Iqiyi Gong Yu “fired”, why did the short drama become “Lady Ox”?

Written by: Internet Jianghu Liu Zhicheng

Two days after announcing its results, iQiyi CEO Gong Yu fired on the short drama.

At the TV drama production industry conference held on February 20, Gong Yu criticized some platforms for abusing their dominant position in the micro-drama industry at the end of his speech and signed an exclusion agreement.

“Gong Yu ‘s direction of firing was very clear, pointing directly at the short drama platform.

Who is the most popular short drama platform at the moment?

It is none other than the red fruit short drama under Byte.

Why is Gong Yu anxious?

It may be the pressure brought by the short drama, or it may be that I have been holding back the energy for the past two days. After all, anyone who reads iQiyi’s just-released annual report will be a little angry, let alone the person at the helm of iQiyi.

Throughout the 24 years, iQiyi’s revenue fell by 9.22%, net profit fell by 59.51%, and its performance fell both.

Among them, member service revenue fell by 13%, and advertising revenue fell by 8%. The reasons for the decline were insufficient content creation and the lack of elephant hit dramas like “Mad Rush”. Looking at the short drama platform, traffic is booming.

According to QuestMobile statistics, by December, the MAU of Hongguo free short drama APP had grown to 158 million.

When long dramas and short dramas are compared, the trend of each decline and the other grows stronger, and iQiyi’s sense of crisis may become stronger.

With the short drama platform growing so fast, the market may not have much time left for iQiyi and Gong Yu to adjust.

Revenue, cost, dilemma of commercializing long videos”

Data does not lie.

After reading iQiyi’s annual report from 2020 to 2024, I always have the feeling that iQiyi, which is good at making homemade dramas, has been troubled by cost issues over the years.

After four years of hard work, iQiyi’s revenue scale has remained at the level of five years ago. In the past five years, iQiyi has turned from loss to profit. The core is not growth, but cost control.

Is reducing costs a good thing?

From a profit perspective, it does save money, but from a revenue perspective, it actually sacrifices growth space.

From a growth perspective, in 2021, 2022, and 2024, when iQiyi’s operating costs declined, except for 2021 (costs only dropped by 1.3% in 21 years), revenue declined in the other two years. Revenue fell by 4.42% in 2022, and revenue fell by 9.22% in 2024.

Whenever iQiyi cuts costs aggressively, revenue always declines.

In 2022, Wang Xiaohui, chief content officer (CCO) of iQiyi, systematically expressed four abandonment options: abandoning content that simply caters to the target, abandoning content that is suspended, abandoning content that obviously loses money, and abandoning content that is not innovative. According to Tianyan APP information, Wang Xiaohui also serves as a supervisor of Beijing Aiqiyi Technology Co., Ltd.

After the adjustment, the 23-year financial report was immediate, and the revenue and profit data were excellent. However, operating costs that year not only did not decrease, but increased by 3.51%.

In this regard, my opinion is that the important thing is not to cut costs, but to spend money on the cutting edge.

Judging from the cost structure of iQiyi in 2024, 71.6% is content costs, 17.6% is sales and management costs, 8.1% is research and development expenses, and the rest is other costs. Moreover, from past experience, iQiyi’s content costs often account for more than 70% of the total costs.

In other words, to significantly reduce costs, there is a high probability that content costs and research and development costs will be cut. But after cutting costs, revenue will face downward pressure again.

Therefore, in 2024, iQiyi’s operating costs will drop by 4.9%, but its revenue will drop by 9.22%.

Spending money has no effect. No matter how much revenue and costs are pulled, it will be difficult for iQiyi to find that balance point.

This is actually not a problem for iQiyi. Tencent Video, Youku and other long-term video platforms will have similar problems. To put it bluntly, it is because the business model of long drama relies too much on production costs.

From the user side, this matter is actually very simple.

“Hurricane” will not be available every year. However, users are only loyal to content, and the platform cannot produce more good dramas, so users naturally do not have a strong paying propensity. If member income declines, the marginal income of the platform’s content investment will be further reduced.

For example, in the second quarter, iQiyi’s response revenue fell by 9% year-on-year. The poor market response of a number of dramas represented by “The Untold” dragged down performance.

In the fourth quarter, the situation did not seem to have fundamentally changed. Although iQiyi’s micro-dramas have improved quite well, they have only driven the growth of iQiyi’s content distribution revenue.

Obviously, short dramas seem to have failed to save iQiyi’s 24-year growth.

The reason is not difficult to explain. Although short dramas are popular, the current traffic value is far greater than the realized value. For the red fruit short dramas below the bytes, the user growth is indeed very rapid, but the main way to monetize them still relies on advertising.

Moreover, for iQiyi, making short dramas still requires investment. In 24 years, iQiyi’s net profit fell by 59.51%. One of the reasons may be investment in new business.

It is difficult for the long drama sector to have phenomenal hits, and the short drama business will not start. This is also a dilemma for iQiyi.

Short dramas are in the ascendant, how does iQiyi choose?

The outbreak of red fruit short dramas shows that short dramas are indeed a structural growth opportunity.

