Hollywood’s hopes in China rest on Youku

June 24, 2014

By Rob Cox

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Look around the subway in Beijing or Shanghai and maybe nine of 10 passengers are watching videos on their mobile devices. Chances are most of them are watching content delivered to them by Youku Tudou. The country’s leading internet television operator streams 400 million videos a day. In that sense, Youku is Netflix and YouTube – plus Comcast and Liberty Media – stuffed into one dumpling. It is also the nexus for Hollywood’s high hopes in the Middle Kingdom.

You wouldn’t know it from Youku’s financial reports. The company founded by Victor Koo, and run day-to-day by a former student of central planning, Dele Liu, is listed in New York, where it commands a relatively modest $4 billion market cap compared to Netflix’s $26 billion. In the first quarter, it lost $36 million on revenue of $113 million. Still, the company is making progress, enough that China’s sultan of e-commerce, Alibaba, bought 16.5 percent of the group for $1 billion in April.

Youku’s long-term fortunes depend on two things: securing and defending copyright for hit shows, and getting Chinese consumers to pay for the privilege of watching them, something they’ve long resisted. China’s government even seems to be getting on board in the battle to protect the makers of intellectual content from robbery. For this reason alone, Tinseltown should hope the scrappy Chinese company can pull it off.

China is still the high seas of global internet piracy. But there are flickers of hope on the horizon. Last week saw a significant advancement in government promises to clamp down on copyright theft when Shenzhen’s Market Supervision and Administration Bureau issued a fine of 260 million yuan ($42 million) to QVOD, a website accused of distributing videos without permission.

That’s a grain in the rice bowl of Hollywood’s $36 billion in global box office sales. And it was QVOD’s alleged distribution of pornography that probably rankled Chinese authorities more than its breaches of copyright. But the fine amounted to three times the revenue QVOD booked on the stolen content. For a country that has long looked the other way on intellectual property violations, that was an encouraging sign.

Moreover, it came a week after the government launched a six-month campaign against online piracy. The crusade, according to an article posted on the Chinese Communist Party’s official website, will run through November and include the efforts of four departments – the National Copyright Administration, the State Internet Information Office, the Ministry of Industry and Information Technology and the Ministry of Public Security.

“The move aims to promote cooperation between online and traditional media institutions and better protect copyright by standardizing the use of copyright owners’ content online,” the departments jointly proclaimed. True, this is the 10th drive of its kind in the past decade. But the QVOD action suggests there’s something to the rhetoric this time around.

China’s leaders aren’t suddenly taking seriously the insistent whining from Los Angeles studio chiefs. As with all directives from Beijing, there is a larger motive here. China wants to develop a movie industry of its own. Not only do the riches of a homegrown version of Hollywood – or Italy’s Cinecitta, India’s Bollywood or British studio Pinewood, for that matter – appeal to an economy destined to become the world’s largest. Movies and television are critical to projecting soft power.

This is where Youku plays a key role. When the government signals that copyright is worth protecting, media providers have an increasing incentive to pay for it. Koo negotiated with nearly every movie and television studio to secure the rights to series including Lions Gate’s “Orange Is the New Black” and feature films like Walt Disney’s “Captain America.” For the studios, the deals are puny compared to the blockbuster agreements they regularly reach with Netflix and its rivals. All told, Youku spent $52 million on content in the first quarter. Netflix is spending $3 billion this year.

More importantly, once Chinese companies own copyright they are going to the courts to protect it, which gives China’s fledgling legal system a helpful workout. That hasn’t always worked to Youku’s benefit – its Tudou site was found guilty on June 23 of allowing programs made by state broadcaster CCTV to be uploaded illegally, and fined 248,000 yuan. The precedent is encouraging, though, for Chinese studios and for foreign ones too.

What Youku is doing with the content matters even more. It’s asking Chinese consumers – tens of millions of whom will watch shows on their phones before they ever flick on a television or a PC – to pay something. For the majority it will come in the form of time – watching the paid ads that bookend clips. For others, it will be 5 yuan for a film, or 20 yuan a month to subscribe to Youku’s library. Either way, it teaches consumers that copyrighted material isn’t free.

The Chinese government seems to recognize that without a flourishing market, there can be no hope of encouraging a local industry to produce programming to meet its cultural aims. Producers, scriptwriters, actors and directors need to feel secure that their work will also be valued. That’s why a crackdown like that on QVOD provides an important signal.

Investors seem to be responding. Fosun International said on June 23 it will invest in Studio 8, a studio run by Jeff Robinov, who oversaw the “Dark Knight” and “Hangover” film franchises while at Warner. Fosun wants to capitalize on Studio 8’s know-how “to drive the development of the Chinese film industry.” The previous week, Light Chaser Animation Studios, which calls itself the Pixar of China, raised $20 million from investors including one of the founders of Youku, to “create world-class animated films with a Chinese cultural touch.”

So is this the dawn of a golden age for Chinese cinema? Don’t count on it. New productions first have to get through the censors. Youku has more than 300 of them combing through videos, and that’s after software has already scanned the 170,000 submissions it receives daily for hints of nudity, violence or anything that suggests instability at home. China’s government has very clear views about what its 1.3 billion people should, or should not, watch.

That doesn’t always make for great viewing. Take “Game of Thrones.” When it broadcasts on its U.S. home channel, Time Warner’s HBO, the show runs about an hour. On CCTV in China, it is far shorter due to substantial cuts. A film industry is developing in China, and consumers are becoming habituated to paying for content, but the good stuff may still get taken out along the way.

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