iQIYI Inc
NASDAQ:IQ
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iQIYI Inc
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Ladies and gentlemen, thank you for standing by, and welcome to the iQIYI First Quarter 2018 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, 27th of April 2018.
I would now like to hand the conference over to your first speaker today, Ms. Dahlia Wei. Thank you, and please go ahead.
Thank you, operator. Hello, everyone, and thank you for joining iQIYI's First Quarter 2018 Earnings Conference Call. The company's results were released earlier today and are available on the company's Investor Relations website at ir.iqiyi.com.
On the call today are Dr. Yu Gong, our Founder and Chief Executive Officer; and Mr. Xiaodong Wang, our Chief Financial Officer. Dr. Gong will give a brief overview of the company's business operations and highlights; followed by Xiaodong, who will go through the financials and guidance. After their prepared remarks, Dr. Gong and Xiaodong will be joined by our Vice President of Investments during the Q&A session to take your questions.
Before we continue, please note that discussion today will contain forward-looking statements based under the safe harbor provisions for the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that can cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but not limited to those outlined in our public filings with the SEC. iQIYI does not undertake any obligation to update any forward-looking statements except as required under applicable law.
With that, I would now turn the call over to Dr. Gong. Please go ahead.
Hello, everyone, and thank you for joining us for our first earning call as a public company. I would like to take this opportunity to thank our shareholders as we are now publicly listed on the NASDAQ. The successful listing was a monumental milestone in our history and also marks the beginning of a new journey for us. We will continue to work tirelessly to fulfill our vision, which is to become a technology-based entertainment giant that brings fine and -- brings fun and joy to people and their families.
Let me now turn to our performance for the first quarter of 2018. In the first quarter, both of our 2 major business categories, advertising services and membership services, delivered strong growth. In particular, we have continued to see significant growth momentum from our in-feed advertising business unit.
Total revenues for the first quarter was RMB 4.9 billion, up 57% year-over-year. Online advertising services revenue was RMB 2.1 billion, an increase of 52% from the same period in 2017.
We saw improved efficiency in our advertising business as we launched several very successful self-produced variety show during this quarter. Advertisers are increasingly recognizing our content production strength at various creative advertising formats that we have developed on our platform. For example, we integrated advertisement into the content of our shows so that viewers perceive the app as a well-connected component of the content itself. We are continually developing new formats and options to enable advertisers to substantially improve the effectiveness of their ads with significant ROI enhancement. This showcases our deep understanding of our content and how we are able to apply this deep understanding into better serving our user, clients and partners.
As I mentioned earlier, another driver in the advertising categories is our in-feed advertising, which saw robust growth year-over-year. During the first quarter, we launched the new independent apps within our iQIYI product metrics, namely Na Dou, rebranded from iQIYI Headlines; and iQIYI comics and animation, a comics-focused app. These independent apps greatly enhanced our feed-based products, traffic and inventory and are currently building it through the strong growth of in-feed advertising.
Our membership business also continues to show strong growth momentum, with revenue growth -- growing at 67% year-over-year to RMB 2.1 billion during the quarter. The number of subscribing members increased 71% year-over-year to over 61 million as March -- as of March 31, 2018. This strong performance highlights our leading position in the industry. The growth of our subscribing members was driven by the high-quality content of platform as well as strong seasonality trend of the Chinese New Year.
We hereby are also happy to announce that as part of our strategic partnership with JD.com, the 2 companies will launch a joint membership program, in which subscribing members will be entitled to premium services and the privilege of both iQiyi VIP and JD Plus at just RMB 198 per year. The partnership leverage both parties' strength in brand content, traffic and the massive paying user base. We believe it will broaden our membership for strengthening the stickiness of regular users and build a solid [indiscernible] commercial alliance that brings better experiences and more benefits to our users.
In March 2018, according to iResearch, iQIYI's MAU and DAU as well as user time spent on mobile apps, once again, ranked #1 in the online video industry. In addition, iQIYI's PC MAU, DAU and user time spent also ranked #1.
Now let me give you some update on our content. We believe original content production is a key underpinning of our content strategy. In the first quarter, we have achieved new milestones.
