Youku Transcends YouTube as China Becomes Center of Internet

The Website
The website is displayed on a computer in Beijing. Photographer: Nelson Ching/Bloomberg Inc. Chief Executive Officer Victor Koo says he’s tired of being asked whether his company, China’s biggest online-video provider, is the nation’s version of YouTube or Hulu. It’s both and better, he says.

“We are in the midst of an arguably more interesting opportunity: Hulu at a YouTube scale,” Koo, 44, said in an interview. “The Internet TV opportunity in China is unique and also arguably more attractive than the rest of the world.”

Koo is among dot-com executives gathering in Beijing today and tomorrow to sell the idea that Chinese online services from Youku to Tencent Holdings Ltd.’s QQ are catching up to the world and western companies will soon turn to China for innovation. Their edge in detecting trends: an Internet population of 420 million, more than the number of people in the U.S. and Germany.

“The Internet’s center of gravity is shifting toward China,” said Duncan Clark, chairman of BDA China in Beijing, a technology consultant. “China has almost double the number of U.S. Internet subscribers. That concentration matters.”

Xu Rongsheng, 63, agrees. The Institute of High Energy Physics researcher, credited by the government with setting up the nation’s first website in 1994, said China has a chance to influence usage in the rest of the world.

“We cannot live without the Internet,” Xu said in an interview. “The Internet is like life.”

Some investors may already be ahead of the curve. Tencent and Baidu Inc., China’s largest Internet companies, are larger than EBay Inc. and Yahoo! Inc. by market value. Alibaba Group Holding Ltd.’s unit is also among the 10 biggest Internet companies globally by market capitalization.

Tencent’s QQ

While Google Inc. and Yahoo have struggled to operate in China, where the government requires Web content to be censored, domestic companies such as Tencent have thrived.

Tencent expanded its QQ online-chat software to offer additional features that appeal to youths, helping it beat services from Skype Technologies SA and Microsoft Corp., according to Jake Li, an Internet analyst at Guotai Junan Securities Co. QQ boomed after Tencent allowed messages to be sent to offline users and allowed subscribers to send files and photos, he said.

QQ controlled 77 percent of China’s instant-messaging market as of December, compared with 4.2 percent for Microsoft’s MSN, according to researcher Analysys International., China’s biggest online-shopping site, overtook San Jose, California-based EBay within three years of its founding in 2003 by waiving commissions from transactions between its users. The approach by Taobao appealed more to China’s cost-conscious Internet users, according to James Hawkins, managing director at DGM Asia, which buys advertising from Internet companies in China.

Expanding to the U.S.

Taobao’s parent, Alibaba, is expanding outside China. In August the company announced its second U.S. acquisition this year when it agreed to buy Auctiva.

While the number of so-called “netizens” trumps those of any other country, Chinese Internet companies have yet to become household names, according to BDA’s Clark.

“Tencent is among the largest Internet companies in the world but most people outside of China haven’t even heard of it,” said Clark, who will be joining Koo as a speaker at the Stanford University-sponsored conference in Beijing, “China 2.0: The Rise of a Digital Superpower.”

China also trails the U.S. in revenue. Sales from online advertising reached 20.7 billion yuan ($3.1 billion) last year, according to data from Beijing-based iResearch Inc. By comparison, ZenithOptimedia estimates U.S. Internet advertisements in 2009 were valued at $54.2 billion.

Trailing in Innovation

China lags behind the U.S. in terms of educational and social conditions to foster innovation, said Mark Natkin, managing director of Marbridge Consulting Ltd., a Beijing-based market research firm. Still, its Internet population guarantees China will impact the Web’s future, he said.

For Youku’s Koo, Chinese Internet companies are developing superior business models to their counterparts in the U.S. and Europe.

Youku’s business model combines the strengths of YouTube and Hulu, Koo said. About 70 percent of the videos on Youku’s site are professionally produced, and the rest are user-generated. Whereas U.S. video sites are dominated by music videos and short clips, about 60 percent of Youku’s content is longer, such as movies, he said.

Different Model

Hulu LLC, founded in 2007 by General Electric Co.’s NBC Universal and News Corp.’s Fox, doesn’t have enough users to challenge YouTube, while YouTube lacks professional content because it’s dominated by user-generated videos, Koo said. YouTube, owned by Google, is inaccessible in China.

YouTube aims to be a comprehensive global video site that allows everyone to broadcast their work to the world and also offers premium content from media companies, said David Marx, a YouTube spokesman.

As Chinese Internet companies find unique strategies that work, they will be adopted by competitors elsewhere, Koo said.

“In the early days China lagged years behind the U.S. or Europe,” Koo said. “Now we see an environment where information is transferred so quickly, that models and ideas about models get transferred on almost real time basis.”

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