Boasting a mix of local and foreign content, online streaming is big business in China. Liz Shackleton reports on the consolidation in the sector and what the future holds.
While online video is slowly gaining momentum in the rest of the world, in China it has already become the major platform for consuming entertainment on small screens - at least for younger audiences who are turned off by the stodgy content on state-controlled TV.
China has 460 million online video viewers, according to consulting firm iResearch, a figure that is set to rise to 700 million by 2016. The content mix is broad - viewers can watch local and foreign films, TV shows and animation. TV drama, including Korean soaps and the latest US and UK shows, appears to be driving viewership, accounting for more than 50% of viewing duration.
Leading internet portal Sohu streamed the second season of House Of Cards [pictured] at the same time as Netflix in the US, while China’s biggest internet company, Tencent, has a channel dedicated to UK dramas including Sherlock, Skins and Wire In The Blood.
Movies account for only 10% of viewing duration, but certain titles can attract big numbers and consumers are more likely to pay for film.
Transformers: Dark Of The Moon racked up 130 million views on Youku Tudou’s platforms and Tencent has created a subscription channel, Hollywood VIP, which offers movies such as The Avengers, Oblivion and The Conjuring. Some of the online video platforms also carry user-generated content and nearly all have stepped into producing their own content, including microfilms, web serials and more recently films.
For Chinese viewers, this means access to an unprecedented wealth of content - most of which they can view for free. While the leading platforms are experimenting with payment models, the industry is mostly funded by advertising. Revenues for online video sites climbed to $2bn (rmb12.8bn) in 2013, of which advertising accounted for 75%, and is predicted to rise to $5.95bn (rmb36.6bn) in 2017. The remaining 25% is derived from selling content rights on to other platforms and value-added services to consumers such as apps and online games.
However, the industry has become intensely competitive in a short space of time and, although Youku Tudou moved into profit in the last quarter of 2013, the high costs of acquiring content, bandwidth and servers are keeping profit margins slim.
Crossing the streams
The major players have been spending big to win market share, but the competition has already resulted in consolidation - industry pioneers Youku and Tudou merged in 2012, and leading search engine Baidu acquired PPStream last year, which it merged with its existing online video platform, iQiyi. Further consolidation is expected later this year.
Competition has also resulted in higher licensing fees for Western content sellers, although it is thought the Chinese video platforms are still paying less than regular broadcasters.
Piracy is also a major headache for the big online video companies, which have been pro-active in removing unlicensed content from their own websites in order to attract advertisers and clean up for stock-market flotations, but still face a tide of rogue websites, video players and apps. Last year, several legitimate platforms and the Motion Picture Association joined forces to fight piracy, and took legal action against Baidu and software company QVOD for providing access to unlicensed content. Both companies were fined.
With technology constantly evolving, the online video giants also need to move fast to keep up with the next delivery mechanisms and consumer behaviour. While viewing was initially PC-based, the availability of smartphones and development of 4G networks is driving viewership towards mobile platforms. More than 100 million people in China are currently using mobile phones and tablets to access online video services every month. The shift is driving them towards ‘hit’ content that they are more likely to share with their friends.
Streaming content to televisions is the next frontier, and all the leading video platforms are exploring tie-ups with manufacturers of set-top boxes and smart TVs. LeTV has so far been the most active in the smart TV business, launching its ‘SuperTVs’ and offering some content exclusively on this platform. Its rivals are looking at whether they need to move into areas such as hardware and cloud computing, or whether it is sufficient to work with a range of existing players.
However the industry evolves, it is likely to remain competitive, dynamic and with a huge appetite for both local and foreign content. So far, foreign movies and TV shows on online platforms appear to have had a much easier ride with government regulators than content acquired for broadcast television and theatrical release.
The question is how much longer the state will allow this industry to develop unchecked when there must be a temptation on both a regulatory and commercial level to intervene.