Firstly, in variety show, in the first quarter, we released a number of highly popular self-produced variety show. Idol Producer, a boy group survival reality show which premiered in January, quickly become another phenomenal success with its appeal to hundreds of millions of young viewers. Idol Producer reached a viewer level exceeded that of The Voice of China during the comparable period last year. Idol Producer recently finished its first season with a huge success. The show's 9 finalists formed an idol group called Nine Percent, which has gained widespread popularity among youngsters not only in China, Southeast Asia, and Japan but also among Asian fan base in North America. iQIYI signed Nine Percent and are now with [ the core ] agency management rights for the next 18 months. Well, we will share all of the revenues from commercials, concerts and [ distribution ] deals and advertising endorsement. This again showcases our diversified business model and strong capabilities in terms of monetization -- monetizing one single IP in many different ways.
Another 2 self-produced variety show: Hot-Blood Dance Crew, a dancing reality show; and Clash Bots, a hybrid [ size ] and entertainment reality show debuted on iQIYI late in this quarter. These 2 shows also generated [indiscernible] traffic and quickly become popular hits. I look forward to providing you with further updates on these 2 shows next quarter after they finished their first season. These successful shows demonstrate our deep understanding of users and our ability to produce engaging content and improves our user stickiness.
Secondly for drama series, we have been expanding our self-production capabilities to duplicate the success we have had from the original variety shows. Recently, in early April, 2 of our self-produced dramas, Tientsin Mystic and Burning Ice, were recognized with honors at the New York Festivals International Television & Film Awards. Tiensin Mystic was awarded a Silver Medal for Best Visual Effects and a Bronze Medal for Best Director. Burning Ice was awarded the Bronze Medal for Best Crime Series. These awards are strong testimonies for our self-production capabilities and will enhanced our position within the entertainment industry.
We currently have several hit drama titles streaming on our platform, including The Great Adventurer Wesley, which we coproduced with a famous Hong Kong Director, Wong Jing. For the rest of the year, we are working with a stellar lineup of well-respected directors and producers on a variety of highly anticipated new drama projects, including Bureau of Transformer and produced by Chen Guofu; Sword Dynasty, produced by Feng Xiaogang; The Golden Eyes, starring Lay Zhang, Chinese name Zhang Yixing, who was one of the managers on the show Idol Producer and [ The Original Scene, ] which is sister drama series to Burning Ice, sharing the same director and producer.
We have also collaborated with 7 local partners in producing 4 great idol drama series, in particular, one of them Meet me @ 1006. We built it simultaneously on iQIYI and several leading local TV stations and recorded the highest viewership ratings in their respective time slots on both [ TTV ] and [ EBC. ] The copyright of this drama series has also been licensed to Singapore, Malaysia, Indonesia, Australia, New Zealand and North America.
Thirdly, in original movies, we established the iQIYI Pictures, our own film production label, 3 years ago and have already produced a number of hits. Youth, for example, a movie we coproduced and was directed by the renowned director Feng Xiaogang, premiered in December 2017 and has, so far, generated over RMB 1.4 billion at the box office; Blue Amber, produced by iQIYI Pictures, was shortlisted for the Asian New Talent Award and Shanghai International Film Festival. More recently, The Pluto Moment, a film we produced, was selected as part of Cannes Directors Fortnight lineup. Building on this success, we target to release 5 theatrical film in 2018. In addition, Chosen, an Internet movie we coproduced with Sony Pictures, premiered in January in China and was expected for a hit. This movie has been licensed to Netflix for international distribution, and it's being launched gradually in over 200 countries and regions globally.
Now I will discuss our technology. Leveraging our deep experience in AI and big data analytics, we are able to best understand our content, our users as well as our partners, all of which, in turn, support our content in production, procurement and in monetization. Earlier this month, we become the first Chinese member of the Alliance for Open Media, a nonprofit industry organization for the development of open, royalty-free technology for media -- multimedia delivery. Founding members include global technology giant such as Apple, Amazon, Google and Facebook. We are currently working with the organization to augment and promote cutting-edge open source and royalty-free video technologies. As a member, we will be able to participate in the formulation of industry standards and help promote ultrafast, high-quality video technology for years to come.
