iQIYI, Inc. 2021Q1 Shareholder Letter

BEIJING, May 18, 2021 /PRNewswire/ —
Dear Shareholders,
In my first shareholder letter to you, I want to share some ideas and views on the web video business, its aggressive panorama, and our content material technique.
1.  The business and our aggressive benefits
The on-line video business in China has greater than a decade lengthy historical past. There are three widespread views on the classification of movies.
The first view is to categorise movies based mostly on size, by which movies are outlined as both lengthy or quick movies, or long-form, medium- type, or short-form. The second view is to categorise movies from the attitude of the content material creators, and may be referred to as PPC (skilled produced content material), PUGC (skilled consumer generated content material) and UGC (consumer generated content material). PPC movies are produced by professionals corresponding to scriptwriters, administrators, cameramen, actors, and actresses, and the content material they produce consists of movies, dramas, animations, and selection reveals.  PUGC is often produced by KOL and MCN, that are usually much less skilled when in comparison with PPC however their content material can nonetheless be monetized by means of promoting or different methods. UGC is made by odd customers and is mostly not thought of skilled content material.
The above-mentioned are the 2 commonest methods to categorise movies.  However, there may be additionally a 3rd view; since content material is made to be consumed by customers, why not classify movies based mostly on the customers’ function, mindset, and the way they mirror as they watch the content material? Therefore, we imagine that video content material will also be outlined as scrumptious, leisure, and interest-based video.
Delicious movies are like quick meals. Users flip to this type of video for merely enjoyable and passing time moderately than gaining any type of insights.
Typical leisure movies are movies, dramas, animations and selection reveals. Quality leisure movies can set off on the spot and steady in-depth ideas, impress customers, and even affect one’s values and life. Among the completely different types of leisure content material, movie was born greater than 120 years in the past and is likely one of the world’s most historic, inventive, and influential works. Dramas and selection reveals even have a historical past of virtually 100 years and a mass affect. While bringing enjoyable and pleasure to individuals, leisure movies additionally as soon as modified individuals’s habits, the society, and even the world. Historically there has all the time been a requirement for romantic, fictional and inventive works that have been created based mostly on actuality, and leisure content material corresponding to motion pictures, dramas, selection reveals and animations is the one video format that successfully meets this demand. We imagine that leisure video content material has absorbed the essence of literature, portray, music, and different arts with an extended historical past, and can have a fair bigger addressable market transferring ahead. We have better confidence within the Chinese market as the general financial system retains creating steadily and continues to undergo a consumption improve.
Interest-based movies are movies that have been created to fulfill customers’ various pursuits and are typically based mostly on actual life occasions. The themes of those movies embody however should not restricted to meals, DIY, product unpacking, journey, pets and so forth. The creators of any such content material vary from MCN and KOL, to amateurs and a small variety of professionals. Interest-based content material and its viewers are extra area of interest and lengthy tail, and the content material is often much less standard than motion pictures, drama collection, animations and selection reveals.
Among the aforementioned video sorts, iQIYI primarily focuses on the latter two.
1)  Our iQIYI app focuses on leisure movies. On one hand, our platform facilitates a better distribution of leisure content material whereas offering customers with a greater expertise by leveraging know-how improvements. Technology innovation coupled with inventive concepts from artists, allows us to provide higher-quality movies, dramas, animations, and selection reveals. While we convey enjoyable and pleasure to our customers, we’re additionally completely satisfied that we will affect customers’ life and supply them with simpler entry to extra thought-provoking tales.
