VentureBeat

[Editor's Note: Numerous local entrepreneurs and investors were quick to point out the problems with measuring internet traffic in China, we discovered during a VentureBeat trip to the country in May. To help explain the issues, we asked Victor Koo (pictured), the founder of leading online vide-sharing site Youku, to contribute his thoughts in the column below. See this recent guest column by the folks at Web2Asia for more details on the Chinese internet market.]

China now boasts the largest Internet market in the world, with over 250 million users. The industry has seen impressive growth across 10 years, and is in many respects as advanced as in any other country. But when it comes to Internet measurement standards, China is arguably stuck in the Dark Ages.

Just one indicator of the gravity of this problem is the fact that some industry pundits, advertising clients and venture capitalists still make decisions based on Alexa statistics. It’s an act of desperation: There just aren’t enough third-party traffic ranking alternatives in China. They rely on Alexa in full knowledge that there’s literally an industry here that thrives on gaming Alexa rankings. Do a search on Baidu or Google in Chinese and you can easily find a long list of such companies, all promising to raise your rankings to Top 100 or Top 500 for a reasonable price. One simply cannot rely on Alexa to get realistic website measurement or comparison in China.

This lack of transparency isn’t because there aren’t companies competing in Internet measurement in China. International companies such as Nielsen/Netratings have offered site census measurement for websites that can afford their services. But they can’t very well publish industry rankings to date, because not everyone in the Internet industry participates. Netratings conducted a site census on my company, Youku, last December, for example, but our competitors in the online video space have either not used their services or have not published their results. That makes it difficult to benchmark across the industry.

Besides site census, large-scale panel-based industry surveys are probably the best alternative. However, existing surveys by Shanghai-based iResearch—one of the leading Internet research companies in China—or by the U.S.-based firm comScore don’t measure traffic from Internet cafes, even though they are a significant part of Internet access in China: some 30 to 40 percent of users routinely access the Web via Internet cafés. On the bright side, I understand that iResearch has been testing their Internet cafe sample recently to provide a more complete picture, and the iResearch sample is already over 100,000 and growing. The Internet Society of China/Data Center of the Chinese Internet is another large sample-based study conducted regularly, so you do see organizations trying to improve the metrics situation in China.

Of course, a lack of understanding of what are the most important measures also plagues the industry. As more and more websites use Ajax technology and more new applications such as online video become increasingly mainstream in the Chinese market, the relevance of measures such as page views have become outdated. Leading Chinese research organizations such as iResearch are highlighting user time spent and unique visitors as the better benchmarks, but it takes a while for the media and advertising community to catch up to this thinking.

This lack of consensus both among publishers and media buyers has created a situation that’s favorable to the old picture-and-text portals who have dominated the Chinese Internet scene since its early days, namely portals Sina and my alma mater, Sohu. Lacking reliable cross-industry traffic data, media buyers tend to reflexively buy on the big, name brand portals that everyone knows, or on the handful of larger vertical portals focused on industries like automotive, real estate, and IT. The way that advertising is sold on the portals and on most of the verticals is still very Dark Ages: on “cost per time” basis, rather than on CPM. The shift away from it has been very slow.

There’s hope, though, that the Internet video industry will help to overcome that inertia and speed things up. We’re working with Internet Society of China on measurement standards, and starting to work with China Advertising Association to establish advertising standards.

Unlike text-and-picture sites, which have to fight one another for the small slice of pie that brands allocate to online advertising, Internet video sites are positioned to begin tapping into the far larger broadcast budgets. But before that can really start happening, media planners and buyers need reliable, transparent data from trustworthy third-party metrics providers gathered in a methodologically sound manner. The online video industry needs to offer advertisers and agencies standards — like ad units that don’t vary wildly from site to site — to enable scalability in video media buying. The two market leaders in China have between them an 80% market share already, so the market’s no longer fragmented, but standards are still missing. Meanwhile, the feedback we’ve gotten from media agencies and advertisers is good so far: They’re eager to move beyond the Dark-Age “cost per time” basis that saps them of their ability to really assess effectiveness. It’s up to us to work together to create an atmosphere of comfort and trust in video advertising. It’s in everyone’s interest.

The third-largest video site in China, 56.com, has been offline for nearly a month due to what most observers believe is government censorship. But that’s not stopping rivals from raising more funding.

Youku, approximately tied with Tudou as the largest video site in the country, has just closed a $30 million round led by private equity firm Maverick Capital, with participation from existing venture and private equity investors.

A much smaller rival, called ku6.com, has also raised $30 million from undisclosed investors, according to Pacific Epoch.

Neither Youku (homepage screenshot, above) and ku6.com appear to be at serious risk of being shut down due to censorship. The Chinese government introduced a new regulation last winter that required all online video sites to receive a license to legally operate that requires they be at least half-owned by a government entity.

Ku6 and many other smaller online video sites have received approval but Youku, Tudou and 56.com haven’t.

Youku has close connections to powerful media companies and investors in China. Besides an hour’s worth of downtime a month ago, it hasn’t had any issues, and most expect it to stay on the right side of local laws. Likewise, Tudou may be safe, according to one report, because it voluntarily went offline to clean objectionable content for a day in March, after being approached by government censors. Meanwhile, 56.com is still offline — some rumors of its shut-down included that it was showing videos of the recent Chinese earthquake that the government didn’t want to be public and that it was too slow to respond to government take-down requests.