During this quarter also, development digital rights management, DRM, system was officially certified by ChinaDRM Lab. ChinaDRM Lab is a government-authorized organization that maintains a set of technical vendors, and the program is for preventing the illegal use of video content copyrights. Such vendors have been recognized by major international organizations. iQIYI was the first in the industry to be certified by ChinaDRM, and this self-development technology will provide a more stable technology, technical procurement and low cost.
Building on the comprehensive content library and solid technology foundation, we are also [ patterned ] IP ecosystem to flourish on our platform by collaborating with all kinds of upstream and downstream partners. As part of our unique business model, we tried to integrate our IP and monetize it through multiple ways and diversifying our revenue streams, by adapting our content for a series of IP-related business, including published IP licensing, online literature, online game, live broadcasting, e-commerce and others.
A few years ago -- a few days ago, we celebrated our eighth anniversary. When we look at our history, we are especially proud of the fact that we have again and again pioneered our new business models, content format, content delivery modes, advertising options that has been setting industry standards. Looking forward, we are continuing to focus on producing original content, developing AI technology, fostering our unique corporate culture that features a harmonious combination of engineering and the creative talent and nurturing of a diversified monetization model, which we call the Netflix-class model. We believe that all of these factors will help us capture the tremendous opportunities in the fast-growing entertainment industry in China and generate a sustainable value for our shareholders.
With that, I will have Xiaodong to go over the financials.
Hello, everyone. I'm pleased that we delivered a very good first quarter after our IPO. Let me go through our financial highlights.
We use net revenue to calculate all percentage changes in the margins from this quarter to exclude VAT impact, the new GAAP requirement, the detail of which can be found in our earning release issued earlier today.
At the first quarter of the year 2018, iQIYI's total revenue was RMB 4.9 billion, representing an increase of 47% (sic) [ 57% ] from the same period last year. The increase was primarily due to the robust growth of membership and advertising services.
Membership service revenue was RMB 2.1 billion, up 67% from the same period in the year 2017. The increase was primarily driven by significant growth of subscribing members. Our subscribing members reached 61.3 billion -- 61.3 million, with a paying ratio of over 97.4% as of March 31 year 2018, increased by 71% from 35.8 million as of March 31 year 2017. The growth was driven by a series of premium content titles as well as various initiatives we rolled out with the Chinese New Year.
Online advertising service revenue was RMB 2.1 billion, representing an increase of 52% from the same period in the year '17. The increase was driven by both brand and in-feed advertising. In terms of brand ads, the number of subscribers and average spending per customers continued to grow, benefiting from hot content primarily this quarter. On the in-feed advertising, we have seen a strong momentum continuing this quarter ever since we started the initiative in late 2016.
Content distribution revenue was RMB 266.7 million, an increase of 44% from the same period in the year '17.
Other revenues were RMB 405 million, an increase of 51% from the same period in 2017. The increase was primarily driven by a strong performance across various major verticals in this category, especially film distribution, online literature as well as IP licensing and the derivatives. Different from our U.S. peers, we offer not only video content but also other service that enable us to generate multiple source of monetization to maximize our revenues.
Moving on to the cost of revenues. Our cost of revenues were RMB 4.8 billion, an increase of 44% from the same period in year 2017. The major component of cost was -- cost of revenue were content costs, which mainly consist of amortization as expense of content licensed copyrights and the revenues-sharing costs. For content uploaded by partners are the costs incurred for [indiscernible]. The increase was primarily driven by increased investment in our overall content offerings. The absolute number of content cost was RMB 3.9 billion, an increase of 54% from the same period in 2017. Our original content cost increased by more than 100% year-over-year and made up a growing part of the total content cost. We expect this trend to continue in the future.
Turning to the operating expenses. SG&A expense in the first quarter were RMB 604.2 million (sic) [ RMB 704.2 million ], an increase of 42% from the same period in year 2017. The increase was primarily due to the increased channel and marketing expenses associated with the pre-installation of iQIYI's app as well as branding and content promotional expenses. Our R&D expense were RMB 387.3 million, up 44% year-over-year. The increase was primarily due to the growth of people cost.
Operating losses in the first quarter were RMB 1.1 billion compared with the operating losses of RMB 1 billion in the same period last year. Our operating loss margin narrowed down to 22% compared to operating loss margin of 34% in the same period last year.
