Skip to main content

Victor Koo, CEO and founder of Yourku, poses for a portrait in the company's offices in Beijing, China on Tuesday, June 28, 2011. Youku Tudou has begun looking at partnerships with U.S. and European content makers, since co-produced content doesn’t count against the 30 per cent cap on foreign-produced content.Keith Bedford/Bloomberg

Youku Tudou Inc., the Chinese company that combines a YouTube-like online streaming service with corporate arms that make video games, movies and TV shows, believes it has built a hit-making machine unlike any other on earth.

And it may be right. Last year, in its inaugural run at moviemaking, its Heyi Pictures division co-produced three of China's top 10 domestic movies and captured 11 per cent of the national box-office take. On Wednesday, it laid out plans for a new year of films that will be spun out of a web comedy, a romance show, a comic book, a theatre play and a song – movies it says it will not shoot but will incubate into intellectual properties that span smartphones, computers, televisions and cinema screens.

"It's really an entertainment ecosystem," said Victor Koo, Youku Tudou's chairman and chief executive, in an interview with The Globe and Mail. It's "something we haven't seen our international or domestic counterparts do."

For China, it's something else, too. It's a way to use the Internet to make money in a piracy-laden country where people remain loath to spend for digital content – Youku's Netflix-like subscription service brought in just 18 per cent of what it spent on bandwidth in the latest quarter – but are spending in record numbers in theatres.

"Getting direct consumer revenue through movies or games or other culture products is something that we are very suitable for. That's an area of focus for the entire group," Mr. Koo said.

The size of China's online titans – Alibaba Group Holding Ltd. boasts a $224-billion market cap, while Youku Tudou is worth $3.3-billion – suggests a maturity that does not exist. In the past year alone, the country welcomed 31 million fresh Internet users and another 57 million people new to the mobile Internet. While the upstarts of the Western online world are now making money – think Facebook Inc. and Twitter Inc. – the same has not been true of some in China.

The business model for companies such as Youku Tudou, the biggest online video site in China with 500 million active monthly users, is fundamentally dissimilar from Western counterparts. Where Facebook and Google Inc., through YouTube, sell ads for content they get for free through user submissions, Youku and its competitors pay heavily to buy and create shows and movies. And unlike Netflix, they haven't had much luck getting people to pay for content. Advertising dollars aren't covering all costs, either (although the company says it is profitable in existing businesses, and is losing money because it is expanding so fast).

That's where the idea of incubating online ideas – that intellectual property – for life in the real world comes in.

Youku Tudou is not creating new content so much as manufacturing it, starting by scouring the viewing habits among the sea of people that click their way through its sites every day. The company looks at "what they view, what they look for, how they interact, how they upload, how they film different content. We have many years of experience, hundreds of millions of user datas to help us drive that knowledge," Mr. Koo said.

"So when the movie comes eventually, we have a much stronger brand name, much more targeted marketing distribution strategy – and it can impact the whole content production process."

Yet the moviemaking sophistication is set against a Chinese media landscape that has gotten far trickier. Driven by President Xi Jinping, a broad ideological tightening has seen universities ordered to ban textbooks with Western values, and artists ordered to the countryside in a move reminiscent of Mao's cultural campaigns. Movies have been ordered re-edited to omit cleavage, and online video sites forced to register their foreign content and limit it to 30 per cent of what they have available.

To compensate, Youku Tudou has begun looking at partnerships with U.S. and European content makers, since co-produced content doesn't count against the cap. But it may have to do more if it's to begin making money.

"Eventually every business needs profit," said Will Tao, an analyst with Beijing-based Internet consultancy iResearch. He believes merging "might be a better choice" for the company, and suggested it might make sense to join with a smartphone-maker such as Xiaomi Inc. or even Alibaba.

Some form of merger is an option Youku Tudou has considered as well.

"The field has always been getting smaller and smaller over time," said Mr. Koo. "It either happens through attrition or through consolidation. The market shapes itself."

Report an error

Editorial code of conduct

Tickers mentioned in this story