Two years ago, the video websites used to be the target for the right holders to combat piracy; while today they are all competing to show off their harvests of copyrighted contents. However, along with their developments, the royalties collected by the online video industry have also been soaring.

 

Currently, the royalties charged by the online video industry are shockingly high. In 2005, one could get extra content when purchasing copyrights. But things change over time, and there’s no wonder that the royalty fee for a single TV series could reach 10 million yuan in the present market. LeTV.com Inc. purchased the copyright of Imperial Harem (46 episodes) with 20 million yuan, PPStream, Inc. spent 22 million yuan on the The Emperor’s Women (35 episodes), Youku, Inc. was charged 25 million yuan for The Exceedingly Beautiful Snow (33 episodes), and Sohu.com Inc. paid 30 million yuan for the New My Fair Princess (98 episodes). If you calculate the royalty fees charged based on the number of episodes sold, the shocking result is that none of the hot video series on the major video websites were licensed below the price of 300,000 yuan per episode.

 

The days of uncopyrighted films and TV series have been quickly fading away since the State Administration of Radio Film and Television (SARFT) issued the Notice of Issuing the Opinions on the Enforcement of the Radio Film and Television Intellectual Property Protecting Strategy, and announced that it was committed to combating online piracy and IP infringement. Meanwhile, the IPO of major video websites have also accelerated the process.

 

Until recently the mainstream video websites have made great achievements in combating piracy and obtaining the copyright to provide films and TV series. But the side effect of the rocketing price of royalty fees has also made it hard for some online companies to survive. The staff in the Public Relations Department of Ku6.com told China IP over the phone that Ku6.com is shifting its attention to video clips and withdrawing from the business concerning films and TV series. However, when asked about whether this move was due to the unaffordable royalties, they made no comment.

 

According to the insiders, Legend of Martial Arts, the most fashionable TV series in China in 2006, which contains 81 episodes in total, was licensed to websites at no more than 1,300 yuan per episode. In 2008, the royalty fee of the hit series reached 5,000 yuan per episode, and the copyright of the hottest series Latency was authorized at 10,000 yuan per episode. In 2009, the price increased to 20,000 yuan per episode on average.

 

In 2010, Gu Yongqiang, the CEO of Youku, Inc.once complained during an interview that the royalty fees for the exclusive broadcast right of the 60 episodes of Journey to the West had been driven up to 16.8 million yuan. The huge sum made a shocking new record at that time, yet has become a common scene today. For example, the latest purchase made by Youku on the copyright to show The Exceedingly Beautiful Snow has cost it 25,000,000 yuan. “It was the best of times; it was the worst of times,” Mr. Gu quoted when the royalty of a single episode of Journey to the West amounted to 280,000 yuan. What comment would he make today when an episode of The Exceedingly Beautiful Snow is worth nearly 760,000 yuan?

 

Since 2005, the Chinese video websites have been exploring legitimate ways to survive for 6 years now and so far, among the original hundreds of websites that once existed, less than 10 major ones have survived the strong winds and big waves in the industry. The market may seem cruel in its elimination of competition, but it is survival of the fittest and this is considered as the first big shuffle by the insiders.

 

With the IPO of the major websites and the combating internet piracy movements conducted by relevant departments, the past two years witnessed a great improvement in China’s online video industry on quieting down piracy. However, this alone still cannot save the industry from the destiny of burning money. Since Baidu, Inc. jumped into the industry with a high profile and launched QIYI.com (former iQIYI.com), which focuses on fully licensed, high-definition, professionally produced content in 2010 and Tencent, Inc. decided to highlight its online video business in 2011, the competition between online companies became even more intense. As the price of licensing is driven up by the keen competition, the burn rates of these companies rise accordingly.

 

According to the listing prospectus of Youku Inc., from 2007 to September 2010, Youku Inc. spent 91 million yuan, 237 million yuan, 336 million yuan and 401 million yuan respectively on copyrights. The sum amounted to 1.065 billion yuan. Meanwhile the statistics of Tudou, Inc. shows that it was charged 101 million yuan, 243 million yuan, 258 million yuan and 309 million yuan in the last four years on copyrights. Reportedly, the whole online video industry has burnt more than 8 billion yuan over the past four years.

 

So far, there’s still no sign showing that this phenomenon will stop. Compared to 2009, the royalty fee for online videos has increased 50%, and the price is continuing to go up. This year is bound to see another dramatic rise as the market shows no signs of cooling down.

 

“When the online video industry was at the starting stage, many people saw the opportunity and came into the industry. There used to be hundreds of online companies in China of various sizes. However, the ‘prosperity’ lasted only for a short while before the first shuffle took place,” said Mr. Gu. In his idea, if the “prosperity” at that time could be regarded as the first market bubble in the online video industry, the industry is now encountering a second period of market bubbles. It does not matter what online companies are competing for (eloquence, content or talent); the competition is simply a tangled warfare for the outsiders. “In this warfare, one can only win by focusing on the critical battle fields like the visitors and the business affairs.”

