Lost in translation: Streaming in China Posted Sep 6, 2016

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Lost in translation: Streaming in China
Posted Sep 6, 2016 by Yoel Zanger

The rapid growth of streaming is taking the globe by storm, but no country seems to have the market potential for OTT video streaming quite like China. While the United States OTT market is beginning to show signs of saturation, it is not a surprise that more than 720 million Chinese internet users seem like the next big opportunity.

The reality, however, is less than perfect.

Controlling the free world of streaming

Prior to 2014, it was like the “Wild East” in China, with little regulation and rampant piracy. This radically changed following a SARFT regulation in 2014; since then, the OTT business in China consolidated and became highly regulated by the government. Indeed, only seven companies were granted the license to distribute streaming video.

The majority of broadcasted content is controlled by China Central Television (CCTV), which owns the internet-based China Network Television (CNTV) and its subsidiary Future TV. The additional OTT players include CIBN (established by China Radio International), Best TV (a subsidiary of Shanghai Media Group), Wasu Digital TV Media Group (Alibaba partners), Southern TV, CETV and Twitch-like live streaming platform Panda TV. With Tencent (the country’s biggest online gaming and social media company) distributing OTT content under a CCTV license, one can easily understand that gaining such permission is not an easy task for newcomers.

Additionally, U.S. content is very popular in China, but also heavily regulated. Tencent acquired rights to distribute NBA games, as well as some HBO and Time Warner titles. Other examples include online streaming company Sohu, which streams Netflix’s House of Cards, and web services company Baidu’s online video unit, iQIYI, which carries Fox’s theatrical releases. But online content providers have to put emphasis on homegrown content, as well, because, according to Chinese regulations, broadcasters and streaming services can’t dedicate more than 30 percent of their programming to foreign content. That is likely the reason Netflix is not rushing to go big in China.

China has its own way

Chinese viewers are accustomed to local alternatives of the most popular online global giants, including Baidu for Google, Alibaba’s Youku for YouTube, Renren for Facebook, Tencent WeChat for WhatsApp and Weibo for Twitter, to name a few. For a long time, China has been mastering the art of creating substitutes of Western solutions in order to feed the digital needs of the internet-hungry population.

Government censorship dictates the rules that foreign companies unsurprisingly find difficult to abide. Unlike YouTube, almost half of the content on Youku includes full-length episodes, cartoons, movies and TV shows that have been uploaded by license-holding partners, such as film and TV production companies in China. On top of sourcing original and licensed content, Youku is investing in high-end user-generated content and programming created by semi-pros, targeting audiences that turn to online platforms for entertainment.

Chinese live streaming has an additional aspect that U.S.-based networks haven’t been able to crack so far: monetization.
To enforce copyright infringement and censorship rules for inappropriate or offensive content, Chinese internet companies allow the government to scan their video libraries. This is something that YouTube, the online video king in most parts of the world, will not allow. And yet Youku and iQIYI, the most popular online video services in Mainland China, reach tens of millions of unique users on their apps for TVs, and hundreds of millions on mobile devices.

Live stream going mainstream

Live streaming is a huge deal in China. Its skyrocketing popularity can be attributed to the fact that the young mobile users are hungry for more edgy content compared to what is made available on SVOD platforms that are constantly filtered by the government.

Live streamers are eager to build an audience, and many of them try to do this through crazy and provocative stunts. Because these feeds are more challenging to control, leading Chinese live streaming platforms caught the attention of regulators, who demanded these companies hire teams of censors to purge inappropriate videos from their platforms. But the Chinese live streaming phenomenon has an additional aspect that U.S.-based networks like Facebook, Twitter and Snapchat haven’t been able to crack so far: monetization.

Chinese live streaming platforms like YY or Ingkee offer publishers, even the non-celebrities, money for their streams. The viewers can send the streamers virtual “gifts” when they see something they like, while the creators can then trade the value of those “gifts” for actual cash. For instance, Huajiao streamers’ income can average $3,000 to $5,000 a month by broadcasting 3-4 hours a day. It is no wonder a recent report from Tencent showed 43 percent of the live streamers are in this space for the money and not to gain exposure.

The 4K paradox

What is perhaps most surprising is the adoption of UHD 4K TV sets and content in China, especially when compared to the United States. Some manufacturers we’ve met with have stated that close to 40 percent of their shipments in Mainland China were UHD TV sets. This aligns with the IHS TV Sets Market Tracker that reported two-thirds of big screen TV sets sold in China were UHD sets, compared with a significantly lower number in North America.

China is shaping up to be the land of opportunities when it comes to streaming business.
Based on these findings, one would assume high penetration rates of 4K content and existence of broadband infrastructure to deliver the high bit rates. However, the internet connection is unstable there. Viewers can experience great connectivity, and a few minutes later, have none at all. To overcome this challenge, OTT providers in China limit their content offering to 4 Mbps — and even less for mobile.

Content providers seem to be well aware of the fluctuating network: During peak hours they proactively limit the video resolution to lower quality SD. UHD requires at least 15 Mbps, which means the network and infrastructure is failing to support those 4K TVs. Indeed a paradox.

Virtual reality is perhaps a bigger deal in China than anywhere else

There has been a lot of hype in the media on Chinese investments in VR, with predictions for the local market to reach $8.5 billion in the next four years. It’s expected that companies from all over the world will experience the “China VR rush,” and it’s beginning to happen already. Taiwan-based HTC is attempting to establish a $10 billion Virtual Reality Venture Capital Alliance, and plans to open 10,000 VR experience stores across the mainland. Disney-backed Jaunt is launching a VR content company called Jaunt China by partnering with Shanghai Media Group and China Media Capital. But as of today, high-quality and immersive experiences of VR streaming will be difficult to achieve because of bandwidth issues that cause buffering and fluctuating image quality.

That said, most everywhere in China recently, investors and vendors expect to see the two magical letters of “VR” on most presentations or documents. If anyone wants to raise capital now in China, having these two letters in your deck substantially improves chances of getting Chinese backing.

Upcoming challenges

One of the current challenges OTT companies in China are facing is the ability to deploy true UHD content. With subscription fees of 30RMB/$4.50 per month (versus $8 per month for a basic plan on Netflix), offering crisp 4K resolution to their consumers will generate additional revenue via premium subscriptions, as well as attract additional viewers from the cable and satellite base.

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The majority of the costs stem from original content creation and licensing, so there is much pressure to improve the bottom line by reducing companies’ CDN (Content Delivery Network) and server-related expenses. While the online video business flourishes, so do vendors’ costs of distributing the content. For example, Baidu-owed iQIYI has been operating at a loss for the past few years, while its bandwidth and marketing expenses increased by 80 percent in 2015.

To find more cost-effective solutions, many content providers turn to Peer-to-Peer (P2P) technologies. By utilizing available storage space on users’ set-top-boxes, Smart TVs and laptops, those companies can significantly reduce their delivery and storage-related expenses. This method is widely adopted in China, while (for obvious reasons) it is less popular outside the country.

Although complex, China is shaping up to be the land of opportunities when it comes to streaming business. The road to success is full of obstacles dictated by the local government, its unique way of doing business and consumer culture. It will be fascinating to see how both domestic and foreign companies will capitalize on this tremendous market opportunity.

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