China’s online-video players face tough task in going ‘straight’

Posted by Tony Brown Thursday, March 4th, 2010

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The decision by China’s leading online-video players, such as Tudou.com and Youku.com, to move toward a more orthodox business model by signing licensing deals with content providers and even beginning to produce some of their own content seems like good news for everyone. But there is a long way to go before any of the country’s online players can really claim to have “gone straight.”

The thinking behind the going-straight strategy from Tudou and Youku is straightforward: The companies have come to the conclusion that they won’t be able to really cash in on their huge popularity among young viewers with major-league advertisers until they rid themselves of their current reputation as largely being purveyors of unauthorized content.

As their Western counterpart YouTube has already discovered, the big multinational advertisers might well be theoretically excited about setting foot on the new viewing playground for hundreds of millions of online TV viewers, but they are still concerned about getting too heavily involved when a significant portion of what is viewed on the sites has not been properly acquired.

That’s not to say that big multinational advertisers are shunning the likes of Tudou: It has already attracted Procter & Gamble, Ford, Pepsi and Nike to its platform, with the advertisers drawn in by Tudou’s 170 million unique viewers every month, especially since 70% of them are under the age of 30 and 80% have a college degree.

Privately held Tudou has disclosed no ad revenues, but as a means of comparison, its major rival, Youku, which has a similar user base, was aiming for CNY100 million (US$14.6 million) in ad revenues in 2009.

Touchy subject
Although they concede that offering more authorized content will significantly help increase advertising revenues, Tudou and Youku remain sensitive to the accusation from some content owners that they have based their success on allowing unauthorized content to be viewed on their sites.

Both Tudou and Youku insist that they diligently respond to every rights infringement that is brought to their attention and cannot be held entirely responsible if some of their tens of millions of users upload unauthorized content. Given that Tudou has 30 million video clips available on its platform – with reports estimating that only 60% of its content is user-generated – a huge amount of content is still coming from outside content providers.

Even with the best intentions in the world, Tudou would require a veritable army of employees – it has only about 400 in total – to check the status of the millions of potentially unauthorized video clips on its site.

As a result, there is little chance that Tudou or Youku will ever be able to claim that their content slate is anything close to being fully legitimate.

Content is pricey
Nonetheless, although the operators’ recent efforts to acquire authorized content and produce their own content are to be admired, the fact is that they are embarking on an ambitious project.

Tudou is reportedly aiming to increase its total hours of authorized programming to 37,000 by end-2010 – up from less than 2,500 at end-1Q09 – and has already signed content-supply deals with local and international companies, including CCTV, Shanghai Media Group, TVB, Seoul Broadcasting System, Munwha Broadcasting and Taiwan Television.

In addition, in a landmark announcement on Feb. 2, Tudou CEO Gary Wang shared a platform with Youku CEO Victor Koo to announce that the companies would launch a “joint broadcasting model for online video,” under which they would share their exclusive online broadcast rights in a move designed to help lower the cost of buying licensed content.

The problem is that buying authorized content is expensive, especially good content from top-tier suppliers, and producing your own content is even more expensive, not to mention risky, considering the online players’ lack of experience in this department.

Tudou has invested an initial CNY100 million in producing and acquiring its own content – a tiny fraction of what is spent by mainstream Chinese broadcasters – and has already produced entertainment-news program Tudou Frontline, the Tudou Angel talent show and the Internet Millionaire quiz show, which attracted 68 million viewers over six episodes.

Tudou showcases much of its exclusive authorized content on its Heidou premium online site, which launched in September 2008 and has a catalog of 10,000 video clips from over 1,000 content providers – all fully authorized.

The Catch-22 problem
The problem for Tudou really is that in becoming more like an “orthodox” broadcaster – albeit with an online, rather than terrestrial or cable, distribution platform – it will rapidly acquire the same sort of programming and content-acquisition cost base that regular broadcasters must maintain.

Tudou and Youku are losing money – though they both expect to hit the black within 12-18 months – but the beauty of their current business model is that they are paying for only a fraction of their content, with the rest either being uploaded user-generated content or unauthorized content from other suppliers.

Once they start filling their content slate to a significant degree with fully authorized content, they effectively become just another broadcaster and will have to find some way to bring enough viewers to that content in order to recoup the cost of the content through advertising – and there are already plenty of broadcasters out there chasing that business model.