With 450 million internet users and moves to tackle piracy, the online video market in China has huge potential. Liz Shackleton assesses a burgeoning market which is striking content deals with Hollywood

Once renowned for lawsuits and pirated content, China’s online video sites have been making headlines for skyrocketing IPOs and Hollywood licensing deals in recent months.

Companies such as Youku [pictured] and Tudou — the local versions of YouTube, which is blocked in China — admit that users sometimes upload copyright-infringing content on their websites but the firms are striving to transform themselves in a bid to raise capital and expand advertising revenue.

Beijing-based Youku said in its prospectus that it has 300 people under contract to monitor its site and remove unauthorised content. It is not just copyright holders it must appease. In 2008, Chinese authorities purged the online video industry, shutting down dozens of sites and issuing licences to those who played by the rules. But Youku’s efforts appear to have paid off. Last November, the company raised $203m on Nasdaq where it saw its stock rise 161% on its opening day. Shanghai-based Tudou is planning an IPO in New York later this year.

‘The Premium platform will be an additional channel for international rights-holders to reacha wider audience’

Victor Koo, Youku

These sites have also started to license product from US studios. Last year, Ku6.com — which has a joint acquisitions fund with leading portal Sohu — announced it had bought content from Sony and Warner Bros. Tudou licensed Twilight and Youku recently struck a deal with Warner Bros to stream Inception.

While most of these sites are free to users and make their money from advertising, Youku used Inception to launch its Youku Premium subscription platform, charging about $0.75 (rmb5) per view. “Though the platform is still in beta, we believe it taps into Chinese online video viewers’ demand for quality content and will provide an additional channel for international copyright-holders to reach a wider audience base,” says Youku founder Victor Koo.

Youth appeal

These companies are all loss-makers at the moment, but they have an attractive pitch for both advertisers and investors. China has 450 million internet users and the demographics for online video look good. In a market where TV content is strictly regulated and tends to have an older audience, the internet is attracting a much younger and more educated crowd. Meanwhile, online advertising is booming. According to local consultancy iResearch, revenues from online video sites were estimated to reach $687m last year.

New business models are also emerging. China’s leading search engine Baidu launched a service last year, Qiyi.com, which is free to users and relies on advertising but does not feature user-generated content, which means users cannot upload copyright-infringing works. The company is busily acquiring Asian films and TV series and is also in talks to acquire US product.

“We’re selective in what we buy — we can use Baidu data to see what people are searching for so have a clear idea of what kind of content is popular,” says business development director Sarah Zhang. Though Baidu says it operates a non-biased search service, the advantages are clear — something akin to Google launching Hulu.

China also has subscription-based video sites. LeTV and Union Voole operate services which stream films and TV series for single viewing or a monthly package for about $0.75 (rmb5). They also make money from reselling content rights to other platforms, and both claim to be profitable.

But all companies are being hit by rising costs. The ad-driven sites with heavy traffic have to pay for extra bandwidth and the staff to monitor their content. And with the increase in competition, the cost of content is going through the roof. “The price of internet rights has been rising steeply in the last few years — now it’s almost the same as buying for a TV station,” says LeTV vice-president James Gao.

The subscription sites are responding with enhanced services, such as set-top boxes which enable ­customers to stream HD content from the internet to TV. “Customers viewing films on a PC screen don’t want to pay a lot, but it’s different for TV platforms — especially when you’re offering films in HD,” says Voole chairman Colin Shao. “You can charge a hundred times what you’d charge for a PC screen.”

‘There remains a substantial amount of unauthorised content on many Chinese sites’

Mike Ellis, MPA

For content owners — both in China and overseas — these developments are encouraging as the internet is shaping up to be a viable distribution channel in a market where theatrical is tightly controlled. China has never had a large DVD market and there is not a huge issue over release windows — films are streamed on the internet one to two months after theatrical release.

But it is still early days and content owners are earning minuscule revenues at the moment. There are also questions on the regulatory side and no guarantee state-owned players will not muscle in if the industry begins to look lucrative. And the internet should not be seen as a free pass into China: though there are no quotas, all content still has to be state-approved.

Western content owners also point out that — despite the best efforts of some companies — China is still some way from eradicating piracy. “We have in recent months seen measures taken by the authorities and local industry to address online infringement in the country,” says Mike Ellis, MPA president, Asia-Pacific. “However, there still remains a substantial amount of unauthorised content available on many Chinese sites.”

For all of these reasons, the US studios appear to be taking a cautious approach — none would go into details of their Chinese digital deals. But with the prospect of a new revenue stream in such a huge market, it is likely Youku and co will be under close scrutiny.