Article / 11 September 2014 at 3:16 GMT

Video streamers' profits under pressure in Beijing crackdown

China Watcher / Shanghai
China
  • Beijing is promoting traditional values and courtesy
  • South Korean content has official support, but Western-style violence does not
  • Competition has been pushing up the cost of foreign content

By Neil Flynn

China’s online video streamers are facing increased pressure on profit margins after the Chinese government decided to impose further regulations on the type of content that sites are allowed to host, with particular restrictions over foreign content. The foreign content of online video sites will be limited to just 30%, creating a major headache for industry leaders such as Youku Tudou (YOKU:XNYS). Foreign content currently makes up more than half of Youku Tudou's library.

The industry has enjoyed explosive growth, and the government has become very wary about the type of content available. Beijing has not been shy about imposing strict penalties on video streamers that step out of line. Earlier this year, Sina (SINA: NASDAQ) had its video licence revoked after pornography was found on one of its sites, despite an explicit ban of such content.

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Beijing is not keen on violent films, but it is rolling out the red carpet for South Korean content.
Photo: Thinkstock

The presidency of Xi Jinping has seen a noticeable crackdown on corruption, as well as the promotion of Chinese values, and stricter regulation of foreign TV and film content is the latest step in this campaign. It has also been reported that video platform firms will have to get approval from the state broadcasting regulator before showing any foreign content.

South Korean TV content is becoming more popular in China, and President Xi’s recent state visit to South Korea was also seen as a good opportunity for content providers to promote their shows to Chinese audiences. South Korean content is favoured by Chinese broadcast regulators because of the polite nature of the characters and strong family values that are depicted, as opposed to the recurring themes of drugs and violence that is common in US content. This is in keeping with a broader theme, as the promotion of a more courteous society can be seen throughout China.

Just this morning on the Shanghai metro, there were several videos telling passengers that it’s rude to shout on your phone in a restaurant, and dangerous to jaywalk. As well as good looking actors, South Korean TV promotes the sort of harmonious society that China wants to maintain, which is why it is seen favourably by government regulators.  

Local content solution

In a previous article, I discussed how Sohu (SOHU:NASDAQ) is facing difficulty in acquiring the rights to show exclusive TV content, because competitors with heavy financial backing have been driving prices sky high. In addition, content exclusivity has only become prevalent in the past year, so video platforms are willing to pay more for the top shows, because they know that they can generate greater advertising revenues from the huge audiences.

Sohu management says that they expect the market prices to eventually cool as the market matures, but as restrictions are applied further to foreign content, I expect that many firms will be priced out of the market.  

Video platform firms will have to adjust their business models, and increase the production of Chinese content. This will be a way of curbing excessive content costs, and will make sure that popular shows remain on their network. Sohu saw a heavy fall in advertising revenues compared to last year as they lost the third series of The Voice Of China to Tencent video.

As a result, I would expect to see consolidation in the market. The likes of Sohu can’t compete financially with Tencent (HKSE: 0700.HK) video, Youku Tudou (backed by Alibaba), or iQiyi and PPStream, which is backed by Baidu (BIDU:XNAS). Because Sohu does still have a large library of quality content, I would it to be taken over at some point in the future. The most likely candidate is Tencent, given that it has invested in Sohu’s Sogou search engine and has already seen strong returns.

-- Edited by Robert Ryan

Neil Flynn is head equity analyst at Chinese Investors


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