Online Video in China: All Cash, No Biz

China’s online video startups might have been the hot venture trend over the past year — see Jackson’s wistful note about making a career change — but are they making any money yet? Not so much, and it won’t likely happen for a while for distribution companies, according to analysts like CCID Consulting. CCID put out a report today condemning many Chinese online video websites for “burning money” and relying on “immature profit models.”

The report contends,

Under the dual pressures of widely recognized lack of profit models for online video and high operating cost, it is virtually building castles in the air if websites want to maintain their normal operations through operating revenues.

CCID says the market is now relying on second and third rounds of venture investment to differentiate the startups that can create strong business models from those with just unmonetized users.

In the past several months YouKu.com, UUSee.com, and PPStream raised series B rounds. ChinaCache also recently raised a second round for its CDN service. And in April Tudou.com raised a third round of venture capital. In total, according to CCID, China’s online video industry has received a total of $120 million of venture investment since 2004.

CCID sees advertising as a possible future for online video sites, calling it a “magic weapon” for “funding difficulties.” But also points out that advertisers are still taking a wait and see approach. Pacific Epoch’s analyst Sage Brennan says the ad market is still very immature China, and tells us “25 million daily clips is far more advertising inventory than any Chinese company can sell, with any reliability… especially with their massive growth rates.”

Brennan writes his own concerns about the online video market in an article he penned recently for MarketWatch. He points out that while the standard online video business is based on intellectual property, this business model is “turned on its head,” in China, by the complete lack of respect for intellectual property rights.

With so much competition in China’s illegal video trade, and so little money at stake in online video in the short term, there really isn’t much point in sitting close to the fire. There are plenty of other ways to make — or lose — money on China’s Internet.

Brennan points to a few startups that are trying to build user bases with some type of legal video content, like Mogo.tv, Mofile.com, Toodou.com, yoqoo.com and 56.com. He writes, “these new revenue strategies are very brave or very foolhardy; either way, I hope they succeed.”

While venture capitalists have been working on weeding out the Chinese online video startups that have money-making potential — and adding more investments to those that do — the revenues are still far from sight. Reuters wrote recently that revenues from online video in China totaled about 500 million yuan, or $64.7 million, in 2006. That’s tiny, especially considering the amount of investment over the past 3 years.

While Reuters quotes estimates of revenues rising to 3.4 billion yuan by 2010, the article says that some are even claiming that venture capitalists are pulling back on the China’s online video industry. It’s more likely they are just getting smarter. There’s still a long time before the services will make much money.

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