Facebook, meanwhile, experienced unexplained downtime in China yesterday.

Ku6.com (homepage screenshot, below) received a $10 million from investors including Chinese internet conglomerate Baidu, Draper Fisher Jurvetson and DT Capital Partners in May of 2007. The company also raised another round sometime at the end of last year, separate from this latest round, according to Pacific Epoch.

Youku has raised a total of $50 million, including $10 million in debt, prior to this latest round, bringing the total raised to $80 million — near what Tudou has also raised. All existing investors in Youku participated in the round — showing the level of confidence everyone seems to be feeling despite the 56.com shutdown — and including Brookside Capital, Sutter Hill Ventures, Farallon Capital, and Chengwei Ventures.

In another sign suggesting Youku will stay live, it has announced content distribution deals with more than 100 traditional media organization including Shanghai TV, Beijing TV, Jiangsu TV, China Film Group, Huayi Music, Universal Music, EMI Music, and others. The company already syndicates regional Chinese television programs. As the Chinese government already regulates traditional media, these moves can only make the site look more legitimate to censors.

Youku, like Tudou, claims to be the largest site in the country. Citing third party reports from Chinese web measurement services like iResearch, Baidu user index and Data Center of China’s Internet, and others, Youku has says it is getting more than 100 million unique visitors per month with each user spends about 300 minutes per month on the site — although many in China questions the validity of third party data tracking in the country.

Also, operating a video site is expensive, anywhere. We’ve previously heard that Youku and Tudou are spending more than one million dollars per month on video infrastructure costs, so this funding should be enough to last them for more than a year as they continue to figure out sustaining business models. Youku’s funding today will also be used to build out its sales and marketing team, to help it start making more money, the company says.

With censorship out of the way, maybe, for most Chinese video sites, the twin issues of web traffic measurement and online video monetization are the monsters left for these companies to slay. Both are still large and unresolved problems in the Chinese internet world.

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 »

Every time we hear from one of the numerous Chinese video sites, they compare themselves to YouTube in its early days. But a closer look at the data suggests the video phenom in China just isn’t comparable.

For example, Youku reports today that the number videos viewed daily on its site has reached the levels YouTube enjoyed in Oct. 2006 when it was acquired by Google. This follows a similar statement by another Chinese competitor 56.com.

Youku says it has 100 million daily views, citing Nielsen/Netrating, which is indeed the level of views that YouTube had back in the day. That’s a whopping 30 million more views per day in November, when we first wrote about the company. However, Youku has far fewer unique visitors than YouTube did back in 2006, according to Comscore’s global data. And while no slouch, Youku doesn’t appear to be growing in the same upward right manner YouTube did, almost without exception — and continues to grow today. Unless Comscore’s data is dreadfully wrong, which is a possibility. However, Youku also has several competitors who say they are growing just as quickly. For example, Tudou and 56.com are just as large, if not larger, in terms of traffic.

Youku has raised US $40 million in three rounds of of funding from Brookside Capital, an affiliate of Bain Capital, Sutter Hill Ventures, Farallon Capital and Chengwei Ventures.

Aside from the question about Comscore’s reliability, there’s a story brewing about the statistics game that is going on in China right now, at least according to what we’re hearing. We’ll try to follow up shortly.

Updated

While Silicon Valley takes a breather this Thanksgiving weekend from a hectic year of deal-making, the action continues over in China.

1) Well-connected China video site gets $25 million more
2) More rumors of Facebook purchases in China
3) Qunar, a Chinese travel search engine, raises $10 million

Well-connected China video site gets $25 million more – Youku.com is a thriving Chinese YouTube-style video sharing site, and has just raised another round of funding, according to Chinese news organization Sohu. It is one of the larger Chinese video sites, with more than 70 million video plays a day according to Pacific Epoch. Youku also has a lot of big-time connections. Victor Koo, the chief executive of Youku, used to be the president of Sohu, and the two companies have a business relationship. Farallon Capital, the hedge fund, led an initial round of $3 million in March 2006. Bain Capital venture subsidiary Brookside Capital Partners led this latest round, with other investors including Chengwei Ventures and Sutter Hill Ventures. We haven’t gotten any comment from Farallon or Sutter Hill to learn more about the company, although well-known Sutter Hill partner Len Baker is on Youku’s board.

More Facebook-China rumors – Either Facebook is trying to buy its way into the Chinese social networking market or a lot of people in China wish it were. We reported on a rumor a couple of weeks ago that Facebook was trying to buy Zhanzuo, a Chinese Facebook-style social network that is backed by Sequoia.

The same — or at least very similar — rumor came around again this week. Facebook adamantly denied anything of the sort. Now, according to Interfax China, Facebook is trying to buy student-focused search engine Tianwang. We’re waiting to hear back from Facebook about this one.

Qunar, a Chinese travel search engine, raises $10 million — The round was led by Lehman Brothers Private Equity — yet another very large financial organization jumping into early-stage Chinese companies. Return investors include GSR Ventures and the Mayfield Fund. Alarm:Clock has more.