The leisure video market has extraordinarily excessive entry boundaries, and it takes time to realize the economies of scale essential to function effectively. The general understanding of the business and its skills can be essential to being profitable, as the whole content material business remains to be in a really nascent stage of industrialization and abilities are scarce. Being the biggest platform for video distribution in China, we have now an in-depth understanding of customers’ demand for leisure movies empowered by our know-how and the huge quantity of information accrued over time. Together with the business’s capital-intensive nature, our information on the business’s guidelines and practices, and our affiliation with administrators, actors, scriptwriters, cameramen, sound engineers, artwork designers and different skills, iQIYI has established a strong main place within the leisure video business in China. We are assured in our means to proceed driving the wholesome development of the business and supply customers with extra high-quality leisure content material. In the longer term, we imagine an growing variety of Chinese customers will pursue leisure content material with greater religious worth and extra inventive high quality after absolutely having fun with the pleasure introduced from watching scrumptious movies. This is merely a strategy of a cultural consumption improve.
2) iQIYI’s Suike app primarily focuses on interest-based movies that are additionally distributed on iQIYI’s most important platform. Interest-based content material could be very diversified and its goal customers are very long-tail. It has greater entry boundaries however its customers are additionally stickier. The whole addressable market of interest-based movies is giant, however it’s troublesome for a single participant to realize a considerable share of the market. In our view, future Chinese media platforms specializing in interest-based content material can be decentralized, as will consumer demand and content material provide. This enterprise mannequin remains to be in a nascent stage in China however we have now nice potential on this rising market with the wealthy assets we accrued over the previous decade.
Simply acknowledged, iQIYI’s core worth is the manufacturing and distribution of leisure content material. Entertainment content material is likely one of the core wants for human beings, and iQIYI is already a pacesetter on this space and can proceed to broaden upon it transferring ahead. For interest-based movies, we’ll proceed to put money into Suike and anticipate that it’ll contribute to our core leisure enterprise.
2. Our method to present challenges
After 10-year growth, it’s broadly recognized that our membership enterprise has turn into the Company’s largest income stream. Although we’re at the moment dealing with some challenges that slowed the expansion of our membership enterprise or fluctuated the variety of subscribing members, we nonetheless firmly imagine that the membership enterprise has big potential. Two supporting items of information are: 1) As of the top of Q1 2021, the variety of accumulative paid accounts has exceeded 490 million; and a pair of) In Q1 2021, the month-to-month common variety of subscribing members who’ve membership advantages for any given day has reached practically 160 million, which each present that there are a number of customers which might be keen to pay for high-quality content material. For the primary purpose of the slowdown in membership enterprise development, the business typically believes that short-form movies and different diversified leisure strategies have squeezed consumer’s time. We acknowledge the affect of this, however we have now additionally noticed that customers’ mindset about watching varied sorts of content material have progressively turn into clearer. At the identical time, based mostly on our information and evaluation, we imagine that the rationale of leisure movies being squeezed by different strategies remains to be the dearth of high-quality content material. Even now, there are a selection of various leisure strategies, however high-quality leisure video content material nonetheless performs an necessary position in driving consumer visitors and time spent. A latest instance is our unique blockbuster “My Heroic Husband” launched in February of this 12 months. Over the course of its run, the mega-hit drama was performed on greater than 180 million gadgets. At its conclusion, it attracted greater than 64 million subscribing members, driving the height variety of subscribing members within the quarter to return near the extent on the finish of Q1 final 12 months.
Continuously producing high-quality content material is the core of accelerating the consumer base and member loyalty. We imagine that the present lack of high-quality content material is principally attributable to two components: 1) The quantity of licensed content material that may be obtained from conventional channels is reducing. The variety of licensed drama collection has decreased persistently with the shrinking market share of the standard TV business, and the affect from the worldwide pandemic has dramatically lowered the variety of theatrical motion pictures, particularly Hollywood productions screened in Chinese cinemas. Theatrical motion pictures play a significant position in attracting and retaining subscribing members. Our evaluation reveals that the variety of motion pictures with a field workplace of greater than RMB100 million, which launched in SVOD mode from January to April in 2020 and 2021, decreased by round half, respectively, in comparison with the identical interval in 2019. Among which, the variety of abroad motion pictures, primarily Hollywood motion pictures, decreased by greater than half, respectively. 2) The amount and high quality of self-produced content material can not at the moment fulfill consumer demand. We want to search out the most effective expertise and companions within the business to construct a powerful content material ecosystem, after which make breakthroughs of authentic content material. It will take time to enhance the content material ecosystem.
