"Long + Short", iQIYI is going to tell a new story.

On November 21, iQIYI (NASDAQ:IQ) released its unaudited third-quarter financial report as of September 30, 2024.

In the third quarter, iQIYI's total revenue was 7.2 billion yuan. Among them, the membership service revenue was 4.4 billion yuan; the online advertising service revenue was 1.3 billion yuan; the content distribution revenue was 810 million yuan; and the other revenue was 730 million yuan. In the current quarter, iQIYI's Non-GAAP (Non-US Generally Accepted Accounting Principles) operating profit was 370 million yuan, and it has achieved a positive operating cash flow for 10 consecutive quarters.

With the ability to maintain continuous profitability, iQIYI still maintains a keen insight into the market and users. After careful planning, iQIYI ushered in two important changes in the third quarter of this year: On the one hand, in the content ecosystem, iQIYI officially entered the micro-drama market, and by constructing a "long + short" new content ecosystem to meet the diversified content consumption needs of users; on the other hand, it carried out a more refined transformation of the membership products and system, launched the family card package, and together with the basic membership, it adapted to the different consumption habits and preferences of users.

Adapting to the changes in user needs and the industry competition, iQIYI keeps evolving.

"Long + Short" Walking on Two Legs

On November 6, the "White Paper on the Development of the Micro-Drama Industry in China (2024)" released by the China Netcasting Services Association estimated that the market size of micro-dramas in China will reach 50.44 billion yuan in 2024, with a year-on-year growth of 34.90%. Its market size is expected to exceed the domestic film box office for the first time.

How should long-video platforms respond to the explosion of micro-dramas? The market has been looking at iQIYI. In this third quarter, we saw iQIYI's answer - constructing a "long + short" new content ecosystem. Gong Yu, the founder and CEO of iQIYI, said that iQIYI has recently upgraded its content supply and service strategy, incorporating the highly concerned micro-dramas into the content portfolio to make them an effective supplement to long videos.

What kind of micro-dramas does iQIYI want to make, and what are their values and characteristics? How does iQIYI understand the relationship between long and short dramas, and what are its advantages in entering this field?

Gong Yu emphasized at this year's Autumn Enjoyment Conference: "iQIYI's short dramas are not low-cost online dramas that are simply cut short, and micro-dramas are not low-quality paid micro-dramas." It is introduced that iQIYI's "Micro Theater" and "Short Theater" are respectively focused on vertical-screen micro-dramas with a single episode duration of 1 - 5 minutes and horizontal-screen short dramas of 5 - 20 minutes. He also pointed out at the earnings call that iQIYI's focus on content purchasing is on top-notch content, and hopes to form a unique content tone and style for iQIYI in the future.

This detailed content layout fully considers the viewing needs of users in different scenarios. Vertical-screen micro-dramas are suitable for users to quickly browse in fragmented time, while horizontal-screen short dramas have a relatively more complete plot and narrative structure, and are suitable for users to watch in a relatively longer free time.

Through the "long + short" content layout, iQIYI can cover a wider user group. At the earnings call, Gong Yu said that the user group of micro-dramas is very different from that of traditional film and television users. Obviously, incorporating micro-dramas into the content supply will also be an opportunity for iQIYI to attract new users and members. Diversified content supply also helps to improve user satisfaction and loyalty.

What are the advantages of iQIYI in making micro-dramas? From the supply side, the entry of long-video platforms such as iQIYI into short dramas has advantages that can be leveraged in terms of the industrial chain, channels, and audience accumulation.

First, at the industrial chain level, iQIYI's existing partners basically include most of the major players in the domestic film and television industry, including many micro-drama content providers. The cooperation between iQIYI and them will be faster and less costly. This new cooperation model further expands and deepens the scope of cooperation between the two sides, and also helps them quickly form a scale in this field. Gong Yu also pointed out that the basic rules of micro-drama operation are not much different from those of long videos, so iQIYI does not need to pay too much tuition in micro-drama operation.

In addition, in terms of products, iQIYI's mobile terminal product App can well undertake short drama content - iQIYI APP and iQIYI Speed Version APP already have a mature technical and product architecture, as well as a solid user base. On this basis, adding new content and making appropriate product revisions is relatively faster, and the cost is more controllable.

It is introduced that in the future, the iQIYI APP will still mainly supply long videos, supplemented by free micro-dramas, and the commercialization will be mainly based on membership and supplemented by advertising, while the iQIYI Speed Version APP will mainly promote free micro-dramas, and use long-video content as a supplement. In terms of commercialization, the advertising model is the main model, and the membership model is the supplementary model.

iQIYI APP, iQIYI Speed Version APP

In addition to the advantages accumulated in the past, iQIYI has also used many new methods to make micro-dramas, such as the payment model. Different from the common single-episode paid viewing model in the market, "free" is the key word for iQIYI's micro-dramas. Gong Yu said that in the future, iQIYI members will be able to watch all micro-dramas for free, non-members can watch free micro-dramas, and can also unlock member-exclusive micro-dramas by paying for a single point. At the same time, they can also watch short dramas for free in the second window period.

