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On June 3rd, the third-largest Chinese video site, 56.com went offline. The official reason: Technical problems. But widespread reports concluded the cause was governmental censorship. Now, the site, whose name sounds like the words “I’m happy” in Chinese, is back online.

56.com has received funding from a range of Western investors, including Silicon Valley venture firms Sequoia Capital, Disney’s Steamboat Ventures and Intel Capital, along with private equity firms

The company had reportedly failed to heed prior warnings about content from the Chinese government — and was punished as a result. A Sequoia partner in China representing 56.com had at one point met with government officials to try to get the site back up but got a chilly reception, according to a rumor heard by China blogger Kaiser Kuo.

56.com’s larger rivals, Tudou and Youku, have already worked out relationships with the government that have kept their sites up for the most part; Youku, notably, received official governmental approval to operate in China, earlier this week.

A specific reason to think 56.com was censored: At one point, a source in China (who I most certainly won’t mention anything more specific about) told me that 56.com had not been adequately censoring videos of the terrible May earthquake in the country. Indeed, a Washington Post article this week says Chinese journalists are still being arrested for covering one of the main causes of the high earthquake death toll — shoddily built elementary schools, built by corrupt contractors who cut corners. However, Western media was covering that issue in May, and from China, and the Chinese government has been publicly holding local officials accountable who were involved in the school construction.

We may never know the real reason why 56.com went down. Maybe it was just a technology problem. The company itself has stayed completely silent from June 4th on.

In any case, it now remains to be seen if the site can regain its users. Now, at least they have a fighting chance.

We’ve been covering the ongoing downtime experienced by third-place Chinese online video site 56.com, a company that has received significant backing from Silicon Valley investors. While the site claims technical problems are causing the downtime, the consensus is that the Chinese government has chosen to censor the site entirely off the web, at least for now.

More rumors are still coming out, courtesy of journalist turned Ogilvy China digital media strategist Kaiser Kuo, who has been breaking news on the story since 56.com first went down on June 3rd.

At least one Sequoia partner has approached Chinese government regulators to try to negotiate for the company to come back online, a source tells him. Larger rival Chinese video site Tudou has already had to do the same thing, I’ve also heard — and been successful. However, Kuo’s source says that the Sequoia effort was met with “a chilly ‘Why should we?’” as regulators are accusing 56.com of failing to act quickly enough to remove content the government deemed inappropriate.

What content, in particular? A rumor I’d heard was that videos of the Chinese earthquake were getting out on 56.com, that the government didn’t want published. But from Kuo’s report, the issues sound deeper than that.

Tudou, the source says, curried favor by taking its own site offline for 24 hours back in March, a move that subsequently helped convince Chinese authorities to let the site stay live. 56.com hasn’t done such a move, and now it is apparently being made a permanent example of. In Kuo’s words:

“Killing the chicken to scare the monkey” is the Chinese idiom being bandied about, though given 56’s competitive position prior to June 3,  it’s more like “killing a monkey to scare the other monkeys.”

Another of Kuo’s sources says the site could still be allowed to come online, but adds that the three-plus weeks of downtime may be enough to put an end to the company. I’ve previously speculated on the latter possibility, based on the fact that the company hasn’t raised a large late-stage round, while Tudou and the other rival, Youku, have. Kuo hears the company has $10 million left in the bank — I’d heard that the company is paying between $1 million and $1.5 million in monthly site costs, so this is less than a year’s worth of run room.

Other sources have recently told me that 56.com may be spending less than the $1 million per month to run the site that I’d previously heard, because it had developed better technology than its competitors (note: I’ve heard at one point or another that each company has the best technology). This CDN network, plus assets like its content delivery network and widget empire — and reams of video content — could mean investors would look for a quick fire sale.

Still none of these companies are profitable. The company and its investors are meeting now to determine the path forward, presumably while they continue to try to get the ban lifted.

