1. Online Video in China: WeTube, Not YouTube?
6th Annual Chinese Internet Research Conference
Hong Kong University
June 14th 2008
Duncan Clark
Chairman
BDA China
www.bdaconnect.com

2. BDA: Telecom, Media & Technology (TMT)
Consulting & Research for Asia
• BDA provides strategic consulting and research to leading TMT firms and financial
institutions with a focus on emerging markets and new technologies in Asia.
• The first independent TMT consultancy in China, established 1994. Team of over
50 in Beijing.
• Active in India since 2004, office opened in 2006. Team of 10 in New Delhi.
• BDA also tracks emerging markets in South East Asia, especially Vietnam.
• BDA has dedicated analysts organized around three sector groups:
Telecommunications
Handsets/Devices Internet/New Media
Equipment & Services
www
• BDA provides three types of services:
– Strategy & market entry consulting projects
– Investment advisory services
– Ongoing research through retainer

3. BDA forecasts China will exceed 1 billion mobile subscriptions
and 0.5 billion Internet subscriptions by 2013
Mobile, Fixed, Internet and Broadband Subscribers 5-year
Million 2007 2012F
CAGR
1000
900 547 965 12%
800
700
210 490 18%
600
500
400 281 264 -1%
300
200 70 150 16%
100
0
2007 2008F 2009F 2010F 2011F 2012F
Mobile Internet PSTN Broadband
Note:
1) The mobile subscriber figure is the number of active SIM cards; BDA estimates that unique users represent around 70% of this number.
2) Internet users are defined as unique, individual users accessing the internet via wireline and/or wireless networks.
3) Broadband subscribers refers to broadband service accounts, mostly held by households or enterprises, rather than individuals.
Source: MII, CNNIC, BDA 3

4. Broadband has become the major access technology in China;
wireless access is also becoming a new growth driver
Internet Users By Different Types of Access
(Million) 59
Wireless
17
Broadband
43 64 91
163
17 Dedicated Line
7 31
27 29
20 27
Dial up
12 54 59
45 51
27 39
23
2001 2002 2003 2004 2005 2006 2007
• Broadband has become the major type of internet access technology for users in China,
taking over from dial-up.
• Falling prices for broadband access coupled with the growing popularity of value added
internet applications have been the key drivers of broadband adoption in China.
Note: 1) Broadband refers to xDSL and cable modem, including dedicated line from 2007. 2) Wireless including
handset and other technologies. Of the 55.8 million wireless access users, 50.4 million are using handset. 3)
Respondents gave multiple answers
Source: CNNIC

5. Chinese Internet users are increasingly hooked on broadband
applications such as online games, music and video
Survey of Most Frequently Used Internet Services
Email 86%
57%
Search Engine
65%
72%
News Reading
62%
74%
IM/Online Chat 43%
81%
Online Gaming
16% Dec-04
59% Dec-07
Listen/Download Music
8%
87%
Watch/Download 5%
Video 77%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: BDA, CNNIC 5

6. Inspired by several waves of IPOs, venture capital has played
a key role in stimulating innovation in China’s communications
sector
VC
Internet Businesses
MEDIA
Media TELECOM
Telecom

7. For tech companies, one of the biggest attractions of China is
its appeal to Venture Capital firms. China is now the biggest
recipient of Silicon Valley VC
7
Source: Joint Venture “Index of Silicon Valley 2007”

8. Shanghai and Beijing now receive more Silicon Valley VC than
any other foreign locales
8
Source: Joint Venture “Index of Silicon Valley 2007”

9. Rapidly growing broadband infrastructure, plentiful capital and
inspiration from Google’s acquisition of YouTube is driving
China’s MeToo’s…
• October 2006: USD 1.65 bn • Proliferation of Chinese YouTube
acquisition by Google look-alikes

10. Financings of Selected Online Video Sites: USD 245
million invested in 8 Sites alone
Financings of Selected Chinese Online Video Websites
Name Year Value (USD MM) Investors
2006 10 Sequoia/Steamboat Ventures/SIG
56.com 2007 20 HIKARI Private Equity/SIG/Adobe Systems Incorporated/
CID/Sequoia/Steamboat Ventures
2006 0.5 Ceyuan Venture
2006 6.5 Ceyuan Venture/Transcosmos
2007 10 Draper Fisher Jurvetson (DFJ)/DT Capital
2005 0.8 Softbank China
2006 5 Softbank China/Bluerun
2007 21 DFJ
2005 1 Ceyuan Venture
2007 10 Ceyuan Venture/Ignition
2005 0.8 IDG
2006 8.5 IDG/Granite Global Ventures (GGV)/JAFCO
2007 20 Capital Today/General Catalyst Partners (GCP)/KTB
2008 57 IDG/GGV/GCP
2005 10 Sequoia/SIG
2007 23.5 DFJ/Highland Capital/Steamboat Ventures/Sequoia/SIG
2006 3 Farallon Capital/Chengwei Ventures
2006 12 Sutter Hill Ventures/Farallon Capital/Chengwei Ventures
2007 25 Sutter Hill Ventures/Farallon Capital/Chengwei Ventures/ Brookside Capital
(an affiliate of Bain Capital)

11. Online video business models:
Video Sharing vs. Online TV
• Video Sharing
– Users upload and view video clips, which are predominantly (although not
exclusively) ‘home-made’ or User Generated Content (UGC), through an online
platform.
– These video sharing sites use streaming technology (users are not required to
download an application before viewing videos) and with their short-format videos
most closely mimic YouTube.
• Online TV
– These sites typically operate using Peer To Peer (“P2P”) technology (users are
required to download a small application to their computer before viewing or sharing
files) and feature mainly TV programs from terrestrial broadcasters. These programs
include both live TV broadcasts carried online or video on demand (previously
broadcast TV programs). Examples include PPLive, PPStream and UUsee.
– While Chinese content