China's internet TV sites in $1 billion battle for foreign shows

China’s big internet-TV companies are spending hundreds of millions of dollars on foreign TV shows and films in a battle to attract users and advertisers, but risk bumping up against regulators protecting the domestic TV and film industry. In less than two years, Sohu.com, Youku Tudou, backed by Alibaba, and Baidu have spent $1 billion on TV series and movies, primarily from the United States, Britain and South Korea. They say they will continue spending, although it could be some time before they turn a profit. The key is differentiation; convincing China’s 632 million internet users to keep coming back to a video streaming service because it has more of the best content. For online video firms, revenue comes from advertisers, and advertisers pay largely based on how many users the video sites have. Users go where the content is good. “You see this dragged-out war of attrition where everybody’s scrambling to buy the best content,” said Mark Natkin, managing director of Beijing-based Marbridge Consulting. “This will ultimately narrow it down to the smallest handful of Goliaths, and then people start to make money.” But China’s regulators have the freewheeling industry in their sights, and are pinning it down with new licensing and quota restrictions - helping the domestic TV and film industry develop with less competition from mature foreign media, analysts say. It also means the state can use regulation to limit the amount of foreign programming and remove what it considers “harmful” content, such as pornography and obscenity, from the internet. PAYING TOP DOLLAR Youku Tudou, nearly one-quarter owned by Alibaba, is way out in front with its foreign content, according to Youku.com, with 1,451 U.S., UK and Korean TV seasons. Sohu has 509 and Tencent Holdings 471. Youku Tudou’s video content costs rose 15 percent in January-September from a year earlier, while Baidu’s content costs, mainly for the iQiyi.com video site, were more than 2.5-times higher. Sohu’s commitments for video content purchases rose 42 percent. The strategy is paying off. “There’s competition between traditional TV and online video platforms,” said Forrester Research’s Wang Xiaofeng. “For advertisers, they think online video is more cost effective, and young people spend more time online than watching TV … It’s a global trend, TV losing advertising budgets to online.” Technology firms are getting in on the act, too. Leading smartphone maker Xiaomi said last week it will buy a stake in Youku Tudou. BIG BANG THEORY TUG-OF-WAR But what separates China from elsewhere is the state regulator. In September, the General Administration of Press, Publication, Radio, Film and Television said it must approve foreign content before it’s aired, and set a 30 percent quota on the ratio of foreign to domestic media on streaming sites. Sohu said that means it must either buy more domestic content, driving up the price, or buy less foreign media and risk losing traffic and advertising money. In May, China’s authorities ordered streaming services to take down popular U.S. shows The Big Bang Theory, The Good Wife, NCIS and The Practice. Soon afterwards, China’s state broadcaster, China Central Television, began airing The Big Bang Theory, leading industry observers to speculate it was behind the edict. Insulating the domestic film and TV industry from unimpeded competition while it develops has echoes of similar moves designed to help China’s tech sector, said Marbridge’s Natkin. “The regulators say ‘we can’t permit this particular show’, but in some cases the real reason is they want to protect and foster the growth of the domestic industry,” he said. Reuters