Everyone Who Watches TV Dramas Has Moved Online. Will the Business Keep Getting Better? | QDaily's 2016 Year in Review

People will always hunt down the content they love, and no medium can stop them.

The arguments it set off made Ode to Joy one of the loudest TV dramas of 2016.

QDaily once collected 46 complaints from viewers — people cared about the show's five women, who differ in family background, career, and love life, and argued over whether they were kind, whether their relationships were equal, and whether their lives reflected anything real.

Ode to Joy was produced by Daylight Entertainment, which had built a solid reputation with Nirvana in Fire and The Disguiser; the core creative team, including producer Hou Hongliang and director Kong Sheng, was pushed into the spotlight along with it. Daylight Entertainment is shifting genres, moving from earlier work like Chuang Guandong (《闯关东》) and A Wenzhou Family (《温州一家人》) toward material aimed at younger audiences.

The experienced production team had its own read on the market. Ode to Joy and Nirvana in Fire belong to different genres, but they share the elements young viewers respond to: adaptation from an online novel, a star-studded cast, and narrative tension.

Beyond the content itself, the show's broadcast platforms were the foundation of all that attention. Ode to Joy aired at the same time on Dragon Television, Zhejiang Television, and several major video sites. This release model, known as a net-TV drama, gets a show the widest possible exposure.

Compare the two channels, though, and Ode to Joy leaned more on its online audience. Its click count topped 18 billion, while its TV rating was an unremarkable 1.2%.

That was the norm in 2016. Eleven hit dramas joined the "10-billion-clicks club" that year, 5.5 times as many as in 2015. On television, only The Legend of Mi Yue passed the symbolic average rating of 2%.

Behind these numbers sits the industry's biggest change: the main battlefield is moving, and the internet has rewritten how people follow a show. According to the 2016 China Online Audiovisual Development Research Report from the Cyberspace Administration of China, China had 514 million online video users, a usage rate of 72.4% — 10 million more than in 2015.

Television, by contrast, has been losing viewing time for five years, and losing it faster each year.

You have probably felt this yourself: almost everyone now watches dramas and films online, and video sites have become one of the main places people spend their free time.

That is why a possible paid-membership market took shape in 2016, and why it would find its footing in 2017 — people will always hunt down the content they love, and no medium can stop them.

Copying a Hit

Once the industry had worn out the word "IP," "hit" became its new favorite. The video business has another term it reaches for just as often: "top-tier content."

The market has already shown that only the most popular dramas earn production companies the fattest profits. Those shows tend to look alike — an IP adaptation, young heartthrob leads, an anime-inflected look — and they deliver the same results: over 10 billion online views, the top TV rating, a lock on Weibo's trending list.

The Journey of Flower, made by Ciwen Media in 2015 from the online novel of the same name and starring Zhao Liying and Wallace Huo, drew 20 billion online clicks and an average rating above 2%. The mobile game released alongside it brought in 200 million yuan a month on its own.

The Mystic Nine, Ciwen's next step down the "young IP" road, was the first web drama of 2016 to pass 10 billion online views. It reportedly cost 168 million yuan and starred William Chan, Zhang Yixing, Zhao Liying, and Nan Pai San Shu, the author of The Lost Tomb. Critics were unconvinced — it scored only 5.9 on Douban — but audiences chased it anyway for the sheer fun of it. It ran 48 episodes, streaming exclusively on iQiyi while also airing weekly on Dragon Television.

The Mystic Nine is estimated to have brought Ciwen Media more than 400 million yuan, not counting its four spin-off series and merchandise. Ciwen's published results put revenue for the first three quarters of 2016 at 853 million yuan, up 1.9 times year over year.

One detail is worth noting. The Mystic Nine still used the "internet plus TV station" model, but dropped the traditional lag of "TV first, internet later." It served iQiyi's paying members first: the night Dragon Television premiered the show, iQiyi put out the first six episodes at once.

The business logic is simple. The Mystic Nine was a "custom drama" for iQiyi, which had pre-ordered it and so became its second investor.

One result, of course, was that The Mystic Nine's average TV rating trailed its online heat, ranking only 45th on the CSM 50-city chart for 2016.

At this point last year, our review of the TV drama market used two words: big-budget and youth-oriented. In 2016, those were still the key ingredients of a hit.

The big production houses that grew up making traditional TV dramas remained the main force behind blockbuster shows. Besides Ode to Joy, 2016 brought Dear Translator (Huace Croton), Sparrow (Huanrui Century), and The Princess Wei Young (Huace Croton), all of which succeeded in both viewership and ratings.

Television stations and video platforms still have different tastes. Love O2O (Huace Croton) brought Youku plenty of new members in August, yet never made the upper reaches of the annual ratings chart. In the other direction, two more traditional dramas from Shandong Television Media, Boarding the Wrong Bus (《搭错车》) and Stepfather Comes Home (《继父回家》), both pulled TV ratings above 1.3% but had almost no hold on young viewers online, which cost them copyright and spin-off income.