We may never know the real reason why 56.com has been shut down. But if the cause is censorship, this is a tragedy for anyone who believes in the democratic system.

But what’s more, Internet companies behave like a wild bunch of monkeys anywhere in the world. To be themselves, they need to run free, not be chained down. If this is really censorship at work, it sends a threatening message to many entrepreneurs in China, who will take less risks for fear of the same reprisal. Ultimately, that will be all of China’s loss.

56.com, the third largest online video-sharing site in China, has been offline since June 3rd. The company says the cause is “technical” problems, via the error message pictured above, but there are two other possible reasons.

The first is that the Chinese government simply shut it down to censor content on the site. That possibility has been covered by a number of prominent China bloggers, this publication and now a number of Western media outlets, and has led to speculation that 56.com’s mysterious downtime implies new and greater risks for any video site, including market leaders Youku and Tudou.

If nothing else, the site being down for so long is perhaps fatal, and a blow to a lot of big names in technology investing that are looking for hit investments in China, and have put money into 56.com. More on that, below.

Fueling general speculation about censorship shutdowns, a new set of government regulations were implemented in February that require any online video companies to get a license certifying that a government-controlled entity has at least a 50 percent stake in it. While none of these three sites have received licenses to officially operate, smaller competitors have.

But even if the government did shut down the site, the move may not be a concern for neither rivals nor rival investors. The most recent rumor I’ve heard going around in China is that 56.com wasn’t adequately censoring videos about the recent, devastating earthquake in China’s Sichuan province from the site.

Both Youku and Tudou have assured me that they’re very careful about following government regulations, saying that because they are the largest sites in China, they face the most scrutiny from the government before getting approval. Both say they work closely with the government to ensure that content is compliant. The fact that Tudou only went down for a day or so in March, and that Youku went down for only an hour on June 4th (both incidents were also officially called technology problems) suggests that they are keeping the government satisfied.

In fact, even though all three sites are variably referred to as the “YouTube of China”, differences have emerged that may already have left 56.com worse off than its larger rivals, regardless of if or when it comes online. Differences that go beyond similarities, such as the presence of pirated content.

Tudou’s head start

Shanghai-based Tudou started first among the three, in the first half of 2005 — around when YouTube, France’s DailyMotion and a number of current worldwide market leaders also rose to prominence. In some sense, it is the most mature. It claims more than 100 million daily unique video views and more than 60 million visitors a month.

It has stopped focusing on growth, chief executive Gary Wang tells me, to focus on making money. “It comes to a point where there’s no point in ramping up traffic without coming up with something real on the revenue model,” as he puts it. But the company has yet to break even, he says — although he adds at the rate the company is going, it will at least break even relatively soon. The question is how it can increase its profit margins, as video hosting can cost millions per month for these larger sites.

In search of profit, it has spent the last nine months testing “everything you can think of” he says, learning about user behavior, as well as how to identify users based on sex, age, and other demographic information. Now, the company has put together months of data about users that it can show advertisers. But like any internet startup in China, Tudou still faces many issues. A big one is unreliable third party traffic data, as we’ve covered. Another is a morass of online ad formats developed individually by larger companies including Sohu, QQ and others, that make it difficult to impossible for large brands to buy across many sites, especially smaller independent sites. Both problems reflect the relatively early days of the internet in China and presumably will be sorted out as online traffic continues to grow.

Tudou says that it is no worse off than the many other large video sites trying to address monetization, and aside from questions around censorship and the current profitability of the Chinese online ad market, that seems to be true.

Youku’s rapid rise

Youku is approximately the same size as Tudou, at least according to most third party estimates I’ve heard (which are themselves questionable, remember). While Wang says Tudou is the biggest, Youku’s chief executive, Victor Koo, says that it’s Youku.

It is a younger company, as Koo actually left his job as president of Sohu, the online conglomerate, to start Youku around two years ago.