With that, I want to speak extra about how we plan to resolve the difficulty we face: lack of high-quality content material.
As content material high quality is on the core of our total ecosystem, we purpose to realize a excessive hit ratio by means of the continual enchancment of content material high quality. To set up sufficient and extremely productive in-house studios is a vital prerequisite for the development of our content material high quality. When we did our IPO in 2018, we set a objective of building 50 in-house studios inside two years which we have now now achieved. Most of those inside studios are specializing in authentic dramas and selection reveals, and some are concentrating on motion pictures and animations. In the following two years, an necessary facet of our content material technique is to construct extra in-house movie and animation studios. Through our in-house studios, we will amass excellent expertise within the content material manufacturing business and acquire extra premium IPs and productions.
With our growing variety of in-house studios, we may also be capable to proceed to stick to our technique of diversifying content material and deepening the vertical classes. Since the profitable launch of our Mist Theater final 12 months, quick collection format and content material high quality have been well known by each our customers and the market. I imagine that by means of the buildup of extra expertise and steady efforts, we’ll present a steady and sustainable high-quality content material pipeline.
The content material manufacturing business additionally faces a number of issues, corresponding to lengthy and uncontrollable manufacturing schedules, low hit ratio, many easy and repetitive duties, the dearth of goal analysis requirements, and excessive monetary danger, and so forth. In response to those challenges, we imagine that the best way to interrupt the state of affairs lies within the industrialization of video manufacturing.
The industrialization consists of the restructuring of business guidelines and clever manufacturing strategies. Among them, clever manufacturing is the important thing focus. This is as a result of though China’s video business has already skilled an industrialization course of for 20 to 30 years, it has but to realize substantial qualitative adjustments. One of the necessary causes is the dearth of technological help, and we imagine that clever manufacturing strategies is the important thing to unravel this downside. Thanks to the event and help of 5G, AI, blockchain, DRM, VR/AR, digital taking pictures and different applied sciences, our clever manufacturing system is progressively enhancing. The clever productions that we’re planning and implementing embody: 1) a manufacturing enterprise intelligence system used for pre-broadcasting enterprise index prediction and post-broadcasting business index evaluation; 2) an clever built-in manufacturing system, leveraging synthetic intelligence to combine individuals, tools, and supplies within the content material manufacturing course of and to standardize the administration of the whole course of; 3) an clever manufacturing instrument set, a multi-faceted manufacturing instrument set utilizing synthetic intelligence, laptop graphics and different applied sciences to enhance work effectivity and consumer expertise. We are utilizing these methods and instruments to reinforce the controllability of manufacturing schedules, content material high quality and monetary dangers, thereby additional decreasing prices and enhancing efficiencies. We imagine that by means of modifying unreasonable guidelines within the business by way of iQIYI’s management and utilizing clever manufacturing strategies to help the optimization of business guidelines and enhance manufacturing effectivity, content material manufacturing will turn into extra steady, steady and environment friendly with greater hit ratio sooner or later.
With over ten years of iQIYI’s development, by way of our enterprise operations, we’re progressively establishing a win-win ecosystem and a diversified monetization mannequin.  In phrases of content material, we’re acknowledged by our customers and business, and by way of know-how, we proceed to innovate to enhance our consumer expertise and working efficiencies. We are assured that our management will proceed to intensify by leveraging our know-how acquired by means of years of extremely intense competitors. We additionally strongly imagine that long-form video is irreplaceable as an leisure format. In the meantime, by means of steady know-how improvements that empower content material manufacturing, we can have the potential to extend our hit ratio, generate better business worth, and broaden the creativeness for the following technology of leisure. As effectively, we sit up for bringing extra excellent news to all shareholders.
