New Fears for China's YouTube Wannabes

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The financiers are keen to replicate the success of Chinese Net stars like Baidu BIDU, the Google-beating search engine that dominates the Chinese market and has had its stock price increase over 11-fold since its 2005 Nasdaq initial public offering, or Alibaba.com, the online marketplace for small and midsize businesses that raised $1.5 billion through its initial public offering in Hong Kong last November.

YouTube Not a Player in China

One reason investors have been so eager: the absence of the biggest player in the industry, YouTube. Chinese Internet users can gain access to sites from YouTube's U.S.-based servers, but those sometimes get blocked by the Chinese government. The Google (GOOG) subsidiary last fall launched services in Hong Kong and Taiwan but has nothing based in the mainland itself and is unlikely to in the near future (BusinessWeek, 12/6/07).

The Jan. 31 regulations make clear that the government expects China's YouTube wannabes to censor all video clips with anti-Beijing content. Reporters Without Borders, the international organization that lobbies in favor of journalists worldwide, on Jan. 4 condemned China's "unprecedented censorship measures." Adds RWB in a press statement: "Under the pretext of developing China's media industry, the authorities are stepping up their control of online content, especially in the runup to the Beijing Olympics."

However the entrepreneurs running the sites inside China contend that they have already been censoring their videos. They're now hoping that their willingness to follow Beijing's censorship rules will make it easier for them to find a way out of the latest regulatory quagmire.

Encouraging Statistics from Nielsen Online

Chinese Internet companies have experience coming up with creative ways around the country's quirky regulations. For instance, since the government requires Chinese ownership for companies that operate most Web sites inside China; and since many of the country's top VC-funded Internet companies are officially not Chinese, but rather are based overseas (in the U.S. or in tax havens like the British Virgin Islands); they have formed partnerships with local companies to provide them with all the content they need to operate the Web site.

Something similar might happen now, says Victor Koo, Youku's CEO. "If you look at the overall history of China's Internet development, the government has always had a pro-development stance," he says. Koo and others are hoping that history holds true this time as well. In the meantime, he says, he's focusing on building the business. Today, for instance, Youku announced that a survey by Nielsen Online, the Internet research arm of A.C. Nielsen, reporting that Youku shows 100 million videos a day—equal, Koo says, to the amount YouTube showed when it was acquired by Google. As for the licensing woes, Youku's legal team is on the case. "Our lawyers will let us know what to do," says Koo.

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