Will the alliance between Douyin and Tencent break the deadlock of entertainment payment?

Hello everyone, I am Dolphin Jun from Changqiao!

The last quarterly report season of 2022 has ended, and the pan-entertainment companies covered by Dolphin Jun have all submitted their report cards. During the "Efficiency Improvement Year" at full speed and braking:

1. Pure entertainment business has not yet seen a recovery, but the slowdown has slowed significantly, and it is basically certain that it will hit bottom in the fourth quarter. When will it return to positive growth? In addition to the low base effect in the second quarter, the significant recovery of content supply is the key. Game supply has significantly recovered, while film and television is still in progress.

2. Cost reduction and efficiency enhancement are the main themes of the year, and early birds with fast and fierce actions have already entered the second half of painful contraction, and will return to normal business growth this year.

3. In addition to being tough on themselves, entertainment platforms have also set their sights on users. After years of getting things for free, it's time to harvest. However, the height of the competitive barriers determines the bargaining power of different platforms facing users. Some platforms have ushered in a new era, while others have almost declared a dead end.

4. The competition between platforms is becoming cooperation, which is a signal that can reduce internal consumption of the industry and focus on industrial transformation optimization. The business model of long videos has been proven by iQiyi. After the competition that was once like a life-and-death struggle is reduced, the trend of a turnaround is further confirmed.

For detailed analysis of key entertainment companies, Dolphin Jun will focus on the subdivision field of entertainment payment and key stocks in the next article, and give short-, medium-, and long-term logical judgments combined with valuations.

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The following is the detailed content:

I. False Recovery, Real Bottoming, waiting for supply improvement

In the fourth quarter of last year, the special environment had a great impact on the short-term operation of the company, and everyone was aware of it. The pan-entertainment target pool tracked by Dolphin Jun has many third-party monitoring data sources, and the company is also happy to communicate with institutions about the operation situation. Therefore, from the perspective of expected difference, it was basically expected and passed smoothly.

Putting market expectations aside, from the trend of the total revenue of the target pool, it seems that the pan-entertainment industry in the fourth quarter has a strong independent recovery trend in the face of macro pressure.

But the actual situation is that the increase in the fourth quarter almost comes from the incremental contribution of Kuaishou. Since Kuaishou tilted its resources to accelerate the penetration of live-streaming e-commerce, the income from e-commerce advertising and commissions has soared, which is still a backbone force that can maintain high growth during the period of short videos after entering the video number.

Looking at other "pure" entertainment companies, except for those with content cycles to resist macroeconomic headwinds (such as iQiyi and Perfect World), the rest of the platforms are still subject to industry beta pressure.

So, to be accurate, the fourth quarter's positive turnover in entertainment revenue did not come from the recovery of original business, but from eating up more e-commerce market share across industries. Although the base figure from the previous year has decreased, macro drag is still not insignificant.

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Looking more closely at the two main monetization methods of entertainment content - advertising and content payment, the fourth quarter presented a different consumption structure because of the company's operating strategy:

(1) Advertising: In the fourth quarter, macro pressure was relatively high, so businesses, like in the previous three quarters, still value actual conversions more. Traditional consumer-oriented merchants prefer to budget for e-commerce platforms closer to the transaction links, while industry-oriented advertisers pursue high-performance advertising and have been basically monopolized by short video platforms in the past two years.

However, traditional entertainment platforms relied more on brand advertising, such as opening screen ads and static branding, and implanted advertising, etc. Although short video functions have been added to various platforms, due to the inherent restrictions on content forms, the immersion is low and it is difficult to reverse the trend of user loss. At most, it only defends core traffic.

Therefore, in a cautious budget period, traditional entertainment platforms are not the preferred choice for advertisers. The overall growth rate of Internet advertising in the fourth quarter increased by 6.31%, and further increased because of the blessing of e-commerce shopping festivals.

However, the advertising revenue of key entertainment platforms, after excluding e-commerce advertising from Kuaishou and advertisements with core barriers such as Tencent that released new inventory in the fourth quarter, the year-on-year growth rate has not yet clearly turned around. However, like the industry environment, the trend is easing.

But on the other hand, after the peak of infection and the Spring Festival, the policy environment in key areas such as games, education, and financial services has been relaxed to varying degrees, and offline economic activities such as medical beauty and local commerce have also resumed, with relevant advertising investment following the trend. On the other hand, this year's second quarter e-commerce peak season, the budget of businesses will be more sufficient than last year, coupled with an ultra-low base figure. Therefore, overall, brand advertising will have a higher recovery elasticity.

