generally believes that
short-form videos and other diversified entertainment methods have
squeezed user's time. We acknowledge the impact of this, but we
have also observed that users' mindset about watching various kinds
of content have gradually become clearer. At the same time, based
on our data and analysis, we believe that the reason of
entertainment videos being squeezed by other methods is still the
lack of high-quality content. Even now, there are a variety of
different entertainment methods, but high-quality entertainment
video content still plays an important role in driving user traffic
and time spent. A recent example is our exclusive blockbuster "My
Heroic Husband" launched in February of this year. Over the course
of its run, the mega-hit drama was played on more than 180 million
devices. At its conclusion, it attracted more than 64 million
subscribing members, driving the peak number of subscribing members
in the quarter to come close to the level at the end of Q1 last
year.
Continuously producing high-quality content is the core of
increasing the user base and member loyalty. We believe that the
current lack of high-quality content is mainly caused by two
factors: 1) The amount of licensed content that can be obtained
from traditional channels is decreasing. The number of licensed
drama series has decreased consistently with the shrinking market
share of the traditional TV industry, and the impact from the
global pandemic has dramatically reduced the number of theatrical
movies, especially Hollywood
productions screened in Chinese cinemas. Theatrical movies play a
vital role in attracting and retaining subscribing members. Our
analysis shows that the number of movies with a box office of more
than RMB100 million, which launched
in SVOD mode from January to April in 2020 and 2021, decreased by
around half, respectively, when compared with the same period in
2019. Among which, the number of overseas movies, primarily
Hollywood movies, decreased by
more than half, respectively. 2) The quantity and quality of
self-produced content cannot currently satisfy user demand. We need
to find the best talent and partners in the industry to build a
strong content ecosystem, and then make breakthroughs of original
content. It will take time to improve the content ecosystem.
With that, I would like to talk more about how we plan to
resolve the issue we face: lack of high-quality content.
As content quality is at the core of our entire ecosystem, we
aim to achieve a high hit ratio through the continuous improvement
of content quality. To establish enough and highly productive
in-house studios is an important prerequisite for the improvement
of our content quality. When we did our IPO in 2018, we set a goal
of establishing 50 in-house studios within two years which we have
now achieved. Most of these internal studios are focusing on
original dramas and variety shows, and a few are concentrating on
movies and animations. In the next two years, an important aspect
of our content strategy is to build more in-house film and
animation studios. Through our in-house studios, we can amass
outstanding talent in the content production industry and obtain
more premium IPs and productions.
With our increasing number of in-house studios, we will also be
able to continue to adhere to our strategy of diversifying content
and deepening the vertical categories. Since the successful launch
of our Mist Theater last year, short series format and content
quality have been widely recognized by both our users and the
market. I believe that through the accumulation of more experience
and continuous efforts, we will provide a stable and sustainable
high-quality content pipeline.
The content production industry also faces several problems,
such as long and uncontrollable production schedules, low hit
ratio, many simple and repetitive tasks, the lack of objective
evaluation standards, and high financial risk, etc. In response to
these challenges, we believe that the way to break the situation
lies in the industrialization of video production.
The industrialization includes the restructuring of industry
rules and intelligent production techniques. Among them,
intelligent production is the key focus. This is because although
China's video industry has already
experienced an industrialization process for 20 to 30 years, it has
yet to achieve substantial qualitative changes. One of the
important reasons is the lack of technological support, and we
believe that intelligent production techniques is the key to solve
this problem. Thanks to the development and support of 5G, AI,
blockchain, DRM, VR/AR, virtual shooting and other technologies,
our intelligent production system is gradually improving. The
intelligent productions that we are planning and implementing
include: 1) a production business intelligence system used for
pre-broadcasting business index prediction and post-broadcasting
commercial index analysis; 2) an intelligent integrated production
system, leveraging artificial intelligence to integrate people,
equipment, and materials in the content production process and to
standardize the management of the entire process; 3) an intelligent
production tool set, a multi-faceted production tool set using
artificial intelligence, computer graphics and other technologies
to improve work efficiency and user experience. We are using these
systems and tools to enhance the controllability of production
schedules, content quality and financial risks, thereby further
reducing costs and improving efficiencies. We believe that through
modifying unreasonable rules in the industry via iQIYI's leadership
and using intelligent production techniques to assist the
optimization of industry rules and improve production efficiency,
content production will become more stable, continuous and
efficient with higher hit ratio in the future.