The A-stream: CHINA’S LEADING ONLINE VIDEO COMPANIES
youku.com / tudou.com
China’s biggest online video company was formed by the merger of two industry leaders, Youku and Tudou, in 2012. The New York Stock Exchange-listed company licenses content from all the US studios and big independents such as Lionsgate and Fremantle Media. It recently signed a deal to show Lionsgate’s Orange Is The New Black just 24 hours after Netflix in the US. Its most popular shows include The Walking Dead, Sherlock and Downton Abbey.
Youku and Tudou both started out by focusing on user-generated content (UGC), which remains an important part of the combined entity’s content mix. The company has also moved into production of micro-films, web serials and movies - it invested in Edko Films’ Firestorm and co-produced Old Boys: The Way Of The Dragon, based on its popular micro-film. While most of its content is free to viewers, the company launched the Youku Premium subscription channel in 2010.
Who to know Victor Koo, CEO; Zhu Xiangyang, head of content; Allen Zhu, head of movies
iqiyi.com / pps.tv
Launched by China’s leading search engine Baidu in early 2010 with backing from venture capital firm Providence Equity Partners, which also backed Hulu, iQiyi has a similar model to the US video-on-demand (VoD) pioneer in streaming licensed video content that is mostly free to users but supported by advertising. NASDAQ-listed Baidu bought out Providence’s stake in 2012 and acquired rival online video platform PPStream for $370m last year, which it is merging with iQiyi.
The company is also moving into smart TVs, working with television manufacturer TCL Multimedia on the brand TV+, and with Galaxy Internet Television and Skyworth Digital Holdings on set-top boxes. At the end of 2013, rumours began surfacing that Baidu would launch an IPO for iQiyi in the US in 2014, after successfully floating its Qunar online travel unit last year.
Who to know Gong Yu, founder and CEO; Zhang Hongyu and Xu Weifeng, co-presidents (formerly with PPStream)
The video unit of NASDAQ-listed Chinese internet portal Sohu has acquired US TV shows such as Saturday Night Live, Ellen and House Of Cards, and also recently signed a deal with BBC Worldwide for factual and drama content including Sinbad, Silk and Frozen Planet.
The second season of House Of Cards was streamed simultaneously with Netflix in the US, and became a huge sensation due to its China-related storylines. Some of those storylines, such as corruption, cyber-espionage and tensions between China and Japan in the East China Sea, would never have made it onto mainstream television, suggesting that censorship is more relaxed on video platforms.
Rumours are now swirling that Sohu and Tencent will merge their video operations, after merging their search engines (Sohu’s Sogou and Tencent’s Soso) last year.
Who to know Charles Zhang, CEO
China’s biggest internet company has revenues and profits bigger than Facebook ($9.91bn and $3.15bn respectively in 2013), mostly from e-commerce and online games. The Hong Kong-listed giant also operates the popular WeChat and QQ messaging services. The company is now bulking up on movies and TV shows for its online video platform, which also carries a small amount of UGC, probably less than 10% of overall content.
Tencent’s Hollywood VIP online movie service (film.qq.com) has deals with Disney, Lionsgate, Miramax, Universal Pictures and Warner Bros. It offers a monthly subscription video-on-demand service and also sells movies on a transactional video-on-demand basis, just a few weeks after US theatrical release. Tencent has also struck deals with the BBC and five other UK production companies for its UK drama channel, while its US television content includes CSI.
Who to know SY Lau, president, Tencent Online Media Group; Sun Zhong Huai, vice-president, online video business
Founded by Jia Yueting in 2004, this profitable Shenzhen-listed company not only provides the platform and content for online viewing, but also the viewing terminal and apps. The company teamed up with Taiwanese electronics manufacturer Foxconn to manufacture smart TVs, branded as Super TV, which support 3D viewing and stream content paid for through annual $80 (rmb499) subscription packages.
It also has a deal to be the exclusive over-the-top (OTT) distributor in China for the first and second seasons of House Of Cards. The company’s regular online platform, available through all devices, started out as subscription-only but later added free viewing supported by advertising.
LeTV also has a film production and distribution subsidiary, Le Vision Pictures, which produces local movies including Zhang Yimou’s Coming Home and scored a $53m hit when it distributed The Expendables 2 in China.
Who to know Jia Yueting, chairman and CEO; Liu Hong, COO