Note from the Company: We will not current this letter on our earnings convention name later right now, to be able to go away extra time to speak with buyers through the Q&A session.
Appendix: 2021Q1 Review and Outlook
We kicked off the 12 months with a strong quarter. Our income elevated each sequentially and year-over-year within the first quarter, which is above our earlier steerage. Besides, in latest quarters when revenues have been comparatively steady, our content material prices have been successfully managed and losses have continued to slim. We proceed to guide the market by launching a constant stream of premium content material. According to QuestMobile, our MAU, DAU and month-to-month time spent all ranked first within the business within the first quarter of 2021.
Membership Business:
As of March 31, 2021, we had 105.3 million subscribers, with 3.6 million web additions through the quarter. Membership companies income elevated by 12% sequentially to RMB4.31 billion.
Subscriber development was pushed by a number of components: 1) Our prime content material, specifically premium dramas, carried out very effectively. For occasion, our prime drama, My Heroic Husband, was a blockbuster through the Spring Festival. Through this drama, we have been in a position to obtain extraordinarily excessive monetization effectivity with comparatively fewer episodes. The common day by day membership consumption exceeded the Story of Yanxi Palace, reaching a brand new report excessive. During the quarter, a lot of theatrical motion pictures have been launched on our platform together with Bath Buddy, Caught in Time and Shock Wave 2. Online motion pictures corresponding to Dreams of Getting Rich and Rising Shaolin: The Protector have been additionally well-received. 2) Users spent extra time on long-form video throughout main holidays corresponding to Spring Festival, driving up the general visitors on our platform. Both of our cell MAUs and DAUs sequentially elevated this quarter. 3) We launched varied progressive advertising and marketing initiatives through the vacation season, together with an incentive job system. We additionally optimized our membership services and products, which considerably improved consumer engagement and loyalty.
In addition to general membership development, our sequential development in membership companies income was additionally as a result of two components together with: 1) An elevated willingness to pay amongst customers. This was pushed by our premium content material in addition to the progressive enterprise fashions we rolled out, corresponding to our superior viewing mannequin for subscribers and PVOD mode. For instance, our unique drama, My Heroic Husband, disrupted the stereotype of costume dramas with its comedy fashion attracting a considerable amount of members to pay additional charges for the advance viewing. Also, the film Dreams of Getting Rich hit report highs in each viewership and pay-per-view income underneath the PVOD mannequin. 2) ARPU development pushed by the headline pricing adjustment in November 2020.
Meanwhile, we strived to broaden our whole addressable market in two areas. 1) In late February, we launched a brand new VIP plan for iQIYI Lite, which targets customers in lower-tier cities. We intend to transform these customers into our subscribers with extra personalized content material and privileges. 2) We additionally continued to broaden our footprint abroad. During the primary quarter, our general abroad MAU elevated by 77% sequentially. Our new downloads additionally remained amongst the TOP 5 in a number of Southeast Asian nations. In explicit, we have been ranked #1 in Thailand and Malaysia. The premium content material we launched additional improved our abroad model consciousness.
Though we nonetheless anticipate short-term volatility in our subscriber numbers, we stay assured within the mid- and long-term growth of our membership enterprise. This relies on our dedication to premium content material, in addition to ongoing enhancements to our authentic content material ecosystem and in-house manufacturing capabilities. We are completely satisfied to see that the content material high quality of home on-line video platforms is progressively converging with that of our international friends. It has turn into a norm that persons are keen to pay for premium content material. We have additionally seen that one in all our friends just lately adopted our transfer in membership pricing changes. That in our view bodes effectively for the long-term profitability of the web video business.