Total other income was RMB 666.2 million compared with the total other expenses of RMB 79.1 million during the same period of year 2017. In the first quarter of 2018, we recognized RMB 186.6 million of fair value gain arising from one of our private company investments in accordance with the new financial instruments accounting standards adopted on January 1, 2018, and RMB 474.2 million of foreign exchange gain arising from the appreciation of the RMB against the U.S. dollars.
Loss before income tax was RMB 396.2 million compared with RMB 1.1 billion during the same period last year.
Income tax expenses were RMB 0.5 million compared with the income tax expenses of RMB 0.8 million during the same period last year.
Net loss attributable to iQIYI, Inc. was RMB 395.7 million compared with RMB 1.1 billion during the same period of year 2017. Fully diluted net loss per ordinary shares were RMB 1.97 compared to RMB 5.37 in the same period of year 2017.
As of March 31, 2018, the company had cash, cash equivalents and the short-term investments of RMB 896.1 million.
We received all the proceeds from the IPO in the early April. And I would like to once again express our thanks to iQIYI investors and the capital markets. We're listed on the NASDAQ Global Market last month.
Turning to the second quarter guidance. For the second quarter of 2018, iQIYI expect total revenue to be between RMB 5.8 billion and RMB 6.04 billion, representing an increase of 42% to 48% year-over-year. The forecast reflects iQIYI's current and preliminary view, subject to change.
This concludes our prepared remarks. I would now turn the call to the operator and open the floor to Q&A.
[Operator Instructions] The first question is from Thomas Chong from Credit Suisse.
I have 3 questions. The first question is about the membership services. Can management comment about the paying subscribers' market size as well as our competitive landscape? Are we actually seeing we are creating or enlarging the market size with our peers? And my second question is about the monetization of original contents. How do we see the monetization potential? And are we seeing better-than-expected monetization on our contents? And my final question is about the overall online video competitive landscape. How would we see the trend going forward, in particular, the content cost of licensed contents?
[Foreign Language] Okay, translate for us.
Yes. So I'll probably translate for the first question first. Yes, your question is about paying members and the landscape and also the total market size. I think on the competition and competing -- [ grabbing ] for the paying members are mostly between iQIYI and Tencent. I think for the competition in the -- for the paying members have significantly higher barrier compared with [indiscernible] services. Looking at the paying membership, if you want to attract paying members, you need to have more premium content. At the same time, you also need to have more systematic design of the technology and the product, including, for example, the diversified source of the traffic as well as a well design of the privilege for members. So trend-wise, I think we are seeing more and more members -- paying members purchasing more than 1 membership across the platform -- video platforms. And overall, this increase of the paying members are driven by the increase of the original premium content because the original premium content are mostly exclusive -- are kind of being provided by the video platforms at the exclusive content and which is a catalyst for driving the conversion of the membership. As a result, for iQIYI, it's our sales strategy to further enhance our original content production as our key strategy.
[Foreign Language]
Your second question is about monetization for the original content. And it is certain that the original content have better monetization capability compared with the licensed content. Comparatively speaking, the main revenue source for the -- the main monetization format for the licensed content is the pre-rolls and post-rolls. And this, with the increase -- for the increase of the members, we believe the growth of this revenue will be -- the growth of this monetization format is perceived to be limited compared with the way we can monetize the original content. Looking at the original content, we can introduce the advertisers at a very early stage of the content production and using various formats to put the advertisement into the production as the -- in a way such as the product placement. And this will be perceived as the integral part of the content itself. And in addition to that, for original titles, we will be -- we will have the flexibility of making different monetization arrangement to maximize the output. For example, for our original shows, we cut it into 3 airing windows. For the first window, we put in the member-only zone, so that we can convert the paying members. For the second window, we actually make it available for all the users so that we can generate advertisement revenue. Then for the third window, we put it back to the membership-only zone to encourage the member retention. And in addition to that, the third thing I would like to highlight is that, for the original content, we have the full rights, which actually help us to monetize the content in manageable ways. For example, we can cut a long-form video into a series of short-form video; and for the short-form video and display it in our app in a format of the feed, we can actually generate in-feed advertisement leveraging the same content.
