For Gong Yu, the founder of iQiyi who has been the only survivor in the video war for more than 10 years, this is probably the darkest moment: after cutting off the "cancer" of views two months ago, he has been unable to turn the tide, and instead continues to slide into the abyss of losses of billions of yuan and continued decline in stock prices.
When he previously closed the playback volume, Gong Yu said "this is a very reluctant decision." He pinned his future hopes on the growth of paid members and the development of vertical screen content. However, many difficult realities have proved that Gong Yu's hope of escaping from the abyss of losses is just a luxury hope. So does Gong Yu regret his decision now?
1. There is no escape from the abyss of losses
In late October, Gong Yu, a male engineer from Tsinghua University, appeared on the set of a variety show in Songjiang, Shanghai, and happily chatted about daily life with the young star William Chen - this is a key project of iQiyi with a total investment of more than 250 million yuan in 2018, and has brought together young idols such as Lu Han, William Chan, Song Qian, and Wang Jiaer.
In the past few years, as the most hands-on person in the video industry, Gong Yu has been traveling to the recording sites of major variety shows all year round, "even going there in person to talk about actors."
However, for Gong Yu, his ultimate goal of rushing to variety shows is not just to chat with celebrities, but to try to be on par with Netflix, the largest online video website in the United States, through self-made strategies and other methods.
But compared to Netflix, which is profitable (profit in the third quarter was US$403 million), the gap between iQiyi, which is stuck in a bottomless pit of huge losses, is getting wider and wider.
On October 31, iQiyi handed over its first half-year report card after listing: According to the unaudited financial report for the third quarter, iQiyi’s third-quarter revenue was 6.9 billion yuan (approximately US$1 billion), with a net loss of 3.1 billion yuan (approximately US$1 billion). 457.3 million U.S. dollars), which has further expanded compared with the same period last year. According to analysts’ previous predictions, iQiyi’s loss per share in the third quarter will reach 0.43 U.S. dollars, but according to the published financial report data, the actual loss per share is approximately 0.63 U.S. dollars.
Affected by the loss, iQiyi’s stock price fell sharply in after-hours trading that day, closing at $19.3, a drop of 13%.
On November 1, with U.S. technology stocks rising across the board and most Chinese concept stocks rising sharply, iQiyi fell again by 11.53%.
It has only been 7 months since iQiyi was split from Baidu and officially listed on Nasdaq on March 29 this year. The capital market has begun to lose confidence in it, especially with the massive year-on-year growth in iQiyi’s paid members. According to iQiyi, the current number of iQiyi subscription members is 80.7 million, and membership service revenue is approximately 2.9 billion yuan, a year-on-year increase of nearly 80%.
The bottomless pit of losses is the most realistic and fatal problem that has faced Gong Yu for many years. In the past few years, iQiyi has continued to suffer huge losses: from 2015 to 2017, the three-year net loss rates were -48%, -27%, and -22% respectively. Compared with the gradually improving net loss rate, the losses have gradually expanded, and the losses in 2017 reached 3.7369 billion yuan.
In the first three quarters of 2018, the Q1 net loss was 396 million yuan, the Q2 operating loss was 1.3 billion yuan, and the Q3 loss was 3.1 billion yuan. Not only did the total losses in the three quarters exceed the entire year of 2017, but the Q3 losses were almost equivalent to the total for the entire year of 2017.
The huge gap in losses from Q2 to Q3, what happened in just a few months?
The most expensive thing is "operating costs". According to iQiyi, the company’s content costs will grow higher than revenue in a short period of time. So far, the company's content costs account for between 70% and 80% of total revenue, and it is expected that this proportion will reach 80% in the second half of the year.
Among them, the main reason is the skyrocketing price of copyrights - a widely circulated data is that from Sohu Video's 25,000 yuan purchase of "Empire of Qin" in 2009 to Tencent Video's 810 million yuan purchase of "Ruyi's Royal Love in the Palace" in 2017, the amount of money spent by video websites on copyright purchases has increased by nearly 400 times at most.
"With such a huge expenditure on copyright fees, the rapid growth of paying users is only a drop in the bucket." An Internet observer told a reporter from Zinc Scale (ID: beefix) that in fact, because iQiyi's self-made variety show invited many young talents, although the traffic was obvious, it was still a sky-high expenditure.
In this Internet person’s view, in addition to sky-high copyrights, iQiyi also has huge expenditures in operations, research and development, bandwidth and other aspects. Moreover, the copyright of the Russian World Cup was exclusively acquired by Youku, which may have indirectly affected iQiyi’s decline in advertising revenue in the third quarter.
2. The cancer has not been completely cut
iQiyi’s stock price trend chart in recent months
A more important reason is related to Gong Yu’s action of "cutting off the wrist of a strong man" in September this year.
In September of this year, Gong Yu chose to attack the cancer of "fake traffic" and replaced the number of views with popularity - since 2016, the number of views has exceeded 10 billion and has become a standard feature of the fake boom in film and television dramas. Looking at online video platforms as a whole, the cumulative number of front-end drama hits on the three major platforms, Youku, iQiyi, and Tencent, was 410.742 billion in 2016, and reached 486.02 billion in 2017, an increase of nearly 70 billion in one year.
"Turn off the playback volume is something we are very reluctant to do, but instead of causing chaos in the market, we should make up our minds and be the first to eat crabs." At that time, Gong Yu's plan was to gradually replace the original playback volume on all terminals based on the content popularity of user discussion, interaction volume, and multi-dimensional playback indicators.
