Chinese Government Removes Free Content From Online Video Sites Causing Viewer Outrage

Just this week, online video fans in China, Taiwan, and Hong Kong woke up to find that many of their favourite US television series, which include the CSI series, True Blood, and Sex in the City (yes, it’s still popular in China) were no longer available for free viewing on the most popular online video sites which include Ku6, PPStream, Tudou, and others. The reason for the change? These sites had removed all unlicensed content from their sites.

For a long time, the US government had pushed the Chinese government to enforce copyright laws which prohibited free distribution of video content made in the US. The reply, which came back from the Chinese government, was that the online video sites were usually privately financed (by US VCs) and did not come under government regulation, and that the Chinese government had only limited control over them. (The copyright issue was treated separately from editorial control over politically sensitive material, which all companies have had to comply with. Failure to comply would result in the immediate loss of their Internet Content Provider licence).

In the past year though, SARFT (State Administration for Radio, Film, and Television), the leading Chinese government agency which regulates media, has gradually expanded its powers to bring China’s online video sites under its regulation and management. At the same time, China Central Television (CCTV), has been actively promoting its own online video site CNTV.com to attract younger viewers. 

All of the US VC-backed firms, led by Youku and Tudou, have been successful at luring the under 30 demographics to watch video on their PCs, and lessening the appeal of China’s government-controlled television, which is still popular with older viewers. For a long time, the Chinese government viewed the online video sites as a nuisance, but as they have become more popular, the demographic shift soon became apparent.

When they started and in their growth years, these sites offered free viewing of American, European, and Korean television series which they could not see on the state-controlled television to win over users, but which were unlicensed. After winning over users though, the biggest challenge was finding a steady revenue source since, with free viewing of video, each company lost money on bandwidth fees for each newly acquired user. All firms have tried to introduce advertising, but without video ad standards, each ad package has had to be individually negotiated with agencies and advertisers, a very time- and resource-consuming process. This has meant that online video ad revenue growth has been slower than they would like.

Now, with the successful IPO of Youku on Nasdaq, it’s apparent that online video will become the trend of the future for viewing video, even in China. In the US, Apple and Google are offering their respective television viewing solutions, which are now fighting it out in the marketplace, along with Netflix. 

For television and video viewing, the two predominant business models are advertising-based and subscription-based revenue. Youku, Tudou, and Ku6 are experimenting with production of their own video series, using product placement to capture sponsorship yuan from advertisers. (In contrast to the US where advertising is predominant, product placement is more widely accepted in China.) Now that the online video sites are under SARFT regulation, the Chinese government wants to insure that the leaders in the space, including the government-owned online video sites such as CNTV.com, have a successful business model to support their growth as they head for IPOs in the US or in China. A necessary part of the transition to a successful business model is the licensing of only copyrighted material, which is the background to this week’s cleanup of China’s online video sites. 

Will all of the sites make a successful transition to an ad- or subscription-based model? Youtube, which is blocked in China, is not yet profitable. Neither is Youku or the other Chinese online video sites. Many viewers in China have been spoiled by free access to online video, and will continue to try to obtain free content. They are price-sensitive and will be reluctant to pay for what they previously could get for free, and most have broadband connections.

Moreover, there is a large and vibrant community of dedicated fans of US television series. Many have gone so far as to voluntarily work together online to add Chinese subtitles to their favourite programs, then distributing those files online for free within their own fan communities. In the US and Europe, many television fans have used Usenet servers to host and distribute their favourite TV programs for free, then using leading Usenet service providers such as Giganews and Newsrazor to connect. For some users, their broadband connections have completely replaced their cable television subscriptions. Right now, the Chinese government is playing a game of whack-a-mole to shut down those services which use China-hosted servers. It is yet to be seen how effective these measures will be. 

What has changed is that the Chinese government is now serious about helping Chinese online video companies to find a steady revenue source so that they can support sustained growth. This marks a clear transition from the past.

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