[Foreign Language]
The third question is about market landscape. As you know, there are 3 major players in this market, and it is our belief that the online video market in China is not going to be monopolized by any of the one players. Instead, we see each could have its own unique position similar to what happened in the U.S. cable market. But there are 3 conditions for that. I think in the U.S. market, what we have seen is that each cable operators actually provides exclusive unique content, and it's the uniqueness of the content which helps them to build the differentiated market positioning. And it tells us that in order to compete effectively, we need to enhance our capability to provide the original content. And so that this strategy will also offering additional merits. For example, by creating more of our unique original content, it will help us actually to initiate -- it will help us to be less reliant on purchasing of the external content and to avoiding the pure price wars. So the second reason, in addition to the content, the origin -- the differentiated content, the second reason for us to believe that the market will not be monopolized is that this market has been experiencing the exponential growth in the past. And in order to get more users and access more market share, each of the dominant video platform has invested significantly, including the capital and the resources. And with the market being matured over time, we do believe that in the mature -- when the market is approaching a mature stage, each of the player will be more focused on the efficiency, and the focus on operating efficiency will help -- will require them to develop their own set of strategies to be effectively differentiated. Then the third reason is that when the market is growing, the business model in this space is actually evolving as well. We do believe that as you probably are aware, our business model has been evolving, and evolving this model can bring differentiations across video platforms over time.
Your next question comes from the line of Ella Ji of China Renaissance.
Ella, due to time limit, can we limit the questions to one? And if you can speak Chinese, can you ask the question in Chinese first and then repeat the question in English? That will be very helpful. Thank you.
[Foreign Language] So just a quick follow-up is I wonder if Mr. Gong can share with us. In terms of the original exclusive content, how long do you think will it take for the 3 major platforms to produce a meaningful amount of the exclusive content by themselves? And then my question is actually about the content spending. I wonder if you can share with us the schedule of your content spending for the rest of the year. I understand that because we see that in the first quarter, the content spending is a little bit like comparing to our expectation. And also, if you could kindly share any color regarding the breakdown between drama series and variety shows and also maybe between original and licensed? [Foreign Language]
[Foreign Language]
I'll answer the first question. I think our satisfactory target is to have the original content accounting for 1/3 of the total content spending, which probably will contribute to something around 20% to 25% for the traffic. And this is a mid- to long-term goal, and we believe it's somewhere achievable in about 3 to 5 years.
I'd add also something about the different number you asked, but I'm not quite sure I heard all your questions. I'll just try to answer your question, but if I missed something, just let me know. You mentioned like a certain breakdown of different types of content, for example, original versus licensed content. I think that still because it's only 1 month after IPO, we don't see like major change from what we said during that period. As you see now, original content, they account for a small percentage of the total content cost. It's somewhere between like 10% to 20%. Unlike for [ certain ] category, for example, variety shows, original content and for something that already exist like 50% to 60%, so majority of the variety show already account for majority of the ones. So basically, that's, I think, the first part. And second, between like a variety show and a drama series, drama series definitely is a much, much bigger one. As you know, we sell like -- it's the biggest traffic source. And we also mentioned before that we might need only like, say, 6 to 7 top-tier variety shows for the whole year. But for drama series, the demand will be like somewhere between like 10 to 20 titles. I know you know the difficulties. And the variety show, they only have like 10 to 12 episodes per season unlike the drama series. And here in China, it's like, say, 50. But even like the shortest ones would likely have 12 to 24 episodes. So basically, to give you some idea why drama series, they account for a very big part of the total content costs. And the outlook of the whole year on content spending, yes, you're right, due to the various reasons, you see like somehow the revenue growth in the first quarter is faster than the content expenditure. But I think still, the way we said before, I still think this is very important year as we plan to invest heavily on the original content while it peaks to a certain level of licensed content [indiscernible]. So basically, I would say still, I would expect the total content cost increase this year to be faster than the total -- the revenue increase [indiscernible]. So that, I think, could have some more idea of the total content outlook for the rest of the year. And did I miss something else?
No, it's very good, yes. And congratulations on your first successful public quarter.
The next question is from Eddie Leung of Merrill Lynch.
[Foreign Language] So my question is about the potential competition and impact from the emerging short-form video platforms in China on our industry.