 

At present, the insiders of the online video industry can be divided into four groups: the westernization faction (depending on their dollar reserves), those born with a silver spoon in their mouth (invested by the four leading portal sites in China), the local companies (depending totally on themselves) and the national team (the SARFT and the China Telecom). As a typical representative of the local companies, Han Xuemin, Vice President of JOY.CN Corporation Limited (“Joy”) commented on the current situation in the online video industry as follows: “To companies dedicates to long videos, the most serious problem confronting them must be the bubbles in the copyright market. However, for most companies, the biggest problem is that they are over-relying on the upstream conditions (copyright holders and bandwidth) while their profit from advertising is not sufficient to support their operations. Therefore, we think the key problem to the industry is how to alleviate the burdens and make profits. A real high-quality TV series requires an excellent shooting team, a well-written drama and sophisticated production and thus it is reasonable to be sold at tens of millions of yuan. But the high price should not be applied to all TV series. And it’s also wrong for some video websites to raise the royalty in bad faith, hoping that they would survive over the others since their money bags are fuller. We once dealt with a TV series which was priced at 200,000 yuan per episode. However, a video website offered voluntarily to raise the price to 250,000 yuan per episode. We have analyzed the current situation with the upstream dealers, and all parties agreed that after years of development, it is unhealthy for the industry to still take higher royalties as a major competitive measure. If the profits cannot meet the cost, the royalty must be unrealistically high.”

 

Faced with the continuously increasing royalty fees, although they are constantly complaining and worrying, the few surviving video websites have no other choice but to spend vast sums of money to secure their market share. “Rational, healthy and orderly development is the key. It asks for joint effort to explore the market and make it a bigger cake. At present, the advertising market, the premium market and the 3G mobile phone market are all expanding. Their futures are bright,” Mr. Han thought high of the vista of the online video industry as well, but there are practical problems which cannot be ignored. The high royalty fees have driven the websites to “explore other paths.”

 

 

According to the statistics, China produces about 500 TV series each year, altogether 10,000 hours, but only 300 of them can be broadcasted by the TV stations, less than 200 by satellite TV stations, and hit series are even fewer. This may also contribute to the high royalties. Confronted by the brutal reality, Youku, Inc., iQIYI, Tencent, Joy and other online companies all shifted their direction and began to produce their own dramas in order to “discover a new continent.”

 

iQIYI.com released its “Produced by iQIYI” strategy in June 2011, aiming at making a great move in producing its own online dramas and programs. It planned to launch four variety shows, one TV series and one movie in 2011. What is worth special note is that iQIYI’s ambition is not limited simply to making its own online video contents, but also to seek deeper cooperation with the TV stations. So far, iQIYI has put on its website two self-produced variety shows, Terrifying! Health Alert and Has Love Gone, jointly produced with professional companies with tens of millions yuan. The two shows are said to have lived up to the standards of regular TV shows, and iQIYI is trying to pass them to TV stations in an opposite direction. In addition, iQIYI has also been considering referring to the frame and mechanism of TV stations and some elite producing companies to build its own production team and director team for variety shows.

 

Youku.com moved even quicker. Its original online dramas Old Boys, Miss Puff and The Office have already grabbed it a big market share. The chief playwright and director of Miss Puff Pi San told China IP that he is optimistic about online broadcasting. “The network media has become an important communication channel after the economic crises. The features of network communication are also favorable for implantation advertisement and precise market monitoring and analysis,” said Mr. Pi. Before Miss Puff was broadcasted, Youku had already recouped the producing costs of the first 26 episodes through implantation advertisements.

 

Compared with iQIYI and Youku, Tencent is more direct and generous. It targeted the upstream industry of copyrighted content and bought 4.6% equity of Huayi Bros. Media Group with 450 million yuan, thus formally marching into the film industry.

 

Joy.cn was the first to make its own dramas in the online video industry. It launched Joke (joke.you.joy.cn), a webpage focusing on original contents as early as 2005. Its first self-made micro film, Three Secret Rooms, was warmly welcomed be netizens. In 2007 and 2008, its first movie The Longest Night in Shanghai and second movie Deadly Delicious were released respectively. In 2010, Joy.cn kicked off the world’s first “interactive cinema.” Moreover, to relieve the pressure, Joy.cn also took other approaches. For example, it adopted a diversified profit model of “advertisement + paid video on demand system + copyright distribution + 3G mobile phone service.” Furthermore, it also managed to get the strategic investment from Jiangsu Satellite TV Channel (“JSTV”), and thus possesses the priority in choosing JSTV’s contents and has hosted many activities with JSTV. Joy.cn and was also the first to invest in the handset video market. It has the most handset users at present. Joy.cn used to invest about 50 million yuan in original contents production each year. It exclusively has also launched the Hollywood channel on its paid video on demand webpage.

 

Reviewing the video websites in China, on the one hand, there are perpendicular websites which have years of cultivation of User Generated Content resources such as Youku.com, Toudou.com and 56.com. On the other hand, there are up-and-coming new websites backed up by Internet leading companies such as iQIYI.com, tv.sohu.com and v.qq.com. When the competition of capital, content, and user number has spread out and around, the competition of self-made videos has just begun. Li Hao, the Vice President of 56.com thought that it has already become a mainstream trend for video websites to shoot videos of their own, and the future of the those self-made videos will be prosperous. But he also commented frankly that the websites themselves are not good at film production and operation, so the key to self-made videos’ maturity is not simply cooperation with film and television companies or employing stars as actors. It is also hard to judge whether the high-cost and high-quality self-made videos will succeed in the short term.