“I just saw the headlines saying that iQIYI has fought through bitter years, and I want to tell our friends at the press that it wasn’t bitter for us,” said a host from iQIYI Innovation Building in Beijing on March 29.
On television, iQIYI CEO Gong Yu was with Baidu CEO Robin Li and other executives for iQIYI’s IPO on Nasdaq, a highlighting moment for China’s giant online video platform often dubbed “China’s Netflix”.
According to a newly disclosed prospectus, iQIYI’s total equity is $4.946 billion. The IPO generated $2.25 billion, which will be used to strengthen technology and expand products.
iQIYI waited eight years for this moment. Yu Gong nervously gave a short speech in English and cheered with the crowd after the ceremony.
Two hours before the listing, Gong set aside 40 minutes to communicate with Beijing and Shanghai media.
iQIYI’s debut on Nasdaq was a success culminating from its eight year history.
Its existing business model promises high-speed growth in the next five years.
Eight years ago, Baidu’s pioneering partner Xuyang Ren told Gong that Hulu does not have user-generated content but only distributes professional videos. Hulu allowed users to watch the videos for free and relied on advertising for revenue.
According to Gong, he learned a new business model from this brief exchange, which leads him to where he is today.
Chinese video sites have been criticized for losses caused by copyright procurement. iQIYI is no exception.
Although iQIYI’s net loss rates for the three years from 2015 to 2017 were -48 percent,-27 percent, and -22 percent, the absolute amount of loss gradually expanded. In 2017, iQIYI lost 3.7369 billion yuan ($596 million).
iQIYI’s highest expenditure is copyright licensing. Some U.S. analysts joked that if iQIYI continued to lose money, the $2 billion raised in the IPO will be spent within a year.
However, Gong firmly believes that iQIYI’s current business model is sound for at least the next five years.
For the past eight years, iQIYI has had two driving forces. One is advertising, copying strategy from the traditional TV industry, and the other is subscription fees.
“Online video industry is a mature industry. Currently, video advertising accounts for about 30 percent of the industry. In five years, the video advertising proportion will exceed 60 percent, which is a high-speed growth with large capacity. iQIYI will gain greater market space in this area.”
The other important driver of revenue is subscription fees.
As of March 18, 2018, iQIYI had over 60.1 million paid subscribers. iQIYI initiated paid subscriptions as early as 2011. At that time, iQIYI’s small number of paid subscribers grew slowly. However, in 2015, the market experienced an explosive growth in paid subscriptions due to its first exclusive member-only TV drama.
Netflix has set an example of a successful subscription-based business model. Gong predicted that, in the next five years, the growth rate of paid subscribers will reach 35 percent, or even exceed 40 percent.
“This large base and high growth rate encourages iQIYI to invest more. Over the next five years, advertising and paid subscriptions will undoubtedly and rapidly drive iQIYI’s growth.”
Netflix’s Q4 2017 earnings showed that as of Dec. 31, 2017, Netflix had 8.34 million new subscribers (U.S. subscribers increased by 1.98 million to 54.75 million; international subscribers increased by 6.36 million to 62.83 million). According to public data, the size of iQIYI’s global paid subscribers has surpassed that of Netflix in the U.S. market.
In addition to video advertising and paid subscriptions, iQIYI will have new opportunities, such as information flow advertising.
Currently, iQIYI has independent information flow products, such as TAP and iQIYI Soy. iQIYI also has social products like iQIYI Bubble, which is based on FADE fans and celebrities. During off-season, iQIYI Bubble had about 45 million daily active users (DAUs), and during the peak season, it had more than 60 million DAUs.
Information flow advertising will play a great role in iQIYI’s development over the next five to eight years. iQIYI has operated in e-commerce and now sells products related to the stars and TV dramas. The income is also growing at a high speed.
“We’re looking for the fourth and even the fifth impetus. The first three are the basic drivers, and it’s much easier for iQIYI to find the fourth and fifth driving force. For example, games and live broadcast may become new growth drivers in the next two years,” Gong said.
After the listing, can iQIYI continue to be the first in the industry?
He soberly answered in an interview, “We never felt that we can always be the first.”
There are two main reasons. First, the industry has invested a lot, and is continuously solving problems.
