Breaking schedules: China’s online video boom

While online video is slowly gaining momentum in the rest of the world, in China its already become the major platform for consuming entertainment on small screens – at least for younger audiences who are turned off by the stodgy content on state-controlled TV.

China has 460 million online video viewers, according to consulting firm iResearch, a figure that is set to rise to 700 million by 2016. The content mix is broad – viewers can watch local and foreign films, TV shows and animation. TV drama, including Korean soaps and the latest US and UK shows, appears to be driving viewership, accounting for more than 50% of viewing duration. Leading internet portal Sohu streamed the second season of House Of Cards at the same time as Netflix in the US, while China’s biggest internet company Tencent has a channel dedicated to UK dramas including Sherlock, Skins and Wire In The Blood.

Movies account for only 10% of viewing duration but certain titles can attract big numbers and consumers are more likely to pay for film. Transformers: Dark Of The Moon racked up 130 million views on Youku Tudou’s platforms and Tencent has created a subscription channel Hollywood VIP that offers movies such as The Avengers, Oblivion and The Conjuring. Some of the online video platforms also carry user-generated content (UGC) and nearly all have stepped into producing their own content, including microfilms, web serials and more recently films.

For Chinese viewers, this means access to an unprecedented wealth of content – most of which they can view for free. While the leading platforms are experimenting with payment models, the industry is mostly funded by advertising. Revenues for online video sites climbed to $2bn (RMB12.8bn) in 2013, of which advertising accounted for 75%, and is predicted to rise to $5.95bn (RMB36.6bn) in 2017. The remaining 25% is derived from selling content rights on to other platforms and value-added services to consumers such as apps and online games.

However, the industry has become intensely competitive in a short space of time and, although Youku Tudou moved into profit in the last quarter of 2013, the high costs of acquiring content, bandwidth and servers are keeping profit margins slim. The major players have been spending big to win market share, but the competition has already resulted in consolidation – industry pioneers Youku and Tudou merged in 2012 and leading search engine Baidu acquired PPStream last year, which it merged with its existing online video platform iQiyi. Further consolidation is expected later this year. Competition has also resulted in higher licensing fees for Western content sellers, although it’s thought the Chinese video platforms are still paying less than regular broadcasters.

Piracy is also a major headache for the big online video companies, which have been proactive in removing unlicensed content their own websites in order to attract advertisers and clean up for stock market flotations, but still face a tide of rogue websites, video players and apps. Last year several legit platforms and the Motion Picture Association (MPA) joined forces to fight piracy and took legal action against Baidu and software company QVOD for providing access to unlicensed content. Both companies were fined.

With technology constantly evolving, the online video giants also need to move fast to keep up with the next delivery mechanisms and consumer behaviour. While viewing was initially PC-based, the availability of smart phones and development of 4G networks is driving viewership towards mobile platforms. More than 100 million people in China are currently using mobile phones and tablets to access online video services every month. The shift is driving them towards ‘hit’ content that they are more likely to share with their friends.

Streaming content to televisions is the next frontier and all the leading video platforms are exploring tie-ups with manufacturers of set-top boxes and smart TVs. LeTV has so far been the most active in the smart TV business, launching its own ‘Super TVs’ and offering some content exclusively on this platform. Its rivals are looking at whether they need to move into areas such as hardware, operating systems and cloud computing, or whether it’s sufficient to work with a range of existing players.

However the industry evolves, it is likely to remain competitive, dynamic and with a huge appetite for both local and foreign content. So far, foreign movies and TV shows on online platforms appear to have had a much easier ride with government regulators than content acquired for broadcast television and theatrical release. The question is how much longer the state will allow this industry to develop unchecked when there must be a temptation on both a regulatory and commercial level to intervene.