Why YouTube Is MIA in China

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Teams of Video Screeners

Youku has no trouble abiding by the government's rules prohibiting sexual or political content, says Koo. "Sex videos are easy to screen," he says. As for political content, "that's a little tougher," says Koo, adding that "we have algorithms that make everything related to politics stand out for us to identify."

Other Chinese YouTube wannabes insist that censorship is not a problem for them, either. Jay Chang is the chief financial officer of 56.com, a Beijing-based site backed by Silicon Valley venture capital firm (and YouTube investor) Sequoia Capital that is one of Youku's main rivals. (The numbers 5 and 6 in Chinese sound like the words "my entertainment," hence the name 56.com.) Operating a video-sharing site "is not any more sensitive [than other sites] as long as we adhere to the local regulations," he says. "Which we do." Like Youku and other sites, 56.com has teams of screeners who watch videos before they go live.

Even if YouTube didn't have to worry about censorship, Chang believes the company would be at a disadvantage operating on its own in China. The track record for U.S. Net companies in China is not great, with high-profile flops such as eBay's (EBAY) attempt to run a Chinese auction site or Yahoo's try to operate a local portal. "As we've seen, they have difficulties operating in this environment," says Chang. Local competitors such as auction site Taobao and portal Sina (SINA) have been able to capitalize on those problems to become market leaders. With video sharing, he says, "we believe we have a similar opportunity."

Slipping Through the Censorship Cracks

Of course, one big advantage YouTube would have if it were to brave the Chinese market would be its deep pockets. Operating a video-sharing service in China "is a very expensive business," says Gary Wang, founder and chief executive of Shanghai-based Tudou.com, a top Chinese player that in July raised $19 million in its latest VC fund-raising round from investors such as IDG China. With more than 60 million video views a day, the company's traffic has increased sevenfold this year and Tudou now has 3,500 servers, compared to just 500 in early 2007. That puts a lot of strain on a company that is still working out a way to pull in revenue from advertisers. "Delivering video is very challenging," he says.

As the popularity of sites like Tudou grows and the volume of videos soars, Chinese users may find that more videos manage to slip through the censorship cracks, at least temporarily. "There's more margin for videos to get around," says MacKinnon. "It's becoming easier and easier to download this stuff." Certainly, controversial videos on taboo subjects such as the banned Falun Gong religious movement or the Dalai Lama, the Tibetan spiritual leader, are unlikely ever to make their way online inside China, but videos on less obviously sensitive news events might last a day or two online before a government censor realizes that their topics should be off-limits. That gives people time to find and save videos before the YouTube wannabes zap them. "There's definitely an increasing awareness that when you see these [videos] on domestic sites, you need to save a copy elsewhere," says MacKinnon.

Einhorn is Asia regional editor in BusinessWeek's Hong Kong bureau .