Call it the power of persistence. A young Chinese man, once shamed on the basketball court, devotes himself to improving his game. Through practice, sweat and numerous pushups, he returns to the court a victor – and even manages to get the girl in the end.
This is not a Hollywood-made story screened at the local multiplex; it is to be found at China’s leading online video website, Youku.com.
What is notable about this video is not its production quality or message, but rather a brief shot of the man’s basketball shoes, made by domestic sportswear firm Li Ning. This piece of entertainment didn’t emerge from Li Ning’s marketing department but from one of Youku.com’s users. Since being uploaded in August, it’s been viewed over 770,000 times.
Videos like this demonstrate the potential for companies to harness online video and social networking sites – which fit under the broad definition of Web 2.0 – as an advertising platform. Chinese firms came late to the party and face challenges of a higher order. But subtle idiosyncrasies in China’s internet culture may make it easier for firms to turn a buck.
In the online video space, the distinction between the world’s leading video website, US-based YouTube, and Youku is indicative of this divide, according to Victor Koo, Youku’s founder and CEO.
"In many ways I don’t think YouTube was created as an advertising friendly environment," Koo told CHINA ECONOMIC REVIEW. "There’s much to be said about Chinese online video companies really trying to innovate or change the model to become more advertising friendly."
Advertising is the mother’s milk of China’s internet industry, and online video and social networking firms have the potential to change how it is consumed by users. Not only can they supply advertisers with demographic data and user preferences for movies, books and hobbies, but also a captive audience: Youku currently has 160 million daily video views, and 20 million of its users on any given day watch videos on the site for over an hour.
Furthermore, the internet in China, unlike in the West, is principally used as an entertainment medium.
"Users in China have different demands," explained Neil Shen, a China internet pioneer and founding managing partner of venture capital firm Sequoia Capital China.
"They want IM (instant messaging) more than any other country, they probably want online gaming functions more than any country, given that they are from the younger generation and are looking for online entertainment more than in any other country."
Open to offers
As their data mining tools develop, social networking sites will have to tread a fine line between offering users targeted advertisement and being intrusive. But there is little doubt that Web 2.0 users in China are generally more receptive to marketing than their Western counterparts.
Sam Flemming, CEO of CIC Data, a Shanghai-based firm that tracks internet word of mouth, sees this acceptance of the Web 2.0 package as the natural progression of existing trends. Chinese internet users have long been avid users of BBS and blogs – social networking sites and video sharing are just the next step.
"It’s part of the netizen DNA in China to go online, share and talk about content and participate in a community," Flemming said. "It’s more mainstream than it is in the West and it’s also more commercial. It’s happening on commercial platforms so there’s a higher tolerance for commercial activity."
The newness of China’s social networking market makes it all but impossible to accurately measure user numbers. (See "Gaming the system: Are these actual numbers?" on p44.) But one of China’s leading social networking sites, 51.com, in which Sequoia Capital is an investor, had 130 million registered users as of September. Of this number, 34 million visited the site once a month and 7 million visited each day, according to Andy Yao, the firm’s vice president.
Yao said that 60% of the firm’s revenues come from value-added services and VIP subscriptions, while 40% come from advertising. The strategy is to break even with advertising revenue and go profitable on the basis of paid services.
He added that at present targeted advertising based on user data is still limited on 51.com partly because advertisers are unfamiliar with these new channels.
"For advertisers, the safest strategy is to put [banner] advertising on a high- traffic site," Yao said.
Small fish, big pond
This conservative attitude is one of the reasons why the internet attracts just a fraction of total advertising expenditure in China. CTR Research estimates that as of February this year, the internet and other new media accounted for 5.8% of the total ad spending. Television drew 74.4% of the money while newspapers took 13.2%.
Online ad spend rose to US$1.55 billion in 2007 from US$890 million the previous year. But with most of that going to portals, some Web 2.0 firms have overestimated their share of that pie.
"A lot of these Web 2.0 firms had this na?ve belief that if they had enough users, eventually the advertisers would beat a path to their door. There’s too much dependence advertising," said Kaiser Kuo, group director of digital strategy at Ogilvy & Mather Advertising in Beijing. Kuo also consults privately for Youku.
Some venture capital investors have already turned a cold shoulder to internet companies that rely on advertising for revenues, according to Rocky Lee, head of DLA Piper’s venture capital and private equity practice in Asia. The brewing global economic crisis only threatens to worsen the situation.
"We’re going to be looking at one of the worst macroeconomic environments in the world. The first thing to go in that environment will be advertising," Lee said. "Investors are really looking pragmatically at deals in China that have real assets, doing asset-backed transactions or investing in real cash flow businesses where they’re selling a product or a service, or even manufacturing."
A decline in overall advertising expenditure, however, may not be the death knell for online ad spending because companies will seek to get the most bang for their buck. A recent report by J.P. Morgan said that television advertising would suffer the most in an economic downturn and that the success of online video during the Olympics would draw more advertisers to the medium in 2009.
But analysts still question whether advertising alone will be able to pay for the infrastructure needed to support the high bandwidth rates required by online video companies.
These firms also must contend with an uncertain regulatory regime. In June, the State Administration for Radio, Film and Television revised the licensing system for online video sites in a bid to clamp down on inappropriate content. In the aftermath, one of the largest sites, 56.com, was essentially closed down.
This is the paradox of the online video sector in China. While much of the media attention, and government scrutiny, involves user-generated content (UGC), a small proportion – which some analysts put as low as one-tenth – is actually user-generated. And while Web 2.0 use a combination of automated tools and staff to screen content for sensitive material, the prospect of a capricious government crackdown remains a major risk.
Regulate or differentiate?
Koo believes regulation is healthy for business, as advertisers don’t want to be associated with racy or inappropriate content. While this may be good news for advertisers, UGC is a crucial means by which firms can differentiate themselves from one another.
"Because most of China’s video sites are broadcasting television programs, many have similar content, so if 56.com is shut down, its users will just change to Youku or Tudou," said Tangos Chan, publisher of the China Web 2.0 Review blog. "Video sites in China cannot differentiate without user generated content."
This leaves firms like Youku.com in a tight spot, though with any luck they’ll find a Hollywood ending of their own.