Limits on TV Content Spur Growth for Streaming Video Sites

Foreign companies are taking advantage of China's huge consumer base through Web-based TV shows and movies. The WSJ's Deborah Kan speaks to Carlos Tejada.

BEIJING — Government restrictions are driving young Chinese to turn off their TV sets and turn on their computers. Advertisers and Western studios are right there with them.

China's streaming-video sites once were derided by the global entertainment industry as homes of stolen movies and television shows. But many sites have cracked down on piracy and are offering original programming, as well as licensed Western movies and TV shows such as "Gossip Girl" and "Mad Men."

As a result, ad revenue for Chinese video websites operated by Youku Inc., Tudou Holdings Ltd., Baidu Inc., Sohu.com Ltd. and others surged to 1.48 billion yuan ($235 million) in the third quarter, up 48% from the second quarter, according to market-data firm Analysys International.

The Youku-GM series 'Miss Puff' features a man who drives a Chevy Cruze.

Some sites are starting to offer some premium content, charging Chinese consumers for each viewing or on a monthly basis. "People are getting used to paying for content," said Gary Wang, chief executive of Tudou, which has about 12 million paying mobile subscribers.

Tudou, which gets 300 million visitors a month, has paid millions of dollars for exclusive rights to broadcast some Hollywood films, he said, though he didn't offer specifics. In October the company began offering Walt Disney Co.'s "Cars 2" animated movie for 20 yuan, or about $3, a view.

Advertisers such as General Motors Co. are responding by buying banner ads, time before shows and in some cases helping to produce their own Chinese programming. Chinese online-video ad rates accelerated last year, rising 40%—50% in some cities—compared with a 25% rise in overall Internet advertising, according to WPP PLC's GroupM Interaction ad-buying arm.

Youku teamed with GM last year to produce "Miss Puff," an animated online video series about a tech-savvy single woman in Beijing. Her handsome suitor drives GM's Chevrolet Cruze.

"It's a real business, a growing business, and it's only going in one direction," said Dede Nickerson, head of production and strategic development for the China arm of Sony Corp.'s Sony Pictures.

The rush has unleashed bidding wars for rights, leading to predictions of an industry shake-up. Last year LeTV.com, a streaming-video website owned by Leshi Internet Information & Technology Corp., paid about 20 million yuan for the Internet rights to "Legend of Concubine Zhen Huan," a Chinese-produced TV series about a young woman in the court of a Qing dynasty emperor. The amount was a record at the time, said Leshi Vice Chairman Liu Hong, but since has been eclipsed.

"The price of copyrights is going up," Mr. Liu said. "The market is going to become very tough." He said LeTV will prosper because it has an extensive back catalog of programming bought when prices were lower.

Tony Chen, president of the China arm of GroupM Interaction, said he expects some streaming-video sites to close their doors. "It's not a healthy model and not a sustainable model," he said. "I don't know how much more money they can burn."

More than 200 million households in China have cable-television access, according to analysts, but relatively few subscribe to premium services. Industry groups blame Chinese media restrictions, which censor content, limit the number of channels available and cap the amount of foreign programming. China's censors last year began cracking down further, limiting the number of entertainment shows China's satellite broadcasters can offer during prime time and criticizing popular time-travel dramas for their "excessively casual" approach to history.

Also, China's market for video on demand—which allows consumers to order individual programs through their TV sets—is just now gaining viewers. Research firm Media Partners Asia Ltd. estimated that revenue for on-demand services in China will rise to $1 billion in 2020 from $120 million in 2010. Consumer video-on-demand spending in the U.S. already reached $1.8 billion in 2010, according to the Digital Entertainment Group trade organization.

"Despite China's large pay-TV subscriber base, its commercial relevance is limited at present," said Media Partners Asia Executive Director Vivek Couto. "Online video has stepped up and taken that market."

China's video sites can offer more content in part because much of what they air is approved by China's Ministry of Culture, which also oversees DVD releases, and not by broadcast-TV regulators. Mr. Liu, of LeTV, said his firm and others avoid running afoul of Beijing by cutting out programming that questions the government, could be viewed as pornography or touches on forbidden subjects like organized crime.

As competition intensifies, China's video websites have begun producing their own material to differentiate themselves. A popular show made for the Web can cost less than $1 million, according to Tudou. Through ad sales, product placement, merchandise sales and licensing the content for broadcast on television and other channels, the cost can be earned back in a matter of weeks, Tudou said. Illustrating the stakes, Youku and Tudou are battling each other over rights to some content.

Youku, which is listed on the New York Stock Exchange, posted a loss of 47.5 million yuan in the third quarter on revenue of 262.5 million. Tudou, which trades on the Nasdaq Stock Market, earned 52.5 million on revenue of 149.7 million yuan in the same quarter. Programming accounts for much of their costs: Youku spent 26% of its revenue on content, while Tudou spent 28%.

There are efforts afoot to keep Chinese viewers in front of TV sets. At the Consumer Electronics Show in Las Vegas last week, Lenovo Group Ltd. unveiled its Smart TV, which uses Google Inc.'s Android operating system and includes video-on-demand, traditional-TV and Internet applications. The TV set, developed in partnership with broadcaster Shanghai Media Group Inc., is expected to ship in April in China.

—Yang Jie in Shanghai and Olivia Geng in Beijing contributed to this article. Write to Loretta Chao at loretta.chao@wsj.com and Carlos Tejada at carlos.tejada@wsj.com