Second, the industry relies on talent. “Such advantage is not permanent, and no one can maintain an absolute lead.”
Therefore, he stressed that he did not have to be first and he was more concerned about the establishment of a mechanism. “This mechanism will make iQIYI first by most indicators. If someone surpasses us, we can surpass them later.”
The above is a concern for iQIYI.
After its listing, iQIYI needs to improve its technology, increase its content, and attract first-class talent. Can iQIYI stay ahead of other competitors with the new capital?
In 2018, competition among video streaming platforms will be intense in the area of variety shows in the same category.
Although iQIYI’s production of “Rap of China II” depended on relevant policies, “Hot Blood Dance Crew” was still a great success in the view of business. Vivo spent 150 million yuan ($23.9 million) on brand sponsorship, and 11 companies, including Pepsi, Procter, Stride, and JD.com, sponsored the show.
iQIYI’s “Clash Bots” was released on the same day as its IPO. The program’s business prospects and the robotics industry is not yet clear.
iQIYI also produced “Idol Producer”, a program that boosted sales of Nongfu Spring, a brand of bottled water, by 500 times. iQIYI has launched multiple popular shows so far.
Can iQIYI maintain its advantage? iQIYI’s original production team was established earlier than others, and iQIYI was able to maintain content advantage for a period of time.
Strategy regarding TV dramas
iQIYI purchased copyrights and produced popular high-quality dramas to attract more audience. This year, iQIYI has exclusive copyrights to several popular dramas, such as “The Rise of Phoenixes” starring Chen Kun and Ni Ni, “Tuoshen” starring Chen Kun, “Sword Dynasty” directed by Feng Xiaogang and “The King of Blaze” starring Jing Tian and Chen Bolin.
iQIYI has carefully prepared dramas in various categories.
All video platforms invest heavily in copyright licensing, and it is difficult to form a monopoly. However, when the user base becomes larger and the rate of new subscribers wane, the competition will escalate.
iQIYI plans to build an entertainment empire in 10 years
Before the IPO bell-ringing ceremony, the iQIYI host shared his own story.
“In the past, when I told friends I worked at iQIYI, they asked if could I give them free subscriptions. Now, when I tell my friends that I work at iQIYI, they would say tell me that they are iQIYI subscribers. I am as excited now as when Beijing won the Olympic bid.”
The employee shared changes brought about by iQIYI users, which has affected American investors’ attitudes toward iQIYI.
About three or four years ago, Gong made two non-deal roadshows, or a series of in-person meetings with investors that don’t involve offering securities, and exchanged views with American investors. However, the exchange before the IPO was unexpected.
“Previously, I mainly introduced the characteristics of the Chinese market, as well as special business models. It’s totally different now. They are already familiar with it. Secondly, the international capital market is very concerned about China’s online entertainment industry.”
American investors are aware that after 40 years of rapid economic growth in China, basic necessities are satisfied. Chinese people have a lot of spare time and seek entertainment.
However, the Chinese entertainment industry also has its own special features. The online entertainment industry develops faster than its offline counterpart. Its market structure can also affect the overall entertainment industry structure.
According to Gong, the rapid online retail industry extends far beyond economically developed regions or countries, in part due to immature or weak offline retail capacity in developing regions.
The entertainment industry is experiencing the same patterns as the retail industry.
China’s offline entertainment industry is in an early stage of development. Not only is it developing rapidly, but it also has a lot of room for development. The internet has expanded the space and pace of the development of the entertainment industry. As one of the most important industries in the online entertainment, the online video industry can easily seize this massive opportunity.
“The whole industry is very positive. iQIYI has reached the middle of the development journey. This opportunity gives iQIYI more desire to invest in exchange for greater development space in the future,” Gong said.
What is the extent of iQIYI’s future development space?
iQIYI once compared itself to Disney, and said it would establish its own kingdom system. Gong Yu hopes to achieve this goal in the next 10 years.
“I’m turning 50 years old this year. Under China’s labor law, I could work for another 10 years before retirement. I hope that within 10 years, iQIYI could draw up blueprint framework to achieve Disney’s scale and establish an online entertainment kingdom in China.”
iQIYI has successfully raised $2.25 billion, but will it become the next Netflix?