But two months later, "The Strong Man Cuts Off His Wrist" obviously fell far short of Gong Yu's expectations. According to Zinc Scale (WeChat ID: beefix), many people in the film and television production industry are extremely cautious about iQiyi’s move and have even reduced the amount of advertising. The implementation of this model has also encountered resistance from film and television investors.
"Compared with playback volume, popularity is more difficult to understand intuitively." A person engaged in film and television marketing told Zinc Scale (ID: beefix) that their company has held several meetings, but how to determine the popularity dimensions originally announced by iQiyi is still a mess, and no one within iQiyi has given a clear explanation.
The above-mentioned person said, "In fact, from our observation, compared with the playback volume, the logic of popularity is actually the same, but the analysis method is more complicated, which is not a reasonable solution to the cancer of fake playback volume."
As of now, the entire industry is still waiting and watching, and Youku, Tencent Video, etc. have notfollow up. Tencent Video internally stated that Tencent Video will not cancel the display of front-end playback volume, but in the future, "member attraction" will replace playback volume as the main assessment strategy for drama broadcasts; while Alibaba Music CEO Yang Weidong bluntly stated that increasing playback volume and turning off playback volume are two different things. There is no positive causal relationship, and it is not a scientific and consensus method.
In fact, for those who brush the volume, this is just a change of operation method. According to Sina Technology reports, many fraudsters said that comments and likes may become new objects of fraud, but the cost and time of fraud have increased. A person with experience in brushing also told Zinc Scale (ID: beefix) that he once tried to brush up the popularity of a video with less than a few hundred hits, and that the popularity can still be increased through traditional brushing methods.
3. Membership growth is reaching the ceiling
For many years, iQiyi has been calling itself the "Chinese version of Netflix". From charging membership fees, to investing resources in producing original content, to now turning off the display of foreground playback, all aspects are trying to be like Netflix.
Relevant data shows that Netflix’s third-quarter revenue was US$4 billion, a year-on-year increase of 34%; net profit was US$403 million, a year-on-year increase of 210%. The number of subscribers is 137 million, which is much higher than iQiyi’s 80.7 million.
The biggest difference between the two is actually the profit model. Nearly half of iQiyi’s revenue comes from advertising, while Netflix had almost no advertising before August this year, and almost all of its revenue comes from membership income. Its business model is simple: revenue = number of users * membership fee.
However, in China, due to the weak copyright awareness - although iQiyi opened the door to payment with "Tomb Raiders" two years ago, the number of iQiyi's paid members has grown rapidly, and the proportion of paid revenue in total revenue has also continued to rise. However, it is basically impossible to achieve all revenue from membership income, and more depends on advertising revenue.
It is also worth noting that iQiyi’s paid members are reaching the ceiling of the industry. With the emergence of competition models such as members of various video websites to watch full episodes, members to watch first-hand, and member-exclusive dramas, it is doubtful how long the membership growth rate can be maintained. Wang Xiaodong, chief financial officer of iQiyi, admitted that the first quarter is the hottest season of the year. The number of members will still increase in the fourth quarter, but the net increase will not be as good as the third quarter.
"In fact, the growth rate of iQiyi members in the third quarter was largely due to the interoperability of members' rights with JD Plus members." An Internet analyst said that in April this year, the interoperability of member rights between JD and iQiyi was officially launched. At that time, the number of iQiyi members was 67.1 million.
4. Baidu is abandoning iQiyi?
Another important question is, how long will Baidu’s support for iQiyi last despite years of huge losses?
In the third quarter, while iQiyi added a record number of paid members, Baidu’s content costs also increased. Baidu’s Q3 content costs were 6.7 billion yuan, a year-on-year increase of 73%, which was higher than Q2’s 68%. This was mainly due to the increase in iQiyi’s content costs.
In fact, for Baidu, which has been far away from Alibaba and Tencent, canceled medical bidding advertising, and is still far away from the commercialization of AI, this kind of loss is unbearable.Heavy, and may even gradually abandon iQiyi.
Previously on July 5, according to a document submitted by Baidu to the SEC, Baidu reduced its holdings of iQiyi shares in June and cashed out US$259 million.
On the eve of the listing, Baidu Robin Li, the largest shareholder of iQiyi, said that although iQiyi has not yet made a profit, our losses are less than those of our competitors. At that time, some media believed that the reason why iQiyi went to the Nasdaq IPO was that Baidu wanted to reduce the speed of iQiyi's "money-burning" sector.
Looking at it now, it is still unclear when the U.S. capital market’s confidence in iQiyi will be restored, and the U.S. stock market has never understood Chinese video websites. The disadvantage is that compared with Youku, which is backed by Alibaba, and Tencent Video, which is backed by Tencent, and competes at all costs, iQiyi will face strict supervision in the US stock market. All key data such as revenue, expenditures and membership must be open and transparent. Previously, Youku had tried to beautify its financial reports through improper accounting methods, but it did not escape the eyes of the SEC.
For Gong Yu, it is impossible to say when iQiyi will make a profit, and such a bottomless pit of continuous losses is very scary. In the video industry, names such as PPS, PPTV, 56.com, Fengxing.com, Ku6, Tudou, Sohu Video, etc. have become or are about to become history. No one can be sure whether iQiyi will be next - after all, the experience and lessons of Jia Yueting LeTV are right in front of them.
Gong Yu, who is "extremely idealistic", doesn't want to be the next one. He has stated many times in public that iQiyi’s future is expected to be a multi-ecological entertainment company, and the benchmark model is Disney rather than Netflix. But in the face of the difficult reality, it is definitely not something he can achieve by running around at variety shows and chatting with popular celebrities.