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(2) Content payment: There is a big difference in performance among different platforms, and the core factor is still the problem of the supply-demand structure of entertainment content mentioned by Dolphin in the previous summary - although entertainment content is optional, it is more vulnerable during economic downturns. However, the core problem in the domestic entertainment market is still the shortage of supply and the potential demand for short and medium-term supply, which has a greater impact on the market size. In addition, the thickness of the platform's competitive barriers is a secondary factor that affects the promotion of price increases. Based on the difference between content supply + competitive barriers, the performance of Dolphin's coverage of pan-entertainment companies in the content payment business can be divided into three categories:

a. The first type can be said to be the "favorable terrain and human type." When the "timing" is unfavorable, due to the fact that it has just entered/is in the content cycle and the inventory supply is concentrated in the short term, it happens to coincide with the competitor's content vacuum period, even if it is a stock plate, the paid users can naturally rebound. In addition to its leading advantage, it also gives the platform sufficient bargaining power, and the execution effect of price increase can be quite good.

A typical example is iQiyi. At the end of last summer quarter, when the content cycle of the top rival Tencent Video was approaching its end after the end of "Dream Huas Record," iQiyi intensively released hot drama stocks such as "Police Honor," "Tang Dynasty Ghosts," "Qingqing Daily," "Wind Blows Half of the Summer," "The Daughter Who Returned," etc. According to Yunhe data, iQiyi's valid playback volume of drama series in the fourth quarter was almost the same as that of the first quarter, which had a phenomenal explosive drama "Raging."

Correspondingly, iQiyi's paid users and payment rate increased against the trend during the same period of price increase.

b. The second type is the "fighting resistance type." Compared with the first type, the second type has no favorable terrain and is more focused on its own efforts. Specifically, the content supply is not in an obvious period of concentrated release, but by including more content in the paid member system, and by driving the penetration rate and the increase of paid users, it maintains the growth of business receivables.

A typical example is Yuewen. By vigorously cracking down on pirated online novels, it has brought a surge in paid reading traffic, and it is expected to be reflected in this year's first-half performance. Another one is Tencent Music. In recent years, Tencent Music has been implementing a "paywall" strategy, restricting more copyrighted music to the scope of membership rights, which has stimulated the conversion of many "just-needed" users.

Although the unit price of payment has continued to decline due to factors such as exclusive copyright unbundling, macro replacement, and competition, the online music business has still maintained its growth rate at around 15-20% by relying on the growth of paid users by about 20-30% during the year of 2022.

Although the downward trend of monthly active users and live K-song business has not been alleviated in the fourth quarter and the competition in short videos is still severe, the acceleration of membership payment users and payment rates, and the stabilization of the decline in single user payment amount have begun.

Tencent Music's paywall strategy has always been effective, essentially due to the accumulation of its own copyright music content, especially its grasp of high-quality content copyright. In addition, in the past, when it relied on live K-song to easily win, the monetization value of online music was not fully tapped, which is also the reason why paid members have continued to increase in recent years. As of the fourth quarter, Tencent Music's member penetration rate has reached 15.6%, although there is still a gap to the company's mid-term goal of 25% and the 45% payment rate benchmarked against Spotify. However, we believe that the improvement in the payment rate in the future does not necessarily mean an absolute increase in paid users.

The unbundling of exclusive licenses may not affect Tencent Music's competitive position in the short term (there are occasional news reports of cooperation problems between competitors NetEase Cloud and music labels), but it is still a blow to the long-term competition logic.

The third type is the 'lying flat' group who neither have geographical or human advantages nor the power to struggle. They are characterized by crowded race tracks with low entry barriers, where the giants are easily able to crush and attack the vertical platforms with their traffic.

In last quarter's summary, Dolphin Jun mainly pointed out paid live broadcasts, as the low entry barriers (can be done with traffic, broadcasters can switch platforms at will) face greater competition from industry giants.

Furthermore, if the platform itself does not have a significant source of traffic, it is easy to become an agent model that is too dependent on head anchorpersons. Not only is it difficult to exert the scale effect of the internet platform, it is also restrained by the anchorpersons’ individual behavior and speech.

From the fourth quarter performance of Douyu and Huya, it basically confirms the view of Dolphin Jun earlier. In the pool of content payment companies that Dolphin Jun focuses on, the two were the only platforms that experienced accelerated revenue deterioration in the fourth quarter.

