The booming online video industry is changing viewer dynamics in China. The future holds more consolidation—and increasingly sophisticated offerings.
When Youku was launched in 2006, it was called a Youtube clone. Seven years later Youku has become China’s leading online video hosting service and boasts of 14 million unique daily users. Interestingly, according to Alexa rankings, it is now the second-largest online video site in the world (Youtube is, of course, the biggest with 1 billion unique monthly visitors). While Youtube focused on content uploaded by users, Youku initially chose to distribute TV shows and movies: its library contains more than 4,500 movie titles, 2,700 television serial dramas and over 900 variety shows.
Determined to lead the next phase of online video development in China, Youku acquired its main competitor, the youth-centric online video portal Tudou in August 2012. Back then, Victor Koo, CEO of Youku, said the goal was to represent a “differentiated leader in the online video market in China with the largest user base, most comprehensive content library, most advanced bandwidth infrastructure and strongest monetization capability within the sector”.
The two entities—Youku and Tudou—are run in parallel under a dual platform strategy aimed at retaining users of both their distinctive audiences. On top of that, they do share a unified advertising system that ensures more efficient marketing coverage and ads reach.
The Gold Rush
Online video is now the fastest-growing internet sector in China. In 2012 the number of users reached 450 million, with a 47.6% year on year revenue growth. Strict local TV regulations have contributed to this boom. Regulations limit the number of advertisements allowed in prime time and therefore TV stations have little money to buy the rights for popular TV shows. There are also restrictions in terms of the content that can be aired, especially foreign productions. A regulation approved last fall allows satellite broadcasters to air only one foreign program a year.
Companies like Sohu, LeTV, KanKan, iQiyi (acquired by China’s largest search giant Baidu in 2012), PPS (also acquired by Baidu) and PPTV were quick to spot this opportunity. Even the big players of the local internet industry like Douban, Sina and QQ have developed their own movie channels. Traditional TV stations like the news channel iFeng TV or the state-owned China Movie Channel have also forayed into online video.
It’s a promising industry with an extremely competitive ecosystem driven by a war for license rights, eyeballs and advertisements. McKinsey and Company estimates that by 2015 there will be more than 700 million online video viewers in China, 89% of the country’s total internet population. But the growth of the sector will also create a surge in user demand and soaring costs will squeeze profitability. According to McKinsey’s report Succeeding in China’s Online Video Market, “successful online video sites will need to buy content that will win the biggest audience and the most advertising”.
In the past few years, peer-to-peer streaming sites, internet protocol TV (IPTV) platforms, mobile video apps and online video websites have mushroomed offering viewers different points of access to all kinds of video content—from dedicated video-only sites like Youku and LeTV to multidimensional platforms like Baidu and Sohu that integrate search and play features. Industry watchers are now pointing to consolidation in the online video sector aimed at reducing costs and ensuring better monetization.
In June 2013, Baidu acquired streaming video site PPS for $370 million (the PPS library will be integrated into iQiyi, another video service owned by Baidu). The combined user base of PPS and iQiyi is expected to make Baidu the biggest player in the sector.
Attracted by the growth of the sector, one of China’s largest electrical appliance retailers Suning Commerce Group, and a local private equity investor, Hony Capital, invested $420 million in online video platform PPTV (ranked fifth in the Industry with 190 million unique monthly visitors). According to internet industry research firm iResearch, this investment will give PPTV enough capital to acquire expensive content rights.
After it launched operations in 2006, Youku quickly realised that user-generated content, so popular in foreign markets thanks to the Youtube model, wouldn’t work in China. It was still too early for the development of a massive video sharing trend due to bandwidth limitations, technical issues and also the mindset of Chinese internet users. So Youku switched its core activity to distributing content like popular TV dramas to rapidly create traffic. The strategy worked. People found it was more convenient to watch dramas online instead of on televisions, explains Will Tao, Analysis Director at iResearch. “When you are getting more traffic, you get advertisers also,” he adds.
Youku’s strategy shift led to the current ad-driven model where users have free access to content, although in some very specific cases, subscription or premium programs let them skip advertisements. The industry’s advertising value has shot up: 72.6% of last year’s RMB 9.25 billion revenues came from ads. “Now advertisers can’t avoid online video as the sector they have to focus their marketing strategies on,” says Tao.
The vast availability of legitimate content makes China’s online video market unique in many ways. Apart from local productions, content libraries include popular shows from South Korea, Hong Kong, Taiwan, the US and Europe. “Normally in other markets the producer will sell the content to a pay TV company. In China the producer doesn’t have this option. And so the best option for them is to sell the show to online video players,” explains Mike Savage, Vice-President of Content for Media Partners Asia.
Consequently, the sector has become the main point of access for foreign programs. To give an example, in August 2013, the popular US TV series Walking Dead reached a combined 250 million viewers across all platforms and it was the most-watched program on Youku.
Some video sites are going beyond TV soap operas and movies and are buying other programs. Sohu, for instance, started airing the American talk show, Saturday Night Live, just a few hours after the episodes were first shown in the US.
The money spent to buy licenses is huge. Youku spends $164 million a year on content licenses. In early December it announced a further investment of RMB 300 million ($49.6 million) to boost its content offering.
However this license-buying spree is no guarantee that online platforms will stand out from the crowd. “Competition becomes very harsh. Audience loyalty is very low because users can get the same program everywhere,” says Tao from iResearch.
Online video platforms have reached a point where they need to differentiate themselves to attract advertisers and retain viewers engaged. “Content will be more valuable to advertisers and their ad value will be higher if there’s a guarantee that there will be people watching,” says Tao.