With over ten years of iQIYI's growth, in terms of our business
operations, we are gradually establishing a win-win ecosystem and a
diversified monetization model. In terms of content, we are
recognized by our users and industry, and in terms of technology,
we continue to innovate to improve our user experience and
operating efficiencies. We are confident that our leadership will
continue to heighten by leveraging our know-how acquired through
years of highly intense competition. We also strongly believe that
long-form video is irreplaceable as an entertainment format. In the
meantime, through continuous technology innovations that empower
content production, we will have the capability to increase our hit
ratio, generate greater commercial value, and expand the
imagination for the next generation of entertainment. As well, we
look forward to bringing more good news to all shareholders.
Note from the Company: We won't present this letter on our
earnings conference call later today, in order to leave more time
to communicate with investors during the Q&A
session.
Appendix: 2021Q1 Review and Outlook
We kicked off the year with a solid quarter. Our revenue
increased both sequentially and year-over-year in the first
quarter, which is above our previous guidance. Besides, in recent
quarters when revenues have
been relatively stable, our content costs have been effectively
controlled and losses have continued to narrow. We continue to lead
the market by launching a consistent stream of premium content.
According to QuestMobile, our MAU, DAU and monthly time spent all
ranked first in the industry in the first quarter of 2021.
Membership Business:
As of March 31, 2021, we had 105.3
million subscribers, with 3.6 million net additions during the
quarter. Membership services revenue increased by 12% sequentially
to RMB4.31 billion.
Subscriber growth was driven by several factors: 1) Our top
content, in particular premium dramas, performed very well. For
instance, our top drama, My Heroic
Husband, was a blockbuster during the Spring Festival. Through this
drama, we were able to achieve extremely high monetization
efficiency with relatively fewer episodes. The average daily
membership consumption exceeded the Story of Yanxi Palace, reaching
a new record high. During the quarter, a number of theatrical
movies were launched on our platform including Bath Buddy, Caught
in Time and Shock Wave 2. Online movies such as Dreams of Getting
Rich and Rising Shaolin: The Protector were also well-received. 2)
Users spent more time on long-form video during major holidays such
as Spring Festival, driving up the overall traffic on our platform.
Both of our mobile MAUs and DAUs sequentially increased this
quarter. 3) We introduced various innovative marketing initiatives
during the holiday season, including an incentive task system. We
also optimized our membership products and services, which
significantly improved user engagement and loyalty.
In addition to overall membership growth, our sequential growth
in membership services revenue was also due to two factors
including: 1) An increased willingness to pay among users. This was
driven by our premium content as well as the innovative business
models we rolled out, such as our advanced viewing model for
subscribers and PVOD mode. For example, our exclusive drama, My Heroic Husband,
disrupted the stereotype of costume dramas with its comedy style
attracting a large amount of members to pay extra fees for the
advance viewing. Also, the movie Dreams of Getting Rich hit record
highs in both viewership and pay-per-view revenue under the PVOD
model. 2) ARPU growth driven by the headline pricing adjustment in
November 2020.
Meanwhile, we strived to expand our total addressable market in
two areas. 1) In late February, we launched a new VIP plan for
iQIYI Lite, which targets users in lower-tier cities. We intend to
convert these users into our subscribers with more customized
content and privileges. 2) We also continued to expand our
footprint overseas. During the first quarter, our overall overseas
MAU increased by 77% sequentially. Our new downloads also remained
amongst the TOP 5 in multiple Southeast Asian countries. In
particular, we were ranked #1 in Thailand and Malaysia. The premium content we launched
further improved our overseas brand awareness.
Though we still expect short-term volatility in our subscriber
numbers, we remain confident in the mid- and long-term development
of our membership business. This is based on our dedication to
premium content, as well as ongoing improvements to our original
content ecosystem and in-house production capabilities. We are
happy to see that the content quality of domestic online video
platforms is gradually converging with that of our global peers. It
has become a norm that people are willing to pay for premium
content. We have also noticed that one of our peers recently
followed our move in membership pricing adjustments. That in our
view bodes well for the long-term profitability of the online video
industry.