Both platforms paid users have fallen to the level of 2018. Not only has the epidemic bonus been wiped out, but it has also shrunk further. In the process of losing traffic, the ARPPU of a single paying user has also dropped synchronously, which does not reflect the logic of core users having higher ARPPU. In other words, not only are non-core users losing, but core users are also transferring more of their spending to other platforms.

If a bad state is compared to a worse state, Huya, which focuses on game live broadcasts, has suffered more severe erosion of its traffic. This is mainly due to the fact that game live broadcasts are one of the few places where traditional live broadcasts can aggregate traffic, so traffic growth is increasingly reaching its peak. It needs to actively seek performance growth from fast hands and B station, which have been putting considerable effort into game live broadcast content acquisition in the past two years (purchasing copyright of esports events, signing game anchorpersons, etc.). The loser in a battle over a fixed market share will definitely incur losses.

In the fourth quarter, Huya's live broadcast revenue was no longer able to cover content costs (copyright, self-production, revenue sharing), and Douyu was also hovering around a death knell for its business model.

Overall, looking at entertainment business in the fourth quarter alone, growth has not fully recovered; however, revenue decline has slowed significantly in a difficult operating environment last year.

1. The recovery of advertising this year, especially the repair of brand advertising placement intention, is a basic and confirmed trend. In previous years, the proportion of advertising in total revenue for generally mature pan-entertainment companies was around 40% (excluding internal circulation advertisements after crossing over to do live e-commerce, and excluding Tencent), after short video popularity in 2018, it slipped to the range of 25-30%. Before the real surge of Kuaishou e-commerce in the second half of 2020, relying on the cost-effectiveness advantage of short-video advertisements, Kuaishou's advertising business has contributed over 40% to the total revenue and driven the overall average level of advertising proportion (excluding Tencent and Kuaishou e-commerce advertisements) to about 35%.

The advertising proportion of the consolidated targets in the fourth quarter (excluding Tencent and Kuaishou e-commerce advertisements) reached the normal level in history of about 32%, so for mature vertical platforms without fresh traffic growth, they will have to rely on more content supply to provide more user stickiness and increase advertising inventory for future growth.

1. Similarly, for content payments, short-term impacts are more susceptible to changes in content supply, and the medium to long-term perspective is to discuss the thickness of the company's competitive barriers.

For the changes in the content supply of pan-entertainment from the fourth quarter to the present, we use the game and film/TV markets as examples:

a. The supply of the game market is clearly improving. Since the game version number resumed issuance last December, over 85 domestic games have been approved each month from January to March. In addition, 27 imported games have been approved in March.

Although it is unrealistic to expect the game to return to the peak before 2018, a supply of around 1000-1200 per year, averaging 100 pieces per month during 2019-2020, is still expected. However, it takes some time from the approval of the version number to the final launch. Generally speaking, the company will formulate a launch plan based on the degree of improvement of its own products, data optimization, the scheduling of market competitors, core user consumption seasonality and other factors.

At present, the number of newly-launched game apps has not yet returned, but from the game pipeline already announced by leading companies (mostly listed), a rebound in the game supply in 2023 is expected. Many of the games are the leading companies' flagship products, so there is hope to see a revival year of various games. b. The film and drama (TV drama, web drama) supply are the main topics in the film and television market discussion, and the variety show and animation markets are not large in scale and will not be discussed for the time being. Overall, the improvement in the supply of the film and television market has not yet been seen to be obvious. Perhaps the upstream content manufacturers have already taken investment actions, but from the TV drama production registration and the actual amount of new episodes on the entire network, it can be seen that the repair still needs to wait.

As for the broadcasting of dramas, Dolphin mainly counts the TV drama content that has been launched on long video platforms. Looking back at last year, it was basically a trend of declining volume season by season. Although there were opening dramas such as "Crazy Speed" in the first quarter, the amount of new episodes released was still lower than the historical level. Therefore, we can still look forward to the improvement of the supply side, which will further repair the market of the film and television industry chain.

二、Profitability: is bargain hunting and content payment viable?

In the cost expenditure of the pan-entertainment company in the fourth quarter, cost reduction and efficiency improvement are still the main theme. However, for the few companies that took action earlier, the strength of cost reduction and efficiency improvement in the fourth quarter has gradually been seen in the second half. In other words, we cannot rely on shrinking to squeeze out profits like last year.

