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The purpose of this blog is for my personal use. It serves as my personal diary as I investigate Chinese internet/gaming companies for investment purpose. If you have any comments or disagreement, please give me feedbacks.

Saturday, May 2, 2009

Sohu: full speed into Internet Video – part 2. Sohu sued 3 companies for piracy

1st part of this article can be found here:

http://chinese-net-gaming-stock.blogspot.com/2009/04/sohu-full-speed-into-internet-video.html


2 years ago, when the video sharing/video broadcasting war broke out in China, I thought this area had great potential. Advertisers love it. They could take market share away from TV advertising. In addition, this is a very costly venture. One would think the cash –rich portals will have the upper hand.


By early 2009, it is clear that portals are a non-actor in this fight, see the following survey result:

http://chinese-net-gaming-stock.blogspot.com/2009/02/chinas-video-and-music-web-site-survey.html


Sina could only get 3.2% market share and Sohu could only have 2.1% market share. Tencent does a little better with the help of its powerful internet messaging service. But overall, the portals are non-factor.


The reason the portals are doing so badly was because of piracy. China's video sharing and video broadcasting industry is dominated by all the pirated materials (TV and movies). While the new startups have no problems broadcasting those pirated materials, the portals can't.


But you may ask 「didn't the portals also have their own search engines and those search engines will help users find pirated materials?」 Yes, the search engine will find the pirated materials. But the difference is that the search engines only facilitate. They don't host the actual pirated materials.


I guess in China, there is a clear difference between the two.


Those video sharing startups were the darlings of the venture capitalists in 2008. Even though this is an expansive venture, they are flushed with money from the venture capitalists. But then the global financial crisis hits. Now those video sharing startups have three major problems:


First, there is a lot of bandwidth and hardware (server) cost to be in this business.


Second, because of the huge potential payoff, it was easy for these startups to get money from the venture capitalists. But now those funding dried up over night after the global economic crisis. But the cost are not going away.


Third, now these startups are forced to start making money before they are ready. But they find out that they can't make money. They have lots of traffics but they can't monetize them. The reason is because most of their traffics are generated from pirated materials, most companies are afraid to advertise with them. Why would any companies spend money and get negative coverage against them?


Now, those new startups are vulnerable. On the other hand, Sohu had just split its gaming unit and got tons of money. Video sharing/video broadcasting is an area of great future growth, its existing players are gasping for air and are running out for cash. Now is a perfect time for Sohu to go in for the kill. And this is exactly what Sohu is doing.


Sohu had been spending money buying broadcasting rights to Chinese movies and Chinese TV series. It spends money for broader bandwidths and more servers. It created a brand new video service called high definition TV channel. One can find that channel here: http://tv.sohu.com/hdtv/


Finally, Sohu starts suing. In the following article, Sohu sued three video sharing sites:

http://it.sohu.com/20090430/n263701826.shtml


The three video sharing sites Sohu sued are Xunlei, 56, and Ku6. They also stopped other video sharing sites from broadcast a particle TV series.


The following article talks about why Sohu is taking this action.

http://it.sohu.com/20090430/n263706783.shtml


One can find some quote by Sohu's CEO regards this:

http://tv.sohu.com/20090429/n263695144.shtml


He said that because it is very expensive venture. Sohu is not making money now in this area. But it is doing it for the future. This is an area with explosive growth. But it would only grow if piracy is stopped.


In another article, he also said the reason why he thinks right now is the right time for China to go against piracy. Before, all the film studios and TV stations are state owned. They don't care about making money. They love it that those video sharing site gets their product more viewers and more famous. But now, even if they are semi-state owned, their existence depends on how much money they make. Now, they start to demand money for their work. Now there are incentives for all the players to demand piracy to be stopped.


If one wants to investigate this more, Sohu's news portal created a special news area regards this topic:

http://tv.sohu.com/s2009/qcwq/


If one is curious about this new HDTV channel Sohu created, its web address is here:

http://tv.sohu.com/hdtv/


Just click on one of the show, it would then go to the web site dedicated to that TV show. Then just click on the episode number. The video quality is very very good. But it freezes very often. I am here in the US while Sohu's server is in China. I imaging that might have something to do with it.


Sohu is doing extremely well during this difficult time. I am extremely glad Sohu uses this opportunity to take over new and exciting industries. I am absolutely certain that this new industry will be extremely lucrative. However, there will be higher short term expenses.

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