China's YouTube Rival Shifts Into Overdrive

Want to see how Chinese users are viewing the Olympics, and themselves? In China, Youku.com is where the online video is at, not that Google-owned site with a similar-sounding name.

Since its launch in December 2006, the site has emerged as China's online video leader. During one week in December 2007, Youku registered over 100 million video views per day, according to Nielsen/Netratings.

CEO and founder Victor Koo, a former president and COO at Chinese portal Sohu.com, claimed that number has now increased to 150 million per day.

Youku developed its own content delivery network, including its own video player, based on the open version of Flash Video. Koo said the company operates its own networking centers in every province in China, using servers from HP and Dell and routers from Cisco and Huawei.

The network saw a lot more building during 2007. "We thought we'd grow five times, not 20 times. That's a nice surprise for traffic, but maybe not such a pleasant surprise for the cost structure," Koo said.

The company's growth was threatened in May, when the State Administration of Radio, Film and Television (SARFT), which regulates the content broadcast online and over the air, omitted Youku.com and its two closest rivals -- Tudou.com and 56.com -- from a list of approved online video sites.

In July, Youku.com emerged from that dust-up with SARFT with not one but two licenses and US$30 million in new investment. Those licenses cover not only user-generated video, but also film and television content distribution. Youku's closest rivals, Tudou.com and 56.com, are still operating without official permission. The latter site, 56.com, spent more than a month offline, due to what it called a "technical upgrade."

Koo took the permit process in stride. "We had already positioned ourselves with mainstream and 'healthy' content from day one," he said.

For Koo, content screening is good business. "If you're purely user-generated, then to be honest you may have a lot of racy content, and brand advertisers are very wary and uncomfortable," he said. He called the site's regulatory approval "the by-product of our advertising standpoint" -- keeping the content "healthy" meant that not only would advertisers approve, but so would regulators.

Maintaining that position takes 20 to 30 people working in eight-hour shifts, 24 hours per day, to approve or reject videos being posted, Koo said. Youku also uses digital fingerprinting to help select content: if a video matches something previously approved, then it too is approved; the same is true for videos that are not accepted. Moderators also use tags to search for sensitive words and weed out pornography. Beyond that, they use the old-fashioned way to screen some content -- watching it to see whether it's suitable for posting.

Koo said that Youku has "directed" the way people prepare their videos, encouraging users to film the world around them instead of just themselves.

That direction seems to be paying off with advertisers. Since it began accepting advertising in January, the company has signed up 150 advertisers, Koo said. They include Olympic sponsors Lenovo and Samsung, both of which ran games-related promotions on the site.

He said advertising growth has been double-digit for every month of 2008, although he did not provide actual figures.

Youku's model sees advertising as its main revenue stream. It also wants to be a platform for professional video content creators, such as film and television studios, and advertisers wishing to use online video. Like rivals both domestic and foreign, Koo does not believe his company will charge users for the service anytime soon.

"We would need to do high-definition (HD) to have an online subscription model," he said. "HD, copyrighted material could work, maybe in two years," he added.

However, with current consumer broadband speeds in China topping out at 2M bytes per second, the country would need an increase in bandwidth before companies can offer HD video online.

Koo said his company takes "a proactive stance towards copyrighted material," by screening out unauthorized content, and seeking out rights holders to create partnerships. Youku counts Shanghai Media Group, Beijing TV and Hong Kong's Television Broadcasts Ltd. (TVB) as partners for television content, and has agreements with film distributor China Film Group and studio Huayi Brothers.

Those partnerships could be the key to Youku's ultimate success, according to one observer. "Generic content is the scourge of this sector, so their ability to sign up original content deals is key," said Duncan Clark, chairman of BDA China, a Beijing-based telecom and Internet investment and research firm.

Liu Bin, BDA's principal analyst, added: "Its major challenge is how to increase the user experience and add user interactivity to its services. A [video on demand]-like business is not the key selling point of video sharing, and user loyalty for such services is not high. Youku cannot effectively grow merely by adding more content. It needs to think of offering more services to compete with other online video companies."

For the remainder of this year and 2009, the challenge for Youku is to prove its model, Koo said. A liquidity event -- usually an initial public offering or buy-out -- wouldn't be considered until after that, he said.

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