The Youku Gambit

In the Hutong

Is it mist, or is it fog? YOU decide

1402 hrs.

Youku’s public relations team are pumping out a release claiming bragging rights as the most popular video site in China, based on a survey by the Data Center of the Chinese Internet under the China Internet Society, a government-sanctioned trade group.

I question the impartiality of surveys that come out of trade groups singling out a paying member as a market leader, especially when those surveys just happen to use the success metrics advocated by the company in question. Given that iResearch, Baidu Index and Google Trends apparently confirm Youku’s position, why bother leading with the weaker statistic?

But let’s leave that aside for the moment, and grant that Youku may in fact be in the lead. What is more important is why, and what that means for Youku’s future.

Quick, get the popcorn – Youku is loading

Youku is particularly happy about that the statistics suggesting that people spend more time on Youku than on its competitors’ sites. There is a good reason for that, as Senior Analyst Elias Glenn at Pacific Epoch pointed out on Twitter today. Youku acknowledged in its release the importance of “professionally produced” long-form content (i.e. movies and TV shows) to the company’s performance.

What is unclear is whether some, most, or all of that long-form content is being show without prior permission of the copyright owners.

There are two possibilities.

Is that the Union Jack or the Jolly Roger?

First, that Youku has reached agreements with all the copyright holders of the content on its site, including 20th Century Fox, the distributors of the Cameron Diaz movie “What Happens in Vegas” that I was enjoying on Youku (sponsored by 51jobs) just a few minutes ago. Or Universal, who kindly allowed Youku to show me “Leatherheads” with George Clooney, and this year’s blockbuster, “Iron Man,” courtesy of the generous folks at Paramount.

If that is the case, they are to be commended, and I will happily join the line of people seeking stock when Youku goes public. Somehow, I don’t think that’s happened yet.

The second is that Youku has not reached those agreements with all of the copyright holders, that its vaunted filtering systems are failing to pick up the pirated videos (despite being able to filter politically objectionable content), and that Youku is building its spectacular user numbers based on its role as a pirate multiplex.

That is going to be a concern to both investors and advertisers.

While China may not enjoy a reputation as an ardent defender of intellectual property rights, the time where a company with Youku’s profile can openly operate as a copyright scofflaw are rapidly coming to an end. Baidu and others have learned that China’s intellectual property laws are slowly growing teeth, and Youku, laying claim to the mantle of the most popular site of its type, would be an ideal chew-toy.

There’s something happening here

As discussed in a post at the beginning of the month (“The online video Hail Mary”), it would be unwise to discount the collective wisdom of Victor Koo, his advisors, and his investors. These are not foolish people. They knew their license was in the bag, and they invested more money.

Similarly, I believe they know that a rights reckoning is coming, that at some point Youku will cross an invisible line in the sand and battalions of television copyright attorneys will descend from the sky, spewing paper death in the form of cease-and-desist letters, or worse.

There is a strategy afoot, one that could never work in the U.S., but can work in China because of the very restrictions the government has placed on conventional media.

I’m not sure what the strategy is, but here is my scenario:

The aforementioned regiment of airmobile copyright attorneys shows up at Youku, girded for battle. Victor Koo opts to parley. Koo suggests that the two sides are in a position to help each other. Content providers – especially the foreigners – need a way to provide access to their content to Chinese people that will help undercut DVD piracy. Youku needs content offered in a format that does not overtly threaten the broadcast powers-that-be.

Youku has the audiences, a decent relationship with regulators, and growing advertising revenue. For a cut of the revenues earned on their content, the copyright owners agree to hold off for a period of time on pressing any claims. Meanwhile, Koo and company engage in a vigorous four-way discussion involving Youku, regulators, advertisers, and content owners to evolve into the country’s leading online TV outlet.

Youku then cuts similar deals with the local broadcasters, very few of whom have had much success building their own online offerings, and would be just as happy letting Koo do all the work in return for a cut. After all, 50% of something beats 100% of a cost center.

This would never play in the U.S.

But here? Where legal music goes for $0.15 a track and where Batman can’t make it past the censors?

It might just work.