Why YouTube Is MIA in China

The Google-owned video-sharing service is conspicuous by its absence in the mainland, and Chinese often have trouble seeing the U.S. site

By any reckoning, China should be an important new territory for YouTube. The country is the world's second-largest Internet market, after the U.S., it's rapidly beefing up its broadband infrastructure, and it's home to millions of Net-savvy youths who love posting videos online. The Backdorm Boys, a Chinese-student singing duo, was one of the first breakout hits from online video, with their lip-synching clips recorded in their dormitory room winning fans worldwide. Moreover, YouTube owner Google (GOOG) is making a big push in the mainland, poaching top Microsoft (MSFT) executive Kai-Fu Lee two years ago to spearhead the search engine's drive into China. In October, YouTube made its first moves in Greater China, launching Chinese versions in Hong Kong and Taiwan in October.

But in China, YouTube is conspicuous by its official absence. It hasn't launched a mainland service yet and Chinese who log onto the company's U.S. site from China often complain that the site is inaccessible. One explanation could be bandwidth shortages. Another cause for the blackouts could be government censorship, since YouTube is not based in China and therefore doesn't follow the Beijing government's rules prohibiting content that the government deems too sexually or politically charged.

That censorship regime means YouTube is unlikely to make any fast move into China, says Rebecca MacKinnon, an assistant professor at the Journalism & Media Studies Center at the University of Hong Kong. Google took a beating from critics in the West after it launched a Chinese search engine and started censoring search results, and rival Yahoo! (YHOO) CEO Jerry Yang last month publicly apologized for Yahoo having provided the Chinese government with e-mail information leading to the imprisonment of a Chinese dissident. Google is not offering e-mail or blogging services in China, says MacKinnon, who often blogs about Internet censorship in the mainland. "It has to do with censorship issues that they don't want to be involved with, because of the criticism they would receive," she says.

A Big Boost for Local Services

YouTube executives would not comment when approached by BusinessWeek via a Google spokesman.

One result of Beijing's censorship policy: It's providing a big boost to local video-sharing services that otherwise might not have much chance of competing against a giant like YouTube. Video "is certainly an area that can be sensitive," says Victor Koo, the CEO and founder of Youku.com, a Beijing startup. With YouTube out of the picture, "that does give the [local] players in China some time."

Koo, 41, is taking advantage of that opportunity. On Nov. 26, the Stanford MBA and former chief operating officer of Chinese portal Sohu.com (SOHU) announced that his video-sharing company had received $25 million in funding from four venture-capital funds, including new investor Brookside Capital, an affiliate of Bain Capital. Existing investors Sutter Hill Ventures, Farallon Capital Management, and Shanghai-based Chengwei Ventures, which previously funded a $15 million round, also took part in the latest fund raising.

Teams of Video Screeners

Youku has no trouble abiding by the government's rules prohibiting sexual or political content, says Koo. "Sex videos are easy to screen," he says. As for political content, "that's a little tougher," says Koo, adding that "we have algorithms that make everything related to politics stand out for us to identify."

Other Chinese YouTube wannabes insist that censorship is not a problem for them, either. Jay Chang is the chief financial officer of 56.com, a Beijing-based site backed by Silicon Valley venture capital firm (and YouTube investor) Sequoia Capital that is one of Youku's main rivals. (The numbers 5 and 6 in Chinese sound like the words "my entertainment," hence the name 56.com.) Operating a video-sharing site "is not any more sensitive [than other sites] as long as we adhere to the local regulations," he says. "Which we do." Like Youku and other sites, 56.com has teams of screeners who watch videos before they go live.

Even if YouTube didn't have to worry about censorship, Chang believes the company would be at a disadvantage operating on its own in China. The track record for U.S. Net companies in China is not great, with high-profile flops such as eBay's (EBAY) attempt to run a Chinese auction site or Yahoo's try to operate a local portal. "As we've seen, they have difficulties operating in this environment," says Chang. Local competitors such as auction site Taobao and portal Sina (SINA) have been able to capitalize on those problems to become market leaders. With video sharing, he says, "we believe we have a similar opportunity."

Slipping Through the Censorship Cracks

Of course, one big advantage YouTube would have if it were to brave the Chinese market would be its deep pockets. Operating a video-sharing service in China "is a very expensive business," says Gary Wang, founder and chief executive of Shanghai-based Tudou.com, a top Chinese player that in July raised $19 million in its latest VC fund-raising round from investors such as IDG China. With more than 60 million video views a day, the company's traffic has increased sevenfold this year and Tudou now has 3,500 servers, compared to just 500 in early 2007. That puts a lot of strain on a company that is still working out a way to pull in revenue from advertisers. "Delivering video is very challenging," he says.

As the popularity of sites like Tudou grows and the volume of videos soars, Chinese users may find that more videos manage to slip through the censorship cracks, at least temporarily. "There's more margin for videos to get around," says MacKinnon. "It's becoming easier and easier to download this stuff." Certainly, controversial videos on taboo subjects such as the banned Falun Gong religious movement or the Dalai Lama, the Tibetan spiritual leader, are unlikely ever to make their way online inside China, but videos on less obviously sensitive news events might last a day or two online before a government censor realizes that their topics should be off-limits. That gives people time to find and save videos before the YouTube wannabes zap them. "There's definitely an increasing awareness that when you see these [videos] on domestic sites, you need to save a copy elsewhere," says MacKinnon.

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