Dolphin summarized the operating profits of major pan-entertainment leaders in the past two years (core main business). Due to the suspension of game version number issuance in the middle of 2021 and the scarcity of new game supply, the impact was greatly magnified in the non-long vacation season of the fourth quarter with a low base. Coupled with extreme cost reduction and efficiency improvement, the profitability rebounded significantly in the fourth quarter of 2022, with a year-on-year increase of nearly 70%.

Correspondingly, the operating profit margin has disrupted the rhythm of further restoration to historical highs in the fourth quarter due to macro-environmental pressures. But after the fourth quarter, the focus is no longer on who can "shrink" better, but who can "efficiently expand" better.

The business model of pan-entertainment content payment, except for games, has always not been seen as promising. The core is that there are problems with both supply and demand, namely, the cost of content and user payment:

(1) The consumer awareness of content copyright is not fully established, and it is easy to copy and burn long videos, music, and other materials with low addiction, which makes it difficult for the payment rate and scale to match that of games.

(2) The cost of content is high, and high-quality exclusive content is hard to come by, and it is essentially scarce. The shortage of supply is not only due to regulatory review mechanisms that limit content innovation, but also the operation of the traffic economy during the rapid development of mobile Internet, which has led to a high degree of value concentration in the industry chain and a clear pyramid shape of content value. As one of the few high-value content producers, the limited supply of content naturally leads to scarcity, which in turn leads to higher premiums.

However, Dolphin has found signs in recent years that both of these problems are being alleviated. Despite the fact that a pandemic has wiped out nearly half of the dream valuations of internet platforms from flooding to withdrawing water, it has actually been beneficial from the perspective of long-term business operations: Since the growth of epidemic dividends is overdrawn, traffic acceleration peaks, and a whole industry-wide movement of reducing costs and increasing efficiency follows, pan-entertainment platforms have also gone ahead to think about how to optimize human efficiency and increase investment efficiency as a result.

Looking at the top few typical content payment platforms, content costs have continued to decline from the second quarter of last year until the end of the year. Excluding the seasonal fluctuations, the overall proportion of content costs to user content payment revenue has shown a trend of decline.

III. Revolutionary Friendship between Cross-platforms: From the “Dream Combination” of Long and Short Clips

Last week's news about the second creation cooperation of Douyin and Tencent video caused a sensation on the Internet. ByteDance and Tencent's grievances, from business line competition to founder's circle mutual abuse, have not stopped since 2018.

Up to now, Tencent's traffic is still facing erosion from ByteDance, and the interconnection of the ecosystem of giants has been called for from 2021 to today. Douyin short videos have still not been able to remove the wall of WeChat, and the video app has also been directly targeted by the market. In the competition relationship of playing up and bluffing, the younger brother Tencent video, who has been losing money for years, has shaken hands and made peace with its competitors. What kind of trick is this?

Here is Dolphin's point of view: The break in the ice between Douyin and Tencent video will not change the direct competition relationship between ByteDance and Tencent. Video app is still targeting the market where Douyin is located. However, for Tencent video, Douyin, as an efficient distribution and promotion channel, will bring significant optimization to the cost end and promote the company to accelerate the establishment of a viable business model.

This is also a step that Tencent video has to take after iQiyi, which lost a lot of money, proved the effectiveness of the business model of content payment. In the first quarter of last year, iQiyi's seasonal member subscription revenue began to cover content costs, so when overall content costs were cut by 20% for the whole year, the coverage rate in the fourth quarter once again significantly increased to 120%. This is the biggest variable that has moved away from years of huge losses (single quarter operating losses of 1-2 billion) towards profitability (nearly 800 million in operating profits in the fourth quarter) in addition to iQiyi's own large-scale cost-cutting measures.

Dolphin believes that the change in the industry may have quietly occurred. In "Learning from History: Sorting Out the Logic Behind iQiyi's Industrialization of the Film and Television Industry," we previously discussed and envisioned the "supply-side reform." Under the impetus of the following four factors, it is starting on its journey:

(1) Content regulation: This must be mentioned first, although regulation refers to the relatively strict content review and industry price limits (single-episode pricing, actor's highest salary ratio, etc.) for drama series, variety shows, and other long video content in recent years by the State Administration of Radio, Film, and Television. Content producers upstream need to sell inventory at a discount on the one hand, and on the other hand, producers are relatively cautious in investing in new projects to prevent the occurrence of investing in projects that fail to pass review and produce nothing, which belongs to the upstream content side's voluntary compression of industry costs.

