Dilemma of China’s long-video streaming platforms and ways to break out

  1. Chinese long-video market
  1. High production cost of self-made content
  1. Long-video platforms suffer from the lack of stickiness among Chinese users, who often pay a short-term membership fee. In 1Q21, owing to the popularity of ‘My Heroic Husband’, iQiyi’s membership fee revenue increased 12.4% QoQ. However in 2Q, given the lack of popular programmes, revenue decreased 7.2% QoQ.
  2. iQiyi, Youku and Tencent rely heavily on the financial support of their shareholders Baidu, Alibaba and Tencent Holdings, respectively, which infuse significant capital for content production capex every year in order to remain competitive. As a result, all the companies invested much more capital than they should, which led to excessive competition in the whole market.
  1. The real competitors of long-video platforms are short-video platforms such as TikTok. Since 2019, long video (11% share) has been overtaken by short video (15%) in terms of daily average online time. In June 2019, short-video monthly active users (MAUs) went up 32.4% y/y to 821m. The explosive growth of short video has eroded long-video MAUs.
  1. In fact, there are essential divergences between the business models of long- and short-video players. Long-video players earn through membership fee so they continually enhance membership scale to raise ARPU. Short-video players spend relatively less on attracting mainstream media, livestream providers and key opinion leaders (KOLs) in the early stage. Later, cash flows through audiences’ rewards, among others.
  2. In September 2020, the penetration rate of the short-video industry was 74.5%. The number of paid users (PUs) and MAU of short videos are forecast to continue to grow in the future, but this is less likely to squeeze the margins of long-video names, as these two types of players may prove to be complementary to each other.
  1. iQiyi, Youku and Tencent have been improving their free cash flow by paring COGS and increasing revenue by:
  2. Obtaining advance from customers for enabling early access to programmes. In August 2019, Tencent launched ‘The Untamed’ — a 24-hour-early-access function. More than 2.5m people paid for this facility, bringing RMB75m in advances.
  3. Producing talent shows. The table below provides four reasons long-video players enjoy producing talent shows.
  • Introducing a salary cap for actors. Top stars’ salary accounted for most of the content production cost before the launch of the salary cap policy at end-2018, which stipulated that all actors’ salary should be less than 40% of production cost and leading actors’ salary should be less than 70% of all actors’ cumulative salaries.
  1. Premium content production
  2. Long-video players should make content themselves.
  3. Although the purchase of external copyright content is paramount, long-video players should give topmost priority to the quality of their own content. Producing premium and exclusive content is the best way to increase PUs, while the continued growth of PUs will likely directly drive revenue growth.
  1. Content distribution is the recommendation of different content to users who may like it. In 2006, Netflix offered $1m to global experts to develop personalised recommendation algorithm for its website. iQiyi, Youku and Tencent have currently adopted a myopic distribution model, directing all its traffic to their best programmes, which may weaken user experience. They should take a cue from Netflix and TikTok and recommend content to more users based on their preference.
  1. The continued launch of premium content by platforms is key to raising membership fee. Referring to Netflix’s ARPU growth plan, it has been found that following each price increase, the membership base grew larger given the guarantee of excellent product quality.
  1. According to Yahoo Finance, Netflix generally pays c.130% of the production cost to content studios to buy out the copyright of a programme. The cash flow is one-off, and Neflix does not share subsequent benefits, if any. However, Chinese TV stations usually pay content producers 60–70% of the production cost in advance and share the revenue if a programme becomes popular. In contrast to TV stations, the downside of the Neflix model is that the user base must be large enough. Following Netflix, if Chinese players cannot improve the quality of their content in the short term, they will have to continue to increase the number of overseas users.

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We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/

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Acuity Knowledge Partners

Acuity Knowledge Partners

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/

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