Advertising Business:
During the quarter, the overall advertising market continued to
recover. Our online advertising services revenue increased by 25%
year over year. Even though the first quarter is traditionally a
slow season for our advertising business, we were able to achieve
decent sequential and year-over-year growth. Like the trend in the
fourth quarter of 2020, growth was mainly attributable to strong
content marketing revenue. Our content marketing revenue recorded
decent growth driven by major variety shows and dramas. The content
marketing revenue accounted for around 64% of our brand ad revenue
in the first quarter, which was a peak for the last few quarters.
This again validated advertisers' recognition of our premium
content.
For brand ads, revenue stabilized driven by the rebound of both
advertisers' budgets and the number of advertisers amid the
macroeconomy recovery. Major dramas in the first quarter triggered
word of mouth recommendations, attracting clients from different
sectors to try out our theater products. If we break it down by
industry, growth mainly came from food and beverage, and the
cosmetics and toiletry industries. In terms of performance ads, the
sequential revenue growth benefited from increased traffic during
the holidays, as well as the contribution from key industries
including network services, e-commerce, online video and
gaming.
Content:
We continued to lead the industry in terms of total number of
top titles and viewership across the categories, including drama,
variety shows, animation, children and other content. According to
third-party data, video views of our dramas and variety shows both
accounted for nearly 40% of the overall market viewership in the
first quarter; our animation, including children's animations, and
movies had even higher numbers reaching over 40% and 50%,
respectively, also ranking first among peers.
During the quarter, we continued to deliver a wide variety of
best-in-class stories that our members loved to watch. We also made
notable progress in IP development and stylistic innovations.
1) For dramas, our exclusive costume drama My Heroic Husband
became an instant hit after its launch. Its innovations in theme
and style provided a whole new way of creating good costume drama
which will have an impact on our future productions. We also
launched a number of popular original dramas with realistic themes
such as, My Best Friend's Story, Dt.
Appledog's Time and Vocation of Love.
2) For variety shows, we keep innovating on original content
with different themes. Our new original variety shows, such as
Theater for Living, Qipa Talk 7, Fourtry 2 and Ladies' Talk became
hits during the quarter.
3) In original movies, we keep working on producing better
stories. Our original movie Underworld Crashed has been screened in
theaters, reached a box office of over RMB300 million, and has received high ratings
from various platforms. Apart from that, we began shooting two new
movies during the quarter. There are currently three others in
post-production and will be released in theaters later this year.
In addition, there are 18 iQIYI Original Films under
development.
For the second quarter, key dramas in our pipeline include A
Love for Dilemma, Court Lady, Crossroad Bistro, The Rebel, The
Lion's Secret and others. Love for Dilemma and Court Lady were
aired in April and well-received by our users. We kept promoting
short drama theater brands with a brand featuring romantic content
scheduled to launch on May 20th. We
will also launch new content in Mist Theater later this year. In
animation, new content to be aired includes No Choice but to Betray
the Earth, The Tales of Wonder Keepers and the light animation
Immortal Father As a Son-in-law 3 as well as others.
Despite some expected uncertainties in our content schedule in
the coming months, we believe that the impact will be mitigated by
our diversified content pipeline, especially self-produced
dramas.
Technology:
We are empowering the entertainment industry with technology,
while building an industrialized system for video production. The
key highlights during the quarter included:
1. Smart production: The iQIYI "X City" extended reality (XR)
live concert. The concert used world-leading extended reality
visual production technology and set a new global benchmark in
terms of the range of virtual scenes and the number of interactive
users online.
2. Products: In January 2021, we
officially released the iQIYI Lite app which targets users in the
lower-tier regions of China. iQIYI
Lite performed well in terms of user engagement. Both its
current average time spent, and average video views have exceeded
that of the main iQIYI app.
For more information, please
contact:
Investor Relations
iQIYI, Inc.
+ 86 10 8264 6585
ir@qiyi.com
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SOURCE iQIYI, Inc.