(2) Unbundling of exclusive rights: This is mainly reflected in the field of digital music. For the digital music industry, Tencent Music's unbundling of exclusive rights is a long-term and effective cost optimization. Tencent Music has also changed its cooperation model with some record companies from guaranteed copyright fees to revenue sharing, thus increasing the return on investment in content procurement.

(3) Investment in slimming down projects: mainly refers to the selection of projects and the reduction of low-ROI project investment. This is one of the core measures for the company to reduce costs and increase efficiency, especially in the long video field (such as iQiyi's proactive reduction of investment in sweet pet dramas). It is a sharp contrast to the crude and simple bombarding of funding before 2022. This move is also the main reason for the absolute decrease in the cost of long video content.

(4) The "magic" of emerging technologies and the efficient distribution of old dramas through short videos: In the second half of last year, Douyin and iQiyi began their second-generation cooperation with the short video-ization of film and television content. In the past six months, the landing effect has been remarkable. Short videos that include clips from films and TV series are promoted to precise user groups in Douyin's vast traffic pool and are further spread to more circles of people by algorithms.

The efficient distribution of short videos can not only save low-efficiency expenses for new drama promotion but also surprisingly, through the cooperation of iQiyi and Douyin, more exclusive old dramas are being delivered to a large number of users. In the third quarter, the effective viewing volume of iQiyi's platform drama increased by 7.7% month-on-month, not lagging behind Tencent Video.

In fact, Tencent Video and iQiyi have launched similar short-video content on their own platforms, including a single-column portrait mode that is more similar to short video style, and personalized recommendations to users by mixing various types of film and television content. iQiyi has even launched the "Suike" short video app, but domestic traffic can be ignored, so it has focused more on overseas development since the second half of 2021. Although the operation of Aiyouteng has certain effects, it has only improved the internal distribution efficiency of the platform.

However, due to the high immersion advantage of pure short video platforms like Douyin and Kuai video, the traffic of long video platforms has been continuously lost in the past two years, and only when there are popular dramas in the same period, they will attract users back. Therefore, if you can't beat them, join them. In the cold capital market, iQiyi, which is eager to turn losses into profits, was the first to start reducing costs and increasing efficiency, and this time it was also the first to surrender.

The monthly active users of iQiyi in the fourth quarter showed a significant rebound, but Tencent Video, which used to closely follow its footsteps, has also been declining since September. The gap between the one and the two is getting wider and wider, so Tencent Video can no longer sit still.

However, compared with the short-term recovery of traffic, Dolphin believes that the combination of long and short videos can also bring more chemical reactions, especially in cost optimization and commercial model development.

While cooperating with efficient distribution, Aiyouteng is also locking more old drama content into the scope of paid members, according to Yunhe data, more than 50% of the playing volume in 2022 comes from old dramas, an increase of nearly 6 percentage points compared to 2021. The repeated broadcasting mode of old dramas can better reflect the scale efficiency of the platform- on the one hand, it can improve member conversion, and on the other hand, the cost of old dramas is lower and can improve operating efficiency.

Of course, such efficiency improvements will not only benefit Aiyouteng, but more importantly, it will greatly improve the industry's profitability.

Prior to Aiyouteng's joint price increase, there were also cross-platform collaborations between Douyin and iQiyi and Tencent Video. This benign "competitive relationship" will also promote the overall entertainment industry to reduce internal friction, promote the transformation of the deformed content industry, and achieve win-win results.

In the next article, Dolphin will focus on the subdivision fields of content payment and individual stocks and give logical judgments in the short, medium, and long term.

Long Bridge Dolphin "Pan-Entertainment Review" historical articles

January 6, 2023 "Pan-Entertainment "Starting Point", Tencent, B Station, whose rebound is more sustainable?" On September 27, 2022, "Can Kuaishou, Xindong, iQiyi and Tencent Music, which have "disappeared", reverse their plight?"

On September 16, 2022, "After seeking different ways out, Tencent, Kuaishou and Bilibili have different fates"

On June 15, 2022, "Kuaishou and Bilibili: two blood-losing gigantic infants, who can recover?"

On May 5, 2022, "Breaking the ice of entertainment: Tencent and Bilibili's limitless future"

On April 15, 2022, "The restart of game licenses has only caused ripples, not major movements. Why did gaming stocks fail to perk up?"

On September 15, 2021, "Retrospect on entertainment industry (2): Another winter, how far is the spring for Tencent and Kuaishou?"

On September 13, 2021, "Retrospect on entertainment industry (1): Another winter, how far is the spring for Tencent and Kuaishou?"

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