Koo’s connections could mean that he and his company have the relationships to counter both censors and ad-sales issues. Youku has distribution deals with television stations around the country. With millions of Chinese moving to work in booming urban areas, Youku has become another way for many to keep track of the news back home. Meanwhile, because these television stations are already self-censoring for the government, Youku doesn’t need to worry about repercussions for republishing their content.

A focus on syndicating professional content, along with its censorship efforts, are examples of what Koo says is his company’s effort to be a “socially responsible web site.”

On the money side, Sohu could also be a way for Youku to develop its advertising. The two companies became strategic partners last November, and Sohu’s existing relationships with advertisers could mean a faster path to more revenue for Youku.

Where does this leave 56.com?

While 56.com is said to be substantially smaller than its two rivals, it is also a the leading widget maker in the country, analogous to Slide and RockYou. As Chinese social networks start building platforms and giving third-party developers to their sites (like American rivals including Facebook and others have done), it would seem new opportunities await the company. But then again, social network application companies everywhere face the same question as video startups. These are questions that have led many investors to lose interest in either market segment anywhere in the world.

So, besides possible earthquake-related censorship, perhaps it is 56.com’s place at the intersection of video and social networking apps that could be behind its downtime. Could it be that 56.com has run out of money, or gotten close enough to running out of money that its investors have pulled the plug?

Read the rest of this entry »

It’s been more than a week, and top Chinese video site 56.com is still “down for maintenance” — This is the longest outage to happen to any of the top three Chinese video sites, all of which have received significant investment from international investors — 56.com’s include Sequoia Capital, Disney’s Steamboat Ventures, and we hear, Intel Capital. Chinese speakers, see 56.com’s message, above for the official explanation. The other two sites, Tudou.com and Youku.com, have also faced outages supposedly due to technology problems, but nothing like this. Earlier this year, the Chinese government introduced regulations that promise to force every video site to become at least 50 percent controlled by a government entity — so these shutdowns may actually be a form of enforcement. Read more on Digital Watch and China Web 2.0 Review.

United Airlines is adding recharger slots for iPods and iPhones — Now on select United planes, you’ll be able to plug your Apple device into a seat and watch what you have on it using a 15.4-inch television attached to the seat in front of you. Your device will recharge in the meantime. Looks like a rather boring and expensive airline is trying to be hip, in the face of competition from the likes of Virgin America and its geeked-out style. We commend the effort, and we’ll test it out once our skinflint business manager Jacob Mullins ups the travel budget a little.

EBay gets its own platform — Taking a page from social networks, stodgy e-commerce giant eBay is launching its own developer platform so third parties can integrate their own software directly into the site. The company has had a developer program since 2000, helping to create a mini-industry of companies with software for things like helping “power sellers” — people who sell a lot of stuff on eBay — organize and track large amounts of their inventory. This platform is both more boring and likely more lucrative than social networking platforms have so far proven to be, although I’ve also heard that eBay’s auction software is aging and not so easy to work with.

Adobe posts strong second quarter earnings — Revenue this past quarter was $886.9 million versus $745.6 million over the same period last year, and versus $890.4 million the first quarter of this year. More here.

Confirmed: Yahoo executive Jeff Weiner leaving for entrepreneurialism – He’s officially becoming an entrepreneur-in-residence for both Accel and Greylock Partners.

Intel. Solar panels. $50 million. Done. — The chip company is spinning off solar panel maker SpectraWatt and funding it with $50 million. It’s not the only storied old tech company to get in on solar technology today: IBM is also jumping in.