Starting in 2012, Hunan TV ran a "weekly drama theater" aimed at students on summer break. The first two youth-oriented hits, Swords of Legends and The Journey of Flower, both aired there. By the summer of 2016, the number of satellite channels with a summer slot had grown from one to four: Hunan (Ice Fantasy, Whirlwind Girl 2), Dragon TV (The Mystic Nine), Jiangsu (Novoland: The Castle in the Sky, 《九州天空城》), and Beijing (New Border Town Vagabond, 《新边城浪子》). Hunan TV also opened a separate non-primetime "Super Exclusive Theater" for Novoland: The Castle in the Sky, purely to dodge the quota on costume dramas.

With more shows competing, some expensive IP adaptations learned a hard lesson. Ice Fantasy, Novoland: The Castle in the Sky, and The Legend of Chusen (《诛仙青云志》) were all supposed to be fantasy blockbusters, and none of them cleared a 1% rating. Ice Fantasy scored 3 out of 10 on Douban. Ratings fell so far short of expectations, by some accounts, that fights broke out with advertisers.

In 2017, Hunan TV treated its summer weekly slot far more carefully. Its 2017 ad-sales lineup dropped both the "Diamond Exclusive Theater" and the "Super Theater." There were even rumors that Hunan TV would pull Fighter of the Destiny, a Mango TV investment, and sell it to Zhejiang TV. Fighter of the Destiny did turn up in the ad-sales lineup in the end, but this fantasy drama — also said to have cost more than 300 million yuan, adapted from Maoni's online novel of the same name, starring Lu Han and Guli Nazha — did not look like something to be optimistic about.

The BAT Buyers

In January 2016, word got out about New Classics Media's Ruyi's Royal Love in the Palace: before a frame had been shot, Tencent Video had already taken its online streaming rights for 810 million yuan. Spread over 90 episodes, that put the online cost above 9 million yuan an episode.

At SMG's TV drama production conference that March, reports said Dragon TV and Jiangsu TV had jointly bought the satellite premiere rights to Ruyi's Royal Love in the Palace for 3 million yuan an episode each. A total broadcast cost of 15 million yuan an episode was a figure the TV drama business had never seen.

In 2016, first-tier satellite channels spent roughly 2 billion yuan on TV dramas. Dragon Television's drama center did not give a number, but said its acquisition budget had risen 35% from the year before.

Television stations no longer set the price, though. In the sale of Ruyi's Royal Love in the Palace, Tencent Video alone paid more than the two traditional stations combined.

iQiyi, Tencent Video, and Youku — the three video sites backed by BAT money — hold more than 50% of the video industry between them. Everyone else, including Sohu Video, LeTV, and Mango TV, holds less than 25%.

Advertising money moving from traditional media to video sites is still the platforms' main revenue. In the second quarter alone, China's online video market was worth 15.18 billion yuan, up 77.8% year over year.

Beyond advertising, paying users have multiplied over the past year or two. In June 2016, iQiyi announced at the Shanghai International Film Festival that it had passed 20 million paying members. On December 8, Youku said it had passed 30 million.

The whole internet has rearranged itself around where users look: among the forms of online advertising, search advertising, once the largest, keeps shrinking, while video advertising, now 12.5% of the total, is growing fastest.

Online video has in fact become one of the main battlefields where the BAT giants fight for user traffic in mobile internet and the "pan-entertainment" business.

In the old TV drama buyer's market, stations inside the state system might plausibly have reached a quiet understanding to hold prices down. Once video sites with BAT behind them joined the game, no price was too high to find a taker, and that will not come down soon.

Four or five years ago, the exclusive online rights to Empresses in the Palace cost 300,000 yuan an episode. In 2015, The Legend of Mi Yue, also starring Sun Li, went to Tencent and LeTV together for 3 million yuan an episode. Other published online-rights figures: iQiyi paid 8 million yuan an episode for Nirvana in Fire 2, Tencent 7.5 million for Fighter of the Destiny.

The fiercer the competition, the heavier everyone's load. At an industry conference in April, iQiyi founder and CEO Gong Yu said of the bidding wars over drama prices: "I loathe it, it makes me sick, but every day we're still fighting it out, spending huge sums fighting over price."

Descendants of the Sun was the most successful import of 2016. Beyond the attention it drew for starring Song Hye-kyo and Song Joong-ki, its broadcast made history: it was the first KBS drama shot in full before it aired. KBS did that mainly to clear Chinese censorship in advance so the show could stream on iQiyi at the same time.

The rights fee for exporting it to China reportedly reached US$230,000 an episode. Even at that price, measured against domestic productions, iQiyi got fairly good value.

In October 2015, Alibaba said it would buy Youku Tudou for US$5.6 billion in cash, about 35.6 billion yuan. December 21, 2016 was Youku's tenth anniversary. Ten years earlier Youku was China's leading video site; now Youku Tudou ranks third in market share, behind iQiyi and Tencent Video.

At its membership strategy launch in March, Youku said it would spend 10 billion yuan on exclusive content. That pushed market prices straight up: the rights to Scarlet Heart: Ryeo set a record for the most expensive Korean drama ever, more than US$400,000 an episode, with all 20 episodes selling for over US$8 million.

