The “YouTube of China” is acting more and more like YouTube

Time for a new strategy.
Time for a new strategy.
Image: Reuters/Reuters Stringer
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YouTube is the unrivaled king of video in most parts of the world, but China’s video portals have it tougher—they face too many near-identical competitors. Chinese consumers looking to watch the latest viral video or TV series recap can turn to iQiyi, PPTV, Sohu, LeTV, or Tencent Video, to name a few.

Youku Tudou, one of the most popular portals, is now trying to distinguish itself by embracing a new business model—fostering China’s next big internet sensation.

The company announced yesterday (link in Chinese) that it will devote 10 billon yuan (about US$1.6 billion) towards producing “professional-generated content,” meaning high-quality videos made by semi-pros. Funds will be used to help make it easier for video makers to produce, upload, and earn money from their videos. In some cases, funds will go directly to the content creator’s business itself.

The move resembles YouTube’s long-time strategy for procuring quality video content. As early as 2011, the Google subsidiary has been funding production for its self-made stars, like comedy duo Smosh and trivia channel Mental Floss. YouTube’s motive was partly to increase overall traffic, and partly to draw in ad dollars from brands outside of Google’s network.

Youku’s billion-dollar initiative marks an important moment in China’s online video industry, which generated nearly $4 billion in revenues during 2014.

Over the past decade, these portals attempted to distinguish themselves by obtaining exclusive licenses for certain TV shows—Sohu, for example, obtained the rights to stream the Netflix political drama House of Cards in China. They traditionally shunned user-generated content because it generated fewer page views, which meant fewer dollars from advertisers. (A report from iResearch shows user-generated content generated at best half as many unique views (registration required) as professionally produced content.)

But this strategy has driven up the cost of licensing content. Youku Tudou paid $80 million in licensing fees during the quarter ending in March 2015, according to its latest earnings release. And the payoff for these video channels brands hasn’t been great.

“In the past, everyone was competing to buy IP rights and purchase the best dramas, using cash to buy traffic,” Victor Koo of Heyi, Youku Tudou’s parent company, told The Beijing News (link in Chinese). “[But] that hasn’t driven any [user] loyalty.”

Promoting and investing in self-produced content would help Youku Tudou to get content exclusivity without paying costly licensing fees. And it would help create some brand loyalty: If you’re a content creator with funding from Youku, it’s bad form to post your videos on a competing platform. And on the off-chance that Youku funds the Michelle Phan of China, it can earn a cut of the take.

Of course, it’s possible that other Chinese video portals will follow suit, and that the fragmentation in China’s video streaming industry will continue. But paying for access to the latest DIY makeup queen will hopefully be cheaper than paying for the rights to stream House of Cards.