The YouTube of China is more than just cat videos

November 9, 2010: 3:00 AM ET

Youku wants to be the premier online video source for China, sure. But it's also something like Hulu and a movie studio. Maybe that's why Goldman Sachs is about to underwrite its IPO.

By Bill Powell, contributor

Viktor Koo is as about as matter of fact as it's possible to be when he describes the audacious goal he has set for a company that he founded just four years ago. "We want to be the primary source of video content [delivered] across Internet-enabled devices." Given that he sits in China, the country that already has the most Internet users in the world (384 million, with roughly 240 million of them already accessing video via the Internet), that would presumably be a pretty valuable piece of cyberspace to occupy. Which is why investment bankers at Goldman Sachs (GS) are in the final stages of preparing an initial public offering of Youku's stock in the U.S. that is, according to one Wall Street source not working on the deal, imminent. (Koo, in an interview with Fortune, declined to confirm or deny that an an IPO is planned.)

Audacious Koo's goal may be—but it's not necessarily unrealistic. A Hong Kong native, graduate of Berkeley and the Stanford Graduate School of Business, and an alum of Bain & Co.—Koo is the founder of Youku.com, the Beijing based company that is typically--and perhaps not quite accurately -- described as the "YouTube' of China. It is, as of now, the leading online video company in China, with a market share of 42 per cent, (as measured by user time spent on video sites in China, according to Itracker.com, a market research firm.) Its principal rival, Tudou.com, has about a 25 per cent share of the market, and it too will go public in New York, either this quarter or next, sources say. (Both companies are now in the so-called quiet period before IPOs and thus can't confirm timing.)

Their dominant positions reinforce the central commercial reality of China's digital world: this is, in effect, a parallel Internet universe. In virtually every key space when it comes to making money online, Chinese companies have either unseated global powerhouses, or entered spaces explicitly off limits to foreign firms. In online commerce, Alibaba-Taobao came from behind and effectively ran eBay (EBAY) out of the country. SOHU.com—where Koo served as CFO and then COO before starting Youku—and SINA.com are the dominant web portals. Google (GOOG) -- which, to be fair, wasn't doing badly as the second largest search engine in China, proceeded to torpedo its chances in China when Sergey Brin decided he couldn't live with Beijing's censorship laws earlier this year. Since then, Baidu (BIDU) has only widened its share of the search business in China.

YouTube, for its part, is already banned in China—accessible only via proxy servers—thus leaving that space wide open to domestic competitors. In the four years since sufficient bandwidth has been available in China to make online video a viable business, Youku and Tudou have emerged as the dominant forces in that market. But YouTube's absence, Koo says, doesn't mean the online video business in China isn't competitive. There were more than than 200 entrants scrambling for share just three years ago, according to Koo.

Koo is frank about the censorship realities for anyone wanting to play in this space in China. "We have much more vigilant screening," he acknowledges, than YouTube does in the U.S. Beijing doesn't want to see any user-generated videos giving props to the Dalai Lama, discussing Tiananmen Square or advocating independence for Taiwan. You either live with those restrictions, among others, or you don't play. "We have a license from the State Administration of Radio and Television, " Koo says, "and our chief editor communicates with them regularly in terms of content we need to be careful about."

How did Youku emerge as the pre-eminent force in China's online video business? Two main reasons, Koo says. First, the company decided not to outsource its technological back office to Limelight or Akamai, (AKAM) or their Chinese equivalents. That "allowed us to do two things: contain our costs, one, and make absolutely sure that the user experience [for video] was good. Obviously, the user experience is critical, and speed is the key. We wanted to control that, so we invested in making sure we got it right, rather than outsourcing that responsibility to someone else.''

The other thing Youku did was come up with its own business model. Little irritates Koo more than the assertion that Youku is simply a Chinese version of YouTube. "At the least we're a combination of YouTube and Hulu," he says, "but the fact is we go well beyond that." Indeed, in addition to providing a platform for user generated content (like YouTube) and carrying TV dramas (ala Hulu), Youku is a co producer of original online video programming. It contracted with ten young Chinese film-makers to produce online films of varying lengths. And a recent film Youku commissioned, called "Old Boys," about two 40-something friends who enter a rock and roll contest, attracted over 30 million viewers to its site. (You can watch the film, replete with English subtitles.) "We re really a hybrid, Koo says. "The way we think about content is very different.''

Koo might not have YouTube to worry about, but several of China's online big guns -- Baidu, SOHU and Sina among them -- are coming after Youku and Tudou. The market for online video is too new, and growing too rapidly, for them to ignore.

There are other key differences, Koo says, in the market in China for online video compared to the U.S., that make it a YouTube/Youko comparison unfair. For one, the U.S. has fewer but more dominant content providers, who watched the recording industry get eaten alive by the digital music revolution, and are playing hardball with online video companies who they fear might try the same trick with online video. Koo benefits from a more fractured online video environment in China, but also has to work hard to distinguish his brand. Yet Koo believes both countries share this in common: video on demand, delivered "over the top" via unmanaged networks like Youku.com, is China's media future, just as it is ours.

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