It can be said that short dramas are the god of growth in the current Red Sea era.

Ask God or send God? This is a fundamental issue facing iQiyi.

For the long drama, iQiyi still has high hopes. Gong Yu, CEO of iQiyi, once said: Since the end of November 2024, we have launched a series of popular works, driving a strong recovery in performance……”

However, in terms of financial data, Gong Yu’s expectations for a recovery did not materialize. According to data from the fourth quarter, iQiyi had a net loss of 190 million yuan, and Non-GAAP had a net loss of 58.78 million yuan. This is the first single-quarter loss since the first quarter of 2022 was profitable.

The hit dramas launched in November did not have the desired growth effect. The financial data performance in the fourth quarter was still low.

Is there any influence from short drama platforms?

I think there may be. After all, short dramas take away traffic and paying users, making it more difficult for users on long-term drama platforms to pay. Especially after the red fruit short drama signed an exclusive agreement with the producer, this impact may be more obvious.

Why does Gong Yu in an industry want to fire on short dramas?

There are several possible reasons:

Signing the exclusivity agreement will only give Hongguo the dominant player in the short drama market. Iqiyi and other platforms, as latecomers, even if they cooperate with Hongguo, will limit the future growth limit of its short drama business. As a result, the exclusive budget content, which was the foundation for the copyright of long-term dramas, became an unacceptable monopoly.

The concentration of short drama content will further cause short drama platforms to occupy more total user time, and the traffic pool of long content platforms such as iQiyi and Tencent Video may be further diverted. The relationship between short dramas and long dramas is a substitution rather than a complementary relationship.

On the one hand, the content and themes are similar, and the production difficulty is similar. Looking at the total duration, the short drama with more than 70 episodes is not short. On the other hand, for similar subject matter content, the short drama has a more compact plot and is obviously more attractive.

The growth of long-content platforms is very difficult. Nowadays, many Short Video platforms can also watch dramas. Iqiyi has to compete with Fast Hand, Douyin, and B sites for user time, and also face popular short dramas, which test the ability to produce high-quality content. Can iQiyi keep up with subsequent popular content production? This is truly related to iQiyi’s future MAU data performance.

3. Short content is easier to make blockbuster money at low cost than long content, which shakes the foundation of long video content traffic.

Iqiyi’s last TV series with more than 20 episodes was expensive to produce, but it was not easy to achieve tens of millions of views. However, the last 80-episode short drama of the Hongguo short drama often has tens of millions of views. Obviously, the latter is more likely to get hit.

If there are hot items, it is easy to have increments, and if there are increments, it is not difficult to commercialize.

For advertisers who used to love to launch long video platforms, running short dramas may be more effective than long dramas.

From Aiqiyi’s perspective, cooperating with Hongguo is actually the worst policy in itself. Although Iqiyi requires fewer resources to invest and the financial report may be better, Iqiyi has missed out on an opportunity to reposition itself in the short drama ecosystem.

The business model of long videos is not good, which has been verified by the market. You Aiteng has been playing with each other for so many years, and Gong Yu has personally experienced it.

From a hindsight perspective, if we had firmly and thoroughly transformed and positioned the short drama, there would still be a certain market dream rate.

After all, the short drama market is still growing at a high speed, and there is an increase. Moreover, users have stronger impulse to pay and are easier to cash in. Subsequent benefits, whether it is advertising revenue or content payment, are all realizable benefits.

Do you want to completely transform into short dramas? It is a question worth pondering by all long video platforms. At least adjusting the proportion of business, 80% of resources to do short dramas and 20% to purchase long dramas may be a new direction.

For iQiyi, it failed to seize the structural opportunities brought by short dramas in time. What it missed was not only the performance of a fiscal year, but also the imagination of the secondary market in the next few years.

We might as well give iQiyi an estimate.

Today’s iQiyi is profitable, its business model is not complex, and it has stable cash flow.

If the DCF valuation method is used, iQiyi’s revenue in 2024 will exceed 26 billion yuan. If iQiyi can continue to create phenomenal sales in the next three years and its advertising business can grow, assume the three-year CAGR (compound growth rate) in the next three years) is 5% to 8%.

If the proportion of content costs is further reduced to 65%, then Non-GAAP operating profit margin is estimated to increase to 10% to 12%. Based on a discount rate of 12% to 15%, iQiyi’s reasonable valuation is about 30 billion to 40 billion yuan.

In reality, iQiyi has a market value of US$2.171 billion, which is approximately US$15.7 billion at current exchange rates.

The two are far apart.

In fact, the market is rational, and the current market value of iQiyi is reflected in the market’s judgment of its reasonable value. On the surface, the market value is more than doubled, but from another perspective, the market may give a greater risk discount.

To put it bluntly, it remains the same view. After all, long video is a business that emphasizes investment and operation. When short dramas become popular, the risk discount of long video business may be further realized.

Old Man Time is honest. The market will eventually give a fairer answer how much value the long video business still has.

Next, can iQiyi overcome the more stringent test brought by short dramas?

Worth looking forward to.