To do that, many online video platforms are now striving for exclusive content rights. In early January, Youku exclusively released the first episode of the third season of the popular British TV series, Sherlock. In just 24 hours it got 4.27 million views and more than 10,000 comments.
Similarly Sohu raked in RMB 200 million ($33 million) in advertising revenuesthis year due to exclusive ownership of the online broadcasting rights of the second season of popular reality show The Voice of China. The show attracted more than 2 billion viewers to the website and more than 700 million views on mobile devices. Another one of Sohu’s recent deals will make it the sole China distributor of popular children’s programs on Nickelodeon, such as SpongeBob SquarePants. The one-year rights licensing falls within an online video-on-demand and video syndication agreement signed with Viacom International Media Networks, and it is expected to reach around 380 million viewers in China.
According to iResearch’s latest online video report, as the industry matures, companies are also increasingly considering user-generated content and self-produced content to reduce content-acquisition costs, differentiate themselves from competitors and improve stickiness.
Even Youku recently deviated from its original strategy and decided to additionally focus on user-generated content and in-house production in response to new viewer habits. Last year, for instance, it launched a masters short film project based on in-house production, as part of Youku Original programming. Reputable film makers were invited to create 25-minute long micro films, which were produced under high quality standards and led by a professional creative team. The format proved to have strong user engagement: during the first month of its second edition, it reached 10 million people and led to more than 15,000 comments.
Putting Youku Original at the core of the company’s hybrid strategy has increased brand reach. Attracted by catchy movies and TV dramas, companies like General Motors, Philips, Hyundai and Sony have ventured into exclusive sponsorhip opportunities with the platform.
“Every marketer knows that if they want to attract the younger generation, online video platforms are the place where they spend their time,” says Tony Chen, President, Group M Interaction.
Changing the Market Dynamics
Online video has disrupted the TV industry in China. “(Chinese online video websites) started by positioning themselves as a sort of online extension of TV, so some of the traditional TV content was transferred online. Since then, lots of users in particular those between 15 and 34, have shifted their behavior from TV to online video,” says Chen.
It will be very hard for local TV stations to catch up as regulations don’t allow them to deliver audiences and advertisers the kind of content they desire.
“Online video content basically redefines prime time,” says Chen. Content consumption becomes extremely fragmented: viewers are in different time zones, they watch different programs and when they go online they watch more than one episode at a time. “Advertising has to follow the content instead of the time slot,” he adds.
However, this new disruptive ad dynamic also poses serious challenges to the future success of many online video websites, prompting leading players to experiment with alternative forms of content distribution.
Being able to provide viewers a holistic user experience is a dramatically important transition to make in China where 77% of the country’s 600 million netizens regularly go online through their smartphones and tablets. Chen points out that “a new cross-screen mixed-reach kind of methodology has been introduced in the market”. In China’s first-tier cities, families have multiple screens at home and family members do not necessarily sit together in front of the TV to watch the same program anymore. “Online video redefines the space of viewership and it also changes the way advertisers spend marketing dollars,” he adds.
To further promote their online video websites, many platforms have entered the hardware production market. In September 2013 Baidu’s iQiyi, for instance, tied up with consumer electronics company TCL to launch TV+ as the first smart TV to incorporate an “Internet DNA” into its functions. Interactive control experiences will give users free access to over 200,000 high-definition videos.
The smart TV market will be a potential game changer. Group M’s Chen points out that with smart TVs, viewership will become even more fragmented and it will impact traditional media buying. “In smart TVs all the choices are basically on the users’ remote control. They can access all kinds of contents and channels at any time. This will cause another revolution in the way advertisers make money,” he adds.
The Integrated Video Future
The multiscreen access to content is a breakthrough in the industry and players now need to think about alternative content delivery mechanisms to avoid losing market share.
Baidu is already working in how to achieve seamless transfer between devices. “If you’re watching a show on your phone and you want to continue watching it on your smart TV, or if you want to be able to download shows, and you are away at work, you should be able to do it remotely,” says Kaiser Kuo, Director of International Communications at Baidu.
Baidu’s search engine gets over 120 million daily active users; and its mobile video app is the first one in the industry with 100 million users and 20 million daily active users on their video app accounts. Additionally, iQiyi and its sister site PPS give Baidu a strong position in video websites since they have a content library of its own. “No matter what device we’re talking about, search is going to be integral of it. You’re going to be able to discover content and flipping through channels and looking for it at programming guides is obviously not the best way to do that. Using search is the most popular way to do it,” says Kuo.
Recommendations based on users’ viewing history or social features showing what friends like to watch will complement the browsing experience and ensure users find the shows they are looking for. “(It will) keep you consuming content that is really relevant to you. All of these things are part of the integrated video future,” says Kuo.
Integrating social media features like personalized recommendations offers both advertisers and content providers a crucial point of intersection. Under a new strategic content-sharing alliance, Sina Weibo (China’s equivalent of Twitter) will promote Youku-Tudou licensed content to its users. It’s a win-win that will drive traffic to both sites.
Moreover, the use of big data will help online video companies understand users better and, therefore, they will be able to offer advertisers the option to place ads based on user behaviour. “Advertisers will value this (targeted) efficiency and in the future there will be more investment (in) online video,” explains Group M’s Chen.
But the challenge for the industry is how to reconnect these three critical fronts–websites, mobile and search–into a unique online video content discovery gateway.
(Image courtesy: iStockphoto)