[Foreign Language]
So thanks, Eddie. As you know, the long form -- the online video sites for the long-form video actually has traditionally been taking time of the user time spent from TVs and from offline entertainment services. This has happened historically. And looking at short-form video in recent years, we believe the same trend applies to them as well. They are also taking the user time spent from TV and more offline entertainment services. So this is -- we are clearly aware of this. And for iQIYI, this is -- for iQIYI, since we are strategically positioned as the one-stop entertainment service provider for Chinese users, we are dedicated to do both the long-form video and also the short-form video. In the script, as I mentioned, we launched, for example, a few independent apps, including Na Dou, which is positioned providing the short-form video services for the users. And the same happened to Paopao, our social network. Most of the feeds in Paopao are also short-form video.
The next question is from Alicia Yap of Citigroup.
[Foreign Language] Congrats on the first public quarter results. My question is actually related to the membership subscription business. Given the strong additions that we saw in the February and also the entire quarter, what could be the new membership sub growth that we should expect for the second quarter and also the rest of the year? And with your recent promotional package of 1 year free with subscriptions for 1 year package, how has the tractions from users so far? And how should we be thinking of the membership growth versus the ARPU trend for the rest of this year? [Foreign Language]
I think, first, what I want to address here is like, let's say, what we saw in the first quarter definitely, I think, the subscriber market is bigger than we have seen before. So we see huge market potential. That's why you see we launched several [ market content ] to seize the market opportunity to be more aggressive in attracting the members. And I'm not actually -- not quite sure what you would call like, say, by 1 year to get a 1 year free. I'm not quite sure what are you actually referring with. I think the major content we're launching in the first quarter is we have a discount for the new members for RMB 6 per month for the first month for the new users, similar to what Netflix did in North America. They have like a trial period. We don't offer like a free trial period but with some discount for those new members. That content actually, I think, has helped a lot. And it helped us to accumulate some of the members, why we see the churn rate and other metrics related to the membership are still very good. We don't see any deteriorations on those metrics. So we think it is helping. So probably, we will continue this kind of activities in the next few quarters. So potentially, you are right, the ARPU could have been lower than what you saw last year. But I don't think it would be like, say, significantly lower than what you have already seen in the first quarter. So I think first quarter could be a guide for the ARPU in the remainder of the year. And what's your next question actually?
[Foreign Language]
Yes, I would also like to comment on what you have mentioned earlier, buying 1 year for the next year free, that free membership for the next year. I think that this is probably the case where we have been making a lot of highlights across a wider spectrum of demographics to understand the consumer behavior. For example, we have been providing [indiscernible] program such as the first month free and enjoying the free trial. We also are encouraging users to pay only RMB 0.01 for the first month to get a free -- almost free member and get the rest of the year -- paying for the rest of the year if you're happy with the content. We also encourage the users to pay, for example, only RMB 6 for the first month. And then if you're happy with the content, stay with us and pay for the rest of the year. And when we are doing all the pilots, we were [ sending them ] the users across different regions, across different terminals, et cetera. But we will continue to do that. Most likely, we have seen in certain, for example, geographic area, et cetera, you could have seen such tests. But this will not be a major component of most of our members. So just to add on that.
Your next question comes from the line of Ming Xu of UBS.
[Foreign Language] So basically, I have 2 questions. First is on the revenue contribution from the in-feed ad. So could management share the contribution inside the total advertising revenue? And is there any target to share? And secondly is on the content cost side. We know that competitors are spending more like niche content, sport-related content. So just want to know our plan on this.
I think -- this is Xiaodong. I will answer your first question and then let Dr. Gong come and answer your second one. I think we said before that in-feed ad accounts for like, say, over 10% of the total advertising service revenue last year. And now I think this year, that is definitely higher because the growth pace of the increase has been much, much faster than, in particular, the branding ones. I would expect -- I think at least it will be over 15%, maybe close to 20%, depends on how fast we can generate today in this ads revenue as well as how the branding advertisement is going in the next few quarters. Just to give you some ideas.