YouTube and The University of California, San Francisco (UCSF) launch brain health channel — I’m not sure if the average YouTube user knows what “neurodegenerative” means, but that may soon change. The Google-owned video site and medical school UCSF are collaboratively launching a YouTube “channel” featuring educational information about fighting dementia and incurable brain diseases. The channel was put together by friends of a former top marketer at Apple and Netscape, Mike Homer, who is battling a form of neurodegenerative illness called Creutzfeldt-Jakob disease. Those friends include top Valley names like investor Ron Conway, executive Bill Campbell, and YouTube founder Chad Hurley. Here’s a video interview with Conway, by reporter Kara Swisher, about the effort:

Youku.com, Tudou.com and 56.com may be the most popular video-sharing sites in China, but within the last few months, they’ve all suffered from downtime — due to what each of these venture-backed companies have said are technical problems.

There’s another angle, though. Online videos are a great medium for sharing things like porn or political dissent, two things the Chinese government sometimes censors.

The Chinese government appears to have shut down 56.com, starting yesterday. More from Ogilvy blogger Kaiser Kuo, who has been following the video-shutdown story for some time:

The shut down — the second to impact a top-tier video sharing site — was in discussion for a few weeks, the insider said, and the timing of the outage “probably has nothing to do with” the anniversary of the suppression of the student uprising of 19 years ago.

The official reason for the site going offline: Server malfunctions. The company, which also makes slideshows widgets similar to those of Slide or RockYou, has received $20 million in funding from Japanese firm Hikari Private Equity and Susquehanna International Group China.

[Update: Sequoia Capital and Disney's Steamboat Ventures have also invested in 56.com and Intel Capital may have as well. My source about those investors mentions the irony that Disney would invest in the company which, like its competitors, hosts large amounts of pirated content. Duncan Riley also emphasizes the piracy issue, in comments, below.]

This past winter, the Chinese government introduced new regulations that require any new video site to have a license showing that it is majority-owned by a government-controlled business. A grandfather clause in the regulations, as China Web 2.0 Review reported, appeared to have made these three sites exempt from that rule. It is my understanding, from talking to these companies, that not one has actually obtained any sort of operating license, in any case.

Notably, one of the others, Tudou.com, was apparently shut down for one day in March. The company has raised a total of $85 million from firms like IDG, Granite Global Ventures and General Catalyst and other foreign investors. It competes neck-and-neck with Youku.com. Both claim to have more than 100 million video views per day; while traffic measures in China are not always trustworthy, both are generally considered larger than 56.com. Like 56.com, Tudou said it went offline because it was moving servers — but other reports suggested censorship. From a post at the time by Kuo:

I’ll leave everyone to draw their own conclusions about what actually happened. There’s a story on Sohu.com about [the shut down] here, which makes reference to (unnamed, unsourced) reports about a document supposedly handed down from SARFT central to its Shanghai bureau, called “Shutdown Order Sanctioning Tudou’s Conduct in Violation of Regulations on Internet Audio-Video Services ” — my loose translation — which according to the Sohu story, order an indefinite shutdown pending rectification and reform for ineffective controls of pornographic content.”

Of course, there are real technical challenges to running any large video site. Even YouTube, the largest video site in the world, has at times gone offline.

Youku, the third video site, was also offline for a short time earlier today. Between the three, it appears to be the most clear-cut case of actual server problems, as Kuo also reports.

The company, like its peers, has raised a significant amount of money from foreign firms. Farallon Capital, the hedge fund, led an initial round of $3 million in March 2006. Bain Capital venture subsidiary Brookside Capital Partners led the company’s latest round, for $25 million last fall, with other investors including Sutter Hill Ventures and Chinese firm Chengwei Ventures.

For the conspiracy-sensitive, though, the timing of Youku going offline today — while 56.com is still offline and on the anniversary of Tianenmen Square — seems a bit much to be a coincidence.

There are two moving pieces here. On the one hand, the Chinese government is contemplating how to ease restrictions like free speech, or not — see my interview with Chinese blogger Isaac Mao or my coverage of Facebook in China for more on that. On the other hand, Chinese entrepreneurs and investors know that in many cases, the government will turn a blind eye to things it declares against the law. These Chinese video sites, it appears, are living on the bleeding edge of what’s permissible, emphasis on bleeding.