Web-Only Dramas

Rights that expensive also make profit hard to reach; advertising growth cannot cover content costs. Every video platform, the three BAT-backed ones included, is losing money badly.

Zhu Xiangyang, senior vice president of Youku Tudou, said: "Sky-high drama prices come from competition among video sites, and video sites will be the ones to clean up the mess in the end, because they simply cannot survive on the current way of buying dramas. A shake-up is bound to come."

Paid membership has become the direction everyone is working toward, and that demands content other platforms don't have.

iQiyi CEO Gong Yu said that buying exclusive rights is not enough to stay ahead, "because the market isn't big enough and the content isn't distinctive enough. You may have bought a show nobody else has, but there are too many other shows of the same type, so the exclusivity doesn't really exist."

Prices have climbed so high that some breakout dramas now run on more than one platform at once. Tribes and Empires: Storm of Prophecy (《海上牧云记》), which cost over 300 million yuan to make, is due to premiere on Hunan TV in 2017 and stream on six platforms at the same time: Tencent Video, PPTV, LeTV, Youku, iQiyi, and Mango TV.

iQiyi's strategy is to buy only a few breakout hits while pouring money into original online content. As Gong Yu put it, "People used to make web dramas for tens of thousands, or a couple hundred thousand yuan. We dared to invest 5 or 6 million yuan an episode in a web drama — The Lost Tomb in 2015, for example."

When the web drama The Lost Tomb went up in July 2015, so many people tried to watch at once that the servers went down, and iQiyi made headlines for it.

An iQiyi marketing staffer told QDaily that with video sites burning cash year after year, and with no one inside iQiyi entirely sure it would work, Gong Yu decided to use The Lost Tomb to move the company toward the paid model of Netflix and other foreign streaming services.

Almost every Chinese video site treats Netflix as its blueprint. Leave aside whether that ambition is reachable; the "future television" these sites want to build really is following the road Netflix has already travelled.

Before it grew into an "internet TV network" worth more than US$50 billion, Netflix also spent years as an "online channel," mostly buying rights to dramas and entertainment shows from broadcasters. Then House of Cards, the acclaimed 2013 series, drove 7% subscriber growth, and Netflix committed to making its own.

iQiyi took the largest market share in a short time not only on the strength of phenomenon-level net-TV dramas like The Mystic Nine, but on a run of low- and mid-budget web-only originals. Yu Zui (《余罪》), With You (《最好的我们》), The Outlaws (《画江湖之不良人》), and Crime Solver (《灭罪师》) — the shows iQiyi turned into hits — all played on iQiyi and nowhere else.

Yu Zui was one of the best-reviewed dramas of 2016. Adapted from the novel of the same name and made for just over 3 million yuan, its first season scored 8.2 on Douban, drew more than 3 billion clicks, and turned former child actor Zhang Yishan into a star.

In 2015, counting imports, 36 paid dramas played across the whole internet. In 2016, the number was 239.

Web dramas aim at young viewers far more deliberately: fast seasons of about 10 episodes; edgier material such as crime, Mary Sue romance, and homoerotic fan service; anime-style characters and acting. The Outlaws was adapted from an adults-only Chinese animation of the same name, and its main appeal lay in its weirdly addictive art style and how faithfully, almost like cosplay, it reproduced the original.

The companies behind these web dramas tend to be small internet or film and TV startups: Wuyuan Culture, which made The Outlaws, or Xiaotangren Media, which made With You. Some are publishers that moved into film and TV, such as Boji Pictures (Medical Examiner Dr. Qin), Baima Shiguang (The Day of Promise, 《应许之日》), and Motie Xingya (I Belonged to You, 《从我的全世界路过》).

But Ma Lilingshan, Wuyuan Culture's founder, told QDaily in an earlier interview that most of the money behind self-produced dramas comes entirely from the video platforms, which means the profits belong to the platforms too. What the production companies get is the favor of more investors and a way up into the mainstream film and TV market.

Seen that way, iQiyi may have looked like a hit factory in 2016, but it has no production teams tied to it for the future. A company that makes a name for itself gains the right to choose. Wuyuan Culture's next web drama, White Night (《白夜》), went to Youku instead.

Original content brings platforms more young users, who are readier to pay for work they genuinely like. But a business built on paying members tests whether a platform can keep producing — online users have no loyalty.

At the start of this article we mentioned a number: video sites now have more than 500 million users between them. That also means the valuable users in China's first-, second-, and third-tier cities have all been claimed. What comes next is a fight over difference.

Even Netflix, to hold users' attention and keep them coming back, has to add new content harder and more often, like filling a bottomless pit.

The video sites' spending war shows no sign of easing. "The subscription model is too brutal. It's hard for several companies to coexist. The more users you have, the more money comes in, and the more dramas you can invest in — the Matthew effect only sharpens," Gong Yu said. "Two more years of fighting it out on subscriptions, and at most two players will be left at scale."

It is quite likely that 2017 will bring new changes.

Cover and in-article images from Douban Movie.