By Max Klein | Tuesday, December 29, 2009

Political Context

After pampering you with marketing and media news for the past few months, allow me to begin this newsletter with a much-needed dose of politics, of the international persuasion.

Back in 2007 the U.S. Trade Representative brought a case against China in the WTO focused on three primary concerns: first, China’s restrictions on importing foreign entertainment materials such as books, CDs, movies, and DVDs; second, China’s restrictions on distributing foreign books and music electronically; and third, China’s lengthy government-mandated review process for foreign television shows, movies, and music distributed domestically. 

These three distinct but interrelated issues riled U.S. and Chinese trade officials for the better part of two years, with other more run-of-the-mill disputes thrown into the mix (Chinese tires?!).

This December, the WTO ruled against China’s appeal, thereby validating the U.S.’s complaints against the Chinese government’s restrictions on foreign entertainment distributed on the Mainland.  After the WTO’s Appellate Body adopts the measures decided upon by the Organization’s officials, China will have 30 days to respond with what amounts to a plan of action to acquiesce to international demands. 

Was that so painful?  Perhaps, but to the extent it helps us understand the current state of China’s online media marketplace and where it might be headed, I think we can stomach it. 

China’s participation in international organizations means it must, in theory, protect the intellectual property of both domestic and foreign enterprises.  The Internet has long been a haven of shanzhai (copied) content readily available to even the least-savvy wangyou (literally ‘web friend,’ or internet user).  Video sites have often ignored international copyrights and posted versions of currently broadcasted TV shows and movies still showing in theaters. 

Overview of Online Media Marketplace in China

A few giants dominate China’s online content universe.  Besides the online chat kings QQ and MSN, China’s web portals (Sina, Sohu) and online video sharing sites (Tudou, Ku6, Youku, 56.com, Tencent) reign supreme.  Many of these portals and video sites have locked horns over copyright disputes over the past few months, with mixed outcomes.  (

http://www.media.asia/searcharticle/2009_09/Youku-files-dual-suits-against-Sohu/37169).  The competition is fierce for dominance in the marketplace.

Earlier this year, Chinese online gaming giant (and NASDAQ listed company) Shanda Online Gaming Interactive agreed to acquire Ku6, one of China’s up and coming online video sites.  The acquisition marks the first time a Chinese online video sharing site finds itself listed on a Western stock exchange, an interesting conundrum for a firm in this space. 

The online video ‘law of the jungle’ necessitates that sites will post content which attracts the most page views and maximizes advertising revenue, the lifeblood of free content online video sharing sites.   Through the merger, Shanda expands its already formidable on- and off-line media reach in China, and will leverage the extent of its resources to ensure the budding site flourishes. 

With more internet users (338M, and growing by the hour) than the U.S. (227M, and growing significantly slower), and a population that increasingly turns to the internet as a source of entertainment (see Metan’s newsletter on Internet Cafes, LINK, and online video, LINK), the online video marketplace will need to accommodate an audience growing in both size and sophistication.  The sites might also find themselves well-positioned in one of this millennium’s most lucrative advertising revenue pools. 

Online market, Announcements by Ku6/Sohu and Youku

On Tuesday, December 22, 2009, Ku6, along with partner Sohu, announced that the video sharing site and web portal would each invest rmb 50,000,000 (for a total of rmb 100,000,000) to acquire legally licensed content copyrights both domestically and from overseas.  Ku6 and Sohu share similar blood; Ku6 CEO Kevin (Shanyou) Li spent years at Sohu under the portal’s renowned Internet tycoon Charles (Chaoyang) Zhang. 

It appears there’s no hard feelings between the one-time colleagues, as Mr. Zhang participated enthusiastically in Mr. Li’s artfully orchestrated press conference on December 22 at the Grand Hyatt Hotel in Beijing’s iconic Oriental Plaza.  The conference featured a Chinese drum performance by qipao­-clad dancers, a laser light show, and yes, interesting viewpoints from industry experts.   

Tudou, the video sharing giant, wasted no time in announcing the establishment of its own rmb 100,000,000 content development and acquisition fund on Wednesday, December 23.  It remains to be seen exactly what content these sites have their eye on, and how the market for foreign copyrighted content broadcast online in China will shape up amongst fierce competition. 

Speculation for the future of China’s online video market

These pledges by online video sites Ku6, Sohu, and Tudou to take down pirated content exemplify a trend in China towards increased protection of international copyrights.  That being said, the issue of broadcasting pirated content presents a prisoners’ dilemma for online video sites.  Talk is cheap, and despite industry leaders’ signing the China Online Video Anti-Piracy Alliance on September 15, 2009, pirated content has not been altogether eliminated.  Companies risk losing valuable advertising revenue if appropriate legal and competitive steps are not taken.

Ku6 and Sohu, along with Tudou, might know something their competitors do not.  Perhaps they foresee a time in the not-so-distant future when pirated content holds no place in the online video marketplace.  This first-mover strategy could prove vital to their survival.  Or, the relevant Chinese authorities have already made it very clear to the online industry that it will no longer tolerate broadcasting pirated content, and that the sites will have to find new ways to attract viewers or else cough up the funds to acquire copyrights.  Either way, change is afoot.

Conclusion

One last caveat to this equation: China’s state-controlled media starts and ends with TV.  The CCTV live advertising auction this year netted over $1.25B in a matter of hours.  If China’s online video portals grow too big too fast, sucking ad dollars away from CCTV and satellite, provincial, and city TV stations, they can expect to get an earful (and possibly more) from the government.  The portals must manage their relationships with TV outlets to ensure a ‘harmonious’ and simultaneous media industry growth. 

Indeed, if these newly-announced funds are any indication, China’s web portals are on the verge of building up large libraries of online content, both current and past, to elbow their way into the video entertainment marketplace. It remains to be seen exactly how these portals will position themselves against each other and against the rest of the industry.  I’ll be watching, and I hope you will, too.