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| Banning Online Video Websites in China: A False Alarm |
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On the last working day of 2007, China's Ministry of Information Industry (MII) and the State Administration of Radio, Film and Television (SARFT) jointly issued the Administrative Provision on Internet Audio-Visual Program Services. According to the Provision, online video business operators have to obtain programming permits from the authority or perform required procedures. Companies applying for internet audio-visual service permits must be "legal persons, fully state-owned or state ownership-controlled, with no law breaching records in the prior three years". The Provision was implemented on 31st Jan 2008.
Announcement of the Provision immediately caused a big splash within China's internet and venture capital (VC) investment industries. Industry insiders thought that if the Provision were strictly implemented, it would be catastrophic for the Chinese online video industry.
A false alarm
But the event had taken a dramatic turn on 3rd February night, when MII and SARFT published explanations on the Provision details. For the most concerned issue of "state-ownership", the two authorities explained that for those video websites commenced business before the announcement of the Provision and without any unlawful records, they can re-register with the authority and continue to operate. The "state-ownership" requirement only applies to video websites launched after the Provision announcement date. This signalled the exemption for existing privately owned video websites. The issue of "Judgement Day" for the Chinese online video industry since January has now finally resolved.
In terms of the reasons for a permit system and emphasising state-ownership, the two authorities explained that the Provision considers state-ownership operated internet audio-visual program services are beneficial to develop Chinese internet culture and maintain public interests. And it is also inline with prior regulations of restricting non-state-owned capital to participate in audio-visual program services and news websites in China. |
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On the other hand, the explanatory details can be viewed as a confirmation of the legitimate and legal status of privately owned video websites in China. Therefore, the explanatory details have delivered far more positive implications for the industry than simply business exemption.
Protective barrier?
From another point of view, the explanatory details have also instantly lifted the entry barrier of China's video website industry, resulting in much less entrants in the future. An industry insider said that "This means for those international video websites that have not yet entered the Chinese market, such as YouTube, it will be more difficult for them to gain access, under the "state-ownership criteria." But for video websites that are already in business in China, the Provision has actually built a protective barrier for them.
But a video website CEO played down the barrier theory, saying that "Online video industry is now a concentrated industry in China. In the early days, we were still competing on the grounds of capital and technologies. But since 2007, those leading players have accumulated large scale of user size, brand recognition and service differentiation. So even without the current Provision, YouTube can probably gain no advantage in China".
Targeting illegitimate contents
In explaining the Provision, the authorities also indicated that a major reason for tightening the regulations is because "there have been significant online pornographic and violent contents and pirate contents, which contaminate the internet environment and negatively affect children and youth development". In other words, the Provision is aiming at pornography, violence and piracy. And the explanatory details also mentioned penalties on broadcasting pornographic and violent contents.
Crazy burning of US$250 million
According to incomplete statistics, since 2003, there have been US$200 million VC investments into the Chinese online video website market. If video-related P2P websites are included, the investment amount goes up to US$250 million.
For the cash burning phenomenon within China's online video sector, Mr Chris Thomas, an executive from Intel's China business, had said that "Online video websites with several million visitors have to spend several million dollars on bandwidth each month. Such cash burning scale will even deter Chinese internet bellwethers such as Tencent and Sina."
Founder and CEO of Youku.com, China's largest online video website, Mr Gu Yongjian, said that "normally, after three rounds of VC capital raising, investors will begin to require profitability". According to Internet Society of China, online video websites in China had registered total sales revenue of US$12 million in 2007, up 125% from 2006. Youku claimed that it broadcast more than 100 million video streams per day.
Commentators have pointed out that regardless of the Provision, there will always be two hurdles faced by online video websites. One is copyright issues for video contents, and the second is how to balance advertisements and user experience. Being the major income source for online video websites, video advertising is still at an early stage. The lack of profit-making ability has become a major bottleneck for online video websites.
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