A Coming China Golden Age Of Online Video Profits For Content Owners?

  • Posted by
  • on February 4th, 2010

China’s online video usage is massive. According to CNNIC 240m Chinese Internet users watched online videos at the end of 2009. The online video ad market is small (figures are hard to come by but I estimate no more than USD 120m) but growing fast.

Today Youku and Tudou, the two leading independent online video sites, announced an alliance in which they will share parts of their video libraries and jointly bid on the rights for new content. According to the story about the alliance “Chinese online video prices have jumped several times over the last year as market competition intensifies. That has made content expenditures the greatest cost for many online-video sites.”

Youku, which is probably 50% bigger than Tudou in traffic and 30% bigger in revenue, also recently announced a “copyright identification management system” to prevent the upload of infringing videos.

Why is there a sudden rush to respect copyrights? There are several reasons, and as usual money is the primary one.

Chinese production firms are spending billions of RMB creating content. Film box office growth in China is soaring, but rights owners have been losing significant amounts to online piracy. Foreign rights holders, as the MPAA has argued for years, have been losing a lot as well, but the Chinese government, especially the State Administration of Radio, Film and Television (SARFT) and China Film Group, do not really care about foreign losses. However, now that serious money is coming out of Chinese pockets the attitude towards enforcement has clearly changed.

The courts are also part of this change, as there are now regular victories for rights holders in piracy cases. Even if the damages awarded tend to be small–10-50,000 RMB–the numbers will add up over time.

The shifting landscape of online video is also speeding the move towards legitimacy. Youku, which has raised $110m in venture capital, and Tudou, which has raised somewhere near $100m, are the only large independent firms left. Youku recorded a loss on 120-130m RMB (USD 20m or so) in net revenues in 2009. Tudou also lost money on a somewhat smaller revenue base. Both are growing fast, benefiting from the huge audiences online and the growing shift of video ad spending to online outlets, but are minnows compared to the rich, powerful, more integrated competitors now entering the online market. I believe the Youku-Tudou deal announced today is just a precursor to an eventual merger, assuming the investors can figure out relative valuations, which will not be easy given the USD 200m or so invested.

Hurray ($HRAY), controlled by Shanda ($SNDA) and Chen Tianqiao), recently purchased Ku6, which had raised around USD 30m, for the distress sale price of USD 44m. Shanda, which built its core business on the infringement of a Korean game and then went legitimate as it accumulated a USD 1B balance sheet, realizes the fastest way for Ku6 to compete with the bigger firms like Youku and Tudou is to have better content and to force them to pay up for the rights.

State-owned firms, AKA the “National Team”, like CCTV and Shanghai Media Group have launched or are launching online video services and they should be good about respecting copyrights. Baidu has established a separate online video company (rumors in the Chinese press say the site will launch in March at qiyi.com) in partnership with Providence Equity Partners, a major investor in Hulu. Chinese portals Netease ($NTES), Tencent, and Sohu ($SOHU) are more aggressively building online video services, all focused on capturing TV ad dollars that will start moving online.

Strange as it may seem given the history of rampant piracy in China, we may now be entering a golden age of profits for Chinese content owners.  Skeptical readers who think they have seen this movie before will likely ask: is it real, or is it Memorex?  To me it looks more real than it ever has before.

Western content owners?  Don’t expect to get rich online here anytime soon, especially when pirated DVDs are still ubiquitous. Your content still needs to be approved by SARFT, and the vast majority of Chinese online video viewers prefer productions from China, Hong Kong, Taiwan and Korea rather than ones from the US or Europe.  But even a small check should be better than open theft.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus
Digicha Blog