The flexible payment model not only meets the needs of different users but also brings more revenue sources to the platform. For member users, watching all micro-dramas for free is a value-added service that makes them feel the unique value of the membership identity. This helps to attract more users to become members and maintain the activity of members. For non-member users, they can choose to watch free micro-dramas or unlock member-exclusive micro-dramas by paying for a single point according to their interests and needs. The setting of watching short dramas for free in the second window period balances the rights and interests of members and non-members to a certain extent, and also provides a wider dissemination channel for short dramas.

Just one week before the release of the financial report, iQIYI also released the micro-theater revenue-sharing rules, and will strive to cooperate with excellent creative partners through three revenue-sharing cooperation methods: membership duration income sharing, paid on-demand income sharing, and advertising revenue sharing. Among them, the revenue-sharing ratio for exclusive content can reach 70%.

Compared with the conventional traffic-sharing model in the short drama industry, iQIYI's more diverse and flexible revenue-sharing rules provide more options for content providers, which not only can stimulate the enthusiasm of creators but also make it easier for high-quality content to stand out.

Overall, previously, the mainstream practice in the micro-drama industry was to use a large amount of funds for traffic and marketing rather than production. However, in fact, the refinement of content is an inevitable choice for the upgrading and development of the micro-drama industry.

With a large user group, professional production capabilities, a perfect membership model, and good revenue-sharing rules, under the guidance of the clear "long + short" new content ecosystem strategy, iQIYI has a great possibility to promote the development of the micro-drama industry to a new height.

While expanding micro-dramas, iQIYI's basic film, television, and variety shows are still performing stably.

Take the hit variety show "The King of Comedy Stand-up Season" in the third quarter as an example, it ranked first on the Yunhe Data Variety Show Domination List for ten consecutive weeks.

In terms of TV series, iQIYI's Yunhe market share also returned to the first place in the third quarter. "The Record of Tang Dynasty Mysteries: Journey to the West" became the 14th TV series on iQIYI with a content popularity value exceeding 10,000. In addition, "The Prosecutor of the Ninth Department" set the highest historical record for the content popularity value of short TV series with less than 20 episodes on iQIYI.

Family Card + Basic Membership, Making Membership Services More Cost-Effective

While the content form is changing, the membership system is another key point for long-video platforms to increase user stickiness. In this quarter, iQIYI also made corresponding adjustments to the membership system based on the observation of user needs -

On November 12, iQIYI launched the Gold VIP Membership Family Card Package, including the rights of the family account monthly subscription card (8 yuan/month) and the main account monthly subscription card (25 yuan/month).

A significant feature of this package design is that the family account and the main account have independent membership accounts, passwords, and playback records, and the experiences of the family account and the main account are independent and do not interfere with each other. This means that family members can enjoy iQIYI's membership content and high-quality audio-visual rights on their respective devices according to their own preferences and schedules without affecting each other.

The launch of the "Family Card" is based on iQIYI's insight into the usage scenarios of family members. Nowadays, the demand for watching movies together in the family scenario is increasing. In the case where the "elderly and children" have video needs but are unwilling to purchase repeatedly, the Family Card is a cost-effective membership solution.

For iQIYI, the Family Card undoubtedly can stimulate the audience with potential needs. This family-oriented promotion strategy helps to expand iQIYI's user group and increase the market share of the platform.

In fact, overseas streaming media platforms Netflix and Disney+ have also launched similar family card services and achieved good responses. According to the data, due to the newly added additional account services, Netflix's paid membership number increased by 10% year-on-year in the third quarter of 2023 after the launch of the Family Card.

In addition, the basic membership has also been expanded from only being available on the iQIYI Speed Version APP to various major products. It is introduced that the basic membership is cheaper than the Gold Membership. Users can watch membership content but need to watch advertisements, serving users who want to watch membership content at a lower price.

Of course, while embracing changes, iQIYI also has many "unchanged" aspects. For example, the continuous deepening of the application of AI and the general direction of going global.

Only considering from a commercial perspective, the core of the current content market is very clear: It is necessary to try various means to penetrate the fragmented hotspots and the fluid consumption, and to achieve a more complete and more viable business closed loop.

The industrialization capability of iQIYI's film and television has been further enhanced. It has now become one of the earliest streaming media platforms in China to successfully complete the entire process of virtual production of TV series shooting and broadcasting. Its virtual production team can provide comprehensive production content, cost assessment, technical solution design rehearsal, and production supervision services, and can simultaneously handle multiple projects and provide full-process technical services for virtual production.

It is reported that "With Jin Chang'an" which is currently in production is the first domestic film and television virtual shooting case that successfully applies the latest version of the Unreal Engine.

In terms of advertising, AI has promoted the growth of performance advertising results. The CPM (Cost Per Mille, cost per thousand impressions) of AI-enabled performance advertising materials is more than 20% higher than that of ordinary materials.

In the expansion of the market, iQIYI is also taking advantage of the global popularity of Chinese mainland dramas to further expand its overseas business. In the third quarter, the total overseas revenue and membership service revenue maintained both year-on-year and quarter-on-quarter growth.

Among them, the membership service revenue in Hong Kong, China, the United Kingdom, Brazil, and Australia increased by more than 40% year-on-year. The average daily number of subscription members overseas also achieved both year-on-year and quarter-on-quarter growth. Among them, the growth in Brazil, Mexico, Hong Kong, China, and Thailand exceeded 45% year-on-year.

Since iQIYI shifted from pursuing scale to pursuing profit, it has focused more on the high-quality development of the main business, which has also led