Metan - Newsletter

Posted: 01.12.2010

From Search to Videos, Baidu's Bet on the Online Market

By Gordon Chu | Tuesday, January 12, 2010

In the past few weeks, we have seen a flurry of news articles about how online platforms are jumping on the bandwagon to invest in licensed content. First came the report of the new SARFT mandate to regulate and restrict P2P downloads of illegal content. Unfortunately for many online viewers, this ultimately means an abrupt goodbye to hit US shows like Heroes and Lost. However, these turn of events also means many online video sites need to radically change their business models – a balance between playing ‘right’ with SARFT and getting the content they need for the viewers.

Ku6 and Sohu came out of the woods first with their pledge to allocate a $10M fund to license content. Tudou upped the ante with a $40M raise at the end of December which they claim is to be utilized to also license programs. Now I will admit that when the cynical side of me first read these reports, I chalked them up as public relation pieces to ease investors that the platforms were playing by the rules. However, the biggest news this week switched my mind with Baidu, China’s top online search company, linking together with Providence Equity to invest a total of $70M to develop a video online channel to the likes of US site, Hulu by the first quarter of 2010.

I have one word to describe what this means to me: wow. Wow for Baidu championing themselves with Providence Equity (Note: although this was reportedly inked with Providence Equity in Hong Kong, Providence Equity was still involved with the original investment for Hulu). Wow for Baidu taking a leap of faith into online videos. And, most importantly, wow for content providers and brands looking at this as the ‘sign’ to enter into China.

IMPORTANCE

Although all the reports with online platforms paving the way to set-up funds are all landmark moves in the online marketplace, to me, Baidu’s news sets precedence to indicate really where this market is headed towards.

Piracy No More

On a very macro level as starters, this could very well be the beginning of the end of online piracy. China has been plagued by piracy issues ever since the advent of the Internet, but this is great news for content providers and brands alike that are looking to China as a legitimate marketplace that takes their assets as value. For what it seems to be ages, content providers have felt slighted to how their content was treated in China.

I will say that this is by no means an easy or fast transformation for the online platforms. From a cultural perspective, the Chinese actually think quite highly of content; however, this ‘knowledge’ is a privilege and should be shared with everyone thus the rampant and liberal share of content. This transformation will take some time and certainly will have its ups and downs before everything is settled. Despite the uphill climb ahead, this is the right first step for everyone.

From Search to Online Videos

From an outsider, this $70M venture is a stretch from its normal lines of business. After all, Baidu is at its core, an online search company – not an online video channel. However, looking west to its counterpart in the US, Google, this move should not be a huge surprise considering Google’s $1.65B acquisition of Youtube in 2006.

The real question is what will Baidu do with their new Hulu-esque site? Any savvy investor can look into Google’s financial statements to realize that, despite all of Youtube’s eyeballs and potential, they are still bleeding money and have yet to make a profit. For me, I’m most interested in Yu Gong, the appointed new CEO of the site. Why you ask? Gong was a former China Unicom executive which might shed some light to where this Chinese Hulu might be headed to… Not making any speculations here, but I definitely like where my thoughts are.

When reading into the Baidu / Providence deal, I noticed one very apparent absentee in the equation – the content providers. This deal is not a joint venture with content providers as it was with Hulu (with ABC, Fox, and NBC). Like the other online platforms that have started their own funds to license content, Baidu is in the very same boat as they are right off the start. This bears the question…

WILL IT WORK

Before I dive right into the thick of things, let me preface this section by dissecting this into two parts of the question:

What is China willing to pay? And…

Is it too late?

What is China willing to pay?

For starters, we had already talked about how philosophical differences between how to treat content will inevitably draw out long-winded negotiations between that of content providers and the online platforms.

Content providers will need to decide what they will accept as reasonable license fees. After all, getting fair market value will be a tough pill to swallow for any online platform dealing with the sheer size like China.

And for online platforms that continually bleed cash due to high bandwidth costs, how will they take on another burden of licensing content to an already stacking outflow of money?

Now, while I don’t anticipate a standstill in negotiations, I do think there will be a significant amount of time to make sure this gets done right. Especially this early in the paradigm shift, these meetings and negotiations will set precedence for the online video market for the foreseeable future.

Is It Too Late?

One of the first business jargons I learned during my MBA: first mover advantage. Definition: An advantage gained by the first significant company entering into a new market. For a predictive new online video market, the first mover’s advantage will play a big role in the definition of pecking order amongst the online platforms.

So, the question is: with all these online platforms all going after the same goal, who has first mover’s advantage? And, more importantly, is it too late for a company such as Baidu to enter the game on the same playing field as the rest?

My personal thoughts are not too late at all. Unlike the US market, the China market is big enough to sustain fairly good competition. In the US where there is Youtube and everyone else, in China, there are plenty of options of online platforms that all fair well in their own respect (i.e. Youku, Tudou, Ku6, Sina, Sohu, etc.). For Baidu, they are right in the mix and I feel they will perform well amongst its new peers of online video sites (granted they have lots of work ahead of them if they are to launch Q1 of 2010).

WHAT DOES THIS ALL MEAN

At the end of the day, this is great news all the way around as it pertains to online platforms, content providers, and advertisers.

For content providers, all these raised issues are good problems to have. After all, you’re going from questioning whether to expand into China at all, to a business model of getting license fees for your content.

For brands, this is a brand new playing field that everyone should be seriously looking to. All-of-a-sudden, programs such as Heroes and Lost can feasibly be available for brands to attach themselves to. Regardless, this opens up a myriad of new opportunities for brands and just might be the missing key to opening the floodgates for online spends. Quality of content will be vital, but as a brand advocate, we should all rejoice in this new dawn.

Source: METAN Development Group

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