Advertising Business:
During the quarter, the general promoting market continued to get well. Our internet marketing companies income elevated by 25% 12 months over 12 months. Even although the primary quarter is historically a sluggish season for our promoting enterprise, we have been in a position to obtain first rate sequential and year-over-year development. Like the pattern within the fourth quarter of 2020, development was primarily attributable to robust content material advertising and marketing income. Our content material advertising and marketing income recorded first rate development pushed by main selection reveals and dramas. The content material advertising and marketing income accounted for round 64% of our model advert income within the first quarter, which was a peak for the previous few quarters. This once more validated advertisers’ recognition of our premium content material.
For model advertisements, income stabilized pushed by the rebound of each advertisers’ budgets and the variety of advertisers amid the macroeconomy restoration. Major dramas within the first quarter triggered phrase of mouth suggestions, attracting shoppers from completely different sectors to check out our theater merchandise. If we break it down by business, development primarily got here from meals and beverage, and the cosmetics and toiletry industries. In phrases of efficiency advertisements, the sequential income development benefited from elevated visitors through the holidays, in addition to the contribution from key industries together with community companies, e-commerce, on-line video and gaming.
We continued to guide the business by way of whole variety of prime titles and viewership throughout the classes, together with drama, selection reveals, animation, kids and different content material. According to third-party information, video views of our dramas and selection reveals each accounted for practically 40% of the general market viewership within the first quarter; our animation, together with kids’s animations, and films had even greater numbers reaching over 40% and 50%, respectively, additionally rating first amongst friends.
During the quarter, we continued to ship all kinds of best-in-class tales that our members liked to observe. We additionally made notable progress in IP growth and stylistic improvements.
1) For dramas, our unique costume drama My Heroic Husband grew to become an on the spot hit after its launch. Its improvements in theme and elegance offered an entire new means of making good costume drama which is able to have an effect on our future productions. We additionally launched a lot of standard authentic dramas with reasonable themes corresponding to, My Best Friend’s Story, Dt. Appledog’s Time and Vocation of Love.
2) For selection reveals, we preserve innovating on authentic content material with completely different themes. Our new authentic selection reveals, corresponding to Theater for Living, Qipa Talk 7, Fourtry 2 and Ladies’ Talk grew to become hits through the quarter.
3) In authentic motion pictures, we preserve engaged on producing higher tales. Our authentic film Underworld Crashed has been screened in theaters, reached a field workplace of over RMB300 million, and has obtained excessive scores from varied platforms. Apart from that, we started taking pictures two new motion pictures through the quarter. There are at the moment three others in post-production and can be launched in theaters later this 12 months. In addition, there are 18 iQIYI Original Films underneath growth.
For the second quarter, key dramas in our pipeline embody A Love for Dilemma, Court Lady, Crossroad Bistro, The Rebel, The Lion’s Secret and others. Love for Dilemma and Court Lady have been aired in April and well-received by our customers. We stored selling quick drama theater manufacturers with a model that includes romantic content material scheduled to launch on May twentieth. We may also launch new content material in Mist Theater later this 12 months. In animation, new content material to be aired consists of No Choice however to Betray the Earth, The Tales of Wonder Keepers and the sunshine animation Immortal Father As a Son-in-law 3 in addition to others.
Despite some anticipated uncertainties in our content material schedule within the coming months, we imagine that the affect can be mitigated by our diversified content material pipeline, particularly self-produced dramas.
We are empowering the leisure business with know-how, whereas constructing an industrialized system for video manufacturing. The key highlights through the quarter included:
1. Smart manufacturing: The iQIYI “X City” prolonged actuality (XR) reside live performance. The live performance used world-leading prolonged actuality visible manufacturing know-how and set a brand new international benchmark by way of the vary of digital scenes and the variety of interactive customers on-line.
2. Products: In January 2021, we formally launched the iQIYI Lite app which targets customers within the lower-tier areas of China. iQIYI Lite carried out effectively by way of consumer engagement.  Both its present common time spent, and common video views have exceeded that of the primary iQIYI app.
For extra info, please contact: Investor Relations iQIYI, Inc. + 86 10 8264 6585 [email protected]

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