iQIYI: Douyin Deal Is Positive, But Headwinds Continue

iQIYI (NASDAQ:IQ) recently disclosed a content licensing agreement with ByteDance-owned Douyin (BDNCE), which will see the company license select content for the editing and distribution of short-form videos on the Douyin platform. The commercial and financial terms were not detailed in the press release, but the commentary indicates clear strategic benefits for IQ, allowing it a new avenue to monetize its quality content for longer at high margins. That said, the core subscription business remains challenged, as highlighted in recent MAU/DAU data weakness, while ad revenues are also under pressure from COVID and macro headwinds. Yet, at current levels, the stock trades at a relatively pricey ~27x FY24 P/E, likely pricing in a decent probability of a turnaround. Net, I would hold off on the name at these levels.

iQIYI Announces Content Licensing Deal with Douyin

iQIYI recently disclosed entering into a definitive agreement with Douyin, which will entail the licensing of select content from its library for editing and distribution as short-form videos (in mutually agreeable formats). Through the licensing deal, Douyin gains official permission to recreate short-form videos using select IQ content, including its drama brand Mist Theatre (迷雾剧场). As Douyin operates under the ByteDance banner, other ByteDance-owned platforms such as Jinri Toutiao and Xigua Video will also gain access to the content. While the finer details of the agreement and the economics of the partnership have not been finalized or disclosed, IQ has (understandably) specified upfront that creating short video summaries of movies or breaking up full-length movies into short clips and re-posting on Douyin is not acceptable. Per the deal terms, both companies will also cooperate in other operational areas and explore improved industry solutions to create more win-win outcomes for content creators, copyright owners, and users.

An Important Step for the Long-Form Video Industry

The content licensing cooperation with Douyin marks an important first step in enforcing cross-platform content copyright protection for long-form media in China. If successful, the move will help to enhance the monetization potential of long-form video content as well, addressing the ongoing dispute between long-form and short-form video players around IP protection in recent years. Recall that in 2021, the call for copyright protection on short video platforms was stepped up, with content industry associations, video platforms, film, and TV companies simultaneously pushing for improved guidelines and standards. The IQ/Douyin cooperation, the first of its kind in China, therefore, offers a mutually agreeable path to facilitating the editing and redistributing of long-form IP while also incentivizing more self-produced quality content from long-form video producers over time.

Assuming the IQ/Douyin deal is successful, it seems likely that other short video platforms like Kuaishou (OTCPK:KSHTY) and Tencent Video (OTCPK:TCEHY) will follow suit with similar content distribution agreements down the line. As a result, long-form video players like IQ stand to gain a potentially lucrative new revenue stream within a quarter or two at virtually zero incremental cost. So while this initiative doesn’t quite alleviate the competitive pressures from short-video platforms for user mindshare and time spent, it is an important milestone for long-form content producers.

Positive Financial and Strategic Implications for iQIYI

Strategically, this deal benefits IQ on the user/traffic acquisition front – edits and recreation of IQ’s long-form content on Douyin’s highly engaged daily active user base of >600m will likely lead to increased mindshare gains. In effect, traffic redirection from Douyin users interested in viewing the full video content serves as a funnel, broadening IQ’s user reach and expanding its addressable market opportunities. In turn, Douyin gets to leverage IQ’s library to provide a more diversified content ecosystem to its users without violating copyright protection.

The monetization potential for IQ’s long-form video content is also compelling, adding an additional option to traditional subscription-based and advertising revenue streams without incremental costs (given the deal involves existing content). The economics of the deal have yet to be disclosed, but in a base case scenario, expect incremental revenue and operating cash flow to flow through the financials from Q3/Q4 2022. In the meantime, the Q2 2022 report (due at the end of August) should see IQ clearing delays in regulatory approvals, given it already has a good inventory of content at its disposal. The outlook for ads remains uncertain, though, and highly dependent on how the COVID and macro situation plays out, both of which have direct impacts on client ad budgets.

Douyin Deal is Positive, but Headwinds Continue to Cloud the Outlook

The recently disclosed content licensing cooperation with Douyin is a clear step in the right direction – it introduces a high-margin avenue for content monetization, supporting further operating leverage and reinvestment in future content production. Besides the incremental licensing revenues, IQ also stands to benefit from a broader reach post-Douyin deal, driving higher membership growth over time. The same hurdles remain, though, with the core business continuing to see weaker ad revenue and user growth data alongside a challenging macro backdrop. With the stock trading at ~27x FY24 consensus earnings numbers as well, the market has likely priced in much of the benefits to IQ’s growth profile and turnaround potential.