[Foreign Language]
Yes. I will comment on the second question regarding the original content such as the nonfiction [ regular ] films as well as the sports. For the nonfiction [ regular ] films, we have been working with BBC and have rolled out a series of titles as well. And so far, the ROI for this particular category of the content is not -- has not reached our satisfactory level. We will continue to do more tests. But so far, we do not have the plan to significantly increase the investment in this category. And the second is the sports. Actually, we shared a view with Netflix, I think, that basically the sports content for the Internet is -- and it cannot be -- we do not have the original capabilities to produce, for example, a sports category. As such, I think the online, generally speaking, is not as high as what we could see in other categories. And we do not have a strategy to increase investment in this segment either.
[Foreign Language]
And I would like to add that the ROI is not satisfactory, and the advertisement revenues generated from these 2 categories of the content is also -- on the -- actually, underperformance compared with other categories, and they are not key components for membership conversion as well.
[Foreign Language]
[Foreign Language] Yes, for entertainment and films.
I just want to add one thing. One thing I would say is we are focused to invest on others. Actually, generally speaking, we're managing like this original content schedule where we mainly have those categories. But as we've discussed during the road show and other analyst meetings, we took apart how we are going to cover the long-term content through our IT partner account. I think we let some of our partners to help us to cover those long-term content so we can further like build our content library. I think that is our strategy on how are we going to build the entire content network.
And we'll take the final question from Alex Yao of JPMorgan.
[Foreign Language] So my first question is about the long-term content cost upside and versus the monetization upside because the top in-house producer content in China currently, they're running at roughly RMB 10 million per episodes versus the top original content in the U.S. hitting almost USD 13 million. That suggests a potential 10x increase in terms of content cost per episode. If that's the case, how do you think about the monetization potential? Will we be able to increase the monetization by 10x to offset the long-term cost increase? The second question is about the regulatory environment. Apparently, the online regulatory environment is tightening since earlier of this year. What are the potential implication to our content operation and sourcing strategy? For example, last year, [Foreign Language] was a big hit in the market. But this year, will content like those, not super mainstream, be gaining a lot of traction?
[Foreign Language]
Regarding your first question, I would like to distinguish 2 concepts. The first concept is the purchase price and the second concept is the production cost. And these concepts are actually not the same. For us, looking at our sales, if we are doing original content, then the best-in-class -- for the best-in-class titles for each episode, the production cost will be somewhere between RMB 7 million to RMB 8 million [indiscernible], which includes the best-in-class actors, actresses, et cetera. And looking at the U.S. side, the average cost for the average drama episode is about 3 million to 4 million. And for the best-in-class -- the production cost for the best-in-class dramas is -- range between USD 6 million to USD 8 million per episode. And when you're referring to the fact that price for each drama episode has reached as high as RMB 10 million per episode, this actually refers to the purchase price. And the purchase price for the content, generally speaking, refers to the purchase of third party owned drama IPs. So in this context, what we would like to happily to see is that if we can increase the percentage of the original production, actually, they help us on the cost control because the in-house original production starts with an idea and then further evolves into the script and the screenplay. And during this creation process, it does not invite bidding, and as a result, this will not be a pure price war. And this is the case when at least for the short term, when 3 platforms collectively identify, for example, a hot title and bid for that. This explains the difference between the production cost and the price war and the -- sorry, the production cost and the purchase price. And in addition to that, you also asked us about the monetization capability. I will say that in short term, you probably will not see monetization go as high as 10x growth. However, as I explained before, the increased percentage of the original production also brings better monetization power. So the -- our strategy actually looks on the original production, on one hand, help us control the cost, and on the other hand, actually increase -- helps on the monetization. And this strategy can help us in achieving our business goals.
[Foreign Language]
So with -- the second question is about the government regulation. I think this regulatory framework has been in place for over 10 years for us as the long-form video platform. Actually, it starts from ever since our inception. And actually, we have been very adaptive to the regulatory requirements. And comparatively speaking, I think other apps such as the news, the short-form videos and also the social apps, probably they are facing more regulatory pressure if they want to be in compliance. And giving one example, I think people -- the audience are aware of The Rap of China. And I think The Rap of China has been here and enjoyed a huge success. And this also brings some of the difficulties for -- after the show was aired. And we have been adaptive. We introduced a new format. And for this year, we are going to launch the season 2. But it will have the same English name, The Rap of China, but it will have a new Chinese name. And it gives us the -- introduce the new formats.
Thank you.
I think we can conclude the call. Thank you.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.