I recently visited the iQIYI headquarters in Beijing. This was part of our China Tech Tour and it was fascinating visit. I’m going to be writing more about iQIYI shortly but wanted to list the key strategy lessons I took away from the visit.
China Tech Tour Day 2: Beijing and iQIYI
The China Tech Tour group was staying in the northwest of Beijing (liangmaqiao) and we had spent the previous day at ByteDance (see my account here) and Baidu. Fortunately, iQIYI is in the San Litun area (my old stomping ground) so we got to avoid an across town commute.
Early morning on day two, we loaded up on caffeine and took the short trip to the iQIYI headquarters. And you can always tell immediately when you’re at entertainment company. There is just a different vibe. Peoples’ desks are covered with characters and artwork. There are movie posters everywhere. It’s just a more creative environment than a typical business or even tech company. I always enjoy this but do feel out of place.
So, we got a tour and then sat down with execs from both the creative and technology teams. Which was awesome. Super interesting.
However, a disclaimer.
None of this is information or opinions from iQIYI. The discussions are still off the record. So, these are my own personal lessons and conclusions. Basically, this is how my own thinking about the company has changed. But this is not anything anyone said during the visit.
Ok. Here are my three lessons.
Lesson 1: iQIYI’s Entertainment Plus Tech Expertise Makes It Well Positioned for a World of Increasing Video Consumption and GenAI
First, some basic comments about iQIYI.
- It’s the market leader for video entertainment for China, at about 20% of the market (according to Statista). It is followed by Tencent Video and Tudou. But these percentages are a bit fuzzy as you need to distinguish between short video, sports, and other types of video entertainment.
- Their service is a mix of YouTube and Netflix (really HBO). It positions itself as a source of high-quality film and television content (especially dramas) but also does user generated content (like YouTube).
- iQIYI revenue has been around $4.15B per year for the last several years. Digital advertising just took a long time to take off in China. And getting people to pay for video streaming took even longer. Free content had long been an accepted norm.
- In 2022, iQIYI finally reached operating profitability after a long hard slog. Gross margins reached breakeven only in 2020. This was largely due to the cost of licensing and producing original content. Original content has been the main lever the video leaders have used to differentiate their services. And they have been in a content spending war for a long time.
I have met with quite a few entertainment companies (Disney, DreamWorks). And I am always struck by how different creative enterprises are in their operations and organization. I start talking in business language and everyone responds in the language of movies, tv, artists and writers. I have the same language problem when talking with pretty much anyone working in fashion.
Film and tv show companies usually have a separate division focused on monetizing their created intellectual property. There is this often a strange organizational and cultural divide within the company. For example, Disney is half artists and writers doing creative stuff (let’s have Iron Man sacrifice himself) and then half businesspeople doing IP deals (let’s put Iron Man on an electric razor).
But iQiyi has serious capabilities in both entertainment and technology. That is different. Yes, they create lots of movies and television shows in-house and by co-production. But they also have a streaming app and a platform business model for user generated content to be shared and curated. So, it’s a lot of creative types plus a lot of software engineers.
That’s pretty important. The leading entertainment companies (Disney, Netflix) have always spoken about how they have to be technology companies because the tech and consumer behavior in entertainment change so fast. Keep in mind, nobody talked about short video ten years ago.
So, lesson #1 is that iQIYI is well positioned for a world with increasing video consumption (it keeps going up). And for the arrival of generative AI. iQiyi has the two required capabilities (tech and entertainment) going forward.
Lesson 2: iQIYI Will Continue its Focus on Growing “High Value Hours.”
The leading content platforms and streaming services of China have had a hard slog in terms of economics. Original content costs a lot to produce. And Chinese consumers were just not willing to pay a lot by subscription or ads. That does limit your strategic options.
For iQIYI, they focused on growing “high value hours”. Basically, they were going for quality content that people would be willing to pay more for. That’s the part of the business you really have to grow.
For iQIYI, this has meant focusing on high value users. Basically, Chinese consumers with higher incomes and more spending power. And the distinction of willing to pay is key. That means they will spend on the products they see in advertisements. And they are willing to buy merchandise based on popular IP. And they are willing to become subscribers. iQIYI has 12 membership subscription plans in seven iQIYI terminals (with 129M subscribers in Q1 2023).
High value users are also willing to engage. You want users who are more willing to share the content. Who will interact and engage. These users are more brand loyal. They can become fans and buy merchandise. These are not just high earners. They can be interesting demographics such as middle-class white-collar workers, chic moms, elderly, youth in small towns, and other groups.
Finally, growing high value users also means offering higher quality services. You want to stream in high quality, which is important for bigger televisions and HDR.
Once you get the focus on growing high value hours, their content strategy makes a lot of sense.
Lesson 3: iQiyi’s Content Strategy is Mostly HBO, Plus Some YouTube.
iQIYI focuses on original content. So, they have a ton of in-house studios, producing the majority or their content. And they focus on genres like historical dramas, which are very popular. (Note: Netflix’s House of Cards was huge in China). Rap shows and singing competitions are also trendy.
The more I study iQIYI, the more it looks like HBO to me.
If you want to be premium quality video entertainment that people are willing to pay for – and that gets the most engagement, you want to focus on high quality tv and movies. And on being on the frontier culture. iQIYI positions itself as the “voice of the times”. And strives to be “young, energetic, fashionable, inspirational.”
However, in practice, it is actually better to be a fast follower in culture and trends. Being first is too difficult and you fail most of the time. It’s better to track user behavior and do market research. And then be a really fast follower. It’s really an adaptive strategy.
Those are my three lessons from the visit. And that brings me to the big question.
What Will Be iQIYI’s Digital Strategy Going Forward? Especially with Generative AI?
I’ll cover that in Part 2.
- What’s Next for iQIYI and Video Entertainment in Digital and Generative AI? (2 of 2) (Tech Strategy – Daily Article)
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