Executives from Tudou—one of two companies left fighting it out to be the YouTube of China—were in San Francisco earlier this week to meet with investors and do a little schmoozing.
I met up with CEO Gary Wang and COO Sam Lai, who already raised some $85 million from Granite Global Ventures and General Catalyst Partners, and they swore they weren’t here trying to raise more cash. That’s a bit of a shock. Last we wrote about Tudou and its arch-competitor YouKu, they were burning through hundreds of millions between them trying to find what YouTube still hasn’t: A way for online advertising to pay for video’s outrageous broadband costs.
But more on Tudou’s financial prospects in a moment. One of the more interesting things we talked about was the company’s new push into mobile. Last week, Tudou won a deal to be the online video channel for China Mobile. Other than one-upping YouKu, who Wang says lost the deal, this doesn’t mean a huge amount yet. So far video can only run on high-end phones and much of China can’t even get 2G access, let alone 3G. And those who can have to pony up a pricey 150 RMB a year. While many game companies have reached massive new audiences via mobile, the people watching Tudou’s videos on their cell phones are likely the same affluent audience the company is already reaching.
But Tudou sees that changing in a few years for four reasons. One, China Mobile is investing some 58 billion RMB to build out 3G capacity in the country this year and will match that investment next year, hoping to catch up to other countries soon.
Two, phones are changing. Taiwan chip company MTK is developing chipsets that allow very low-end phones the ability to download and upload video. Low-cost MTK chips already supplies chips for roughly one-third of the Chinese handset market, Wang says.
Three, concurrent with the connectivity roll out and the dramatic step- up in what a crappy feature phone can do, data plans are plummeting in price. Lai says China Mobile is planning video-subscription plans that offer unlimited uploading and downloading of video for the equivalent of 75 cents a month. That’ll break user generated video in China wide open.
And lastly, in China people are replacing their handsets roughly every nine months. That means all of these changes could ripple out faster than if they required, say, a PC upgrade cycle to complete.
Forget YouTube running on an iPhone as the model—if Tudou’s plan plays out this could mean huge things for video in China, India, Africa and any other emerging market where basic mobile handset adoption and access is widespread but laptop-Internet usage lags. User generated video, gonzo journalism, and self-expression on this kind of scale will make Tweeting about the Iranian election (even if the merit of that can be debatable) look like a prehistoric version of social media-helping-social-good.
And of course, in many countries monetizing over mobile is easier than monetizing over the Web, because mobile minutes—whether pre-paid or subscription based—are essentially becoming currency for people without credit cards.
Tudou sees mobile video starting to take off in 2010, growing rapidly in 2011, and in 2012 generating enough actual revenues to equal what it makes in traditional online advertising.
So, what about those online ads? Wang had vowed when we last talked that the company would prove profitability without raising more money. There are two ways to do this: Sell more ads and clamp down on broadband. To stay alive Tudou, and some of its competitors, have had to do something most Valley companies would find unimaginable: Restrict how many people can view their site. By just making its broadband pipe bigger, Tudou, YouKu or a new competitor could double views in short order—but it’d be bled dry financially in the process. Proof? Since we last talked, Wang says he’s doubled bandwidth and was at capacity again in two weeks.
To add to the costs, Wang is running around Asia doing content deals to add professionally produced, non-pirated content to the 30 million pieces of video inventory Tudou has already. In fact, next year, he expects to spend more on content deals than on broadband. He says these deals are small compared to what gets done between the Valley and Hollywood. A hot new show (think an “Entourage” of Asia) may cost the equivalent of $200,000 US dollars for a two-year run, while a popular, but older show (think a “Friends” of Asia) would cost just $200 in US dollars for a two-year run.
Meanwhile, Tudou is producing a ton of original content including a TMZ-style entertainment news show and a “Who Wants to Be a Millionaire?” style reality show it co-produced with Nokia. Reality TV is a natural for producing lean content for a mostly TV-entertainment-starved nation. The Nokia show cost some $500,000 in US dollars to produce and thirty million uniques tuned in for the six live shows, where contestants could use friends or search engines on their Nokia N97s to help get the answers. A 20-year old girl won 1 million RMB at the end. In fact, it’s original content like that that helped Tudou win the China Mobile deal over competitors, Wang says. (No one wants to get dragged into a copyright war who doesn’t have to.)
It may seem a lot for one company to take on, but that’s the Internet business in China. Since so much of what we’d consider “old” media is developing at the same time, it’s a total land-grab free-for-all when it comes to content and information.
That’s the cost side. Wang said that revenues are increasing 40% per quarter, but admitted it was a small base. Total advertising revenues in China are small for the market: about $15 billion-$20 billion in US dollars. Half of that goes to TV, and a tiny 6% or so goes to online, Wang says. It’s at most $100 million in US dollars the country is carving up. (This could explain why sales of virtual goods are such a hot market.) He’s hoping to break even next year.
To put it mildly, between broadband costs, content deals, pioneering a new advertising segment in a young ad market, and now moving video to mobile, this is not an easy business. There’s a reason that out of thousands of YouTube copy cats, YouKu and Tudou are the only big ones that have survived, by most people’s estimations.
But unlike when I wrote my post last May, there seems enough traction that someone can survive in China’s online video business—whether it’s Tudou, YouKu, or a competing site launched by an existing Chinese Internet giant like Tencent or Sina. And that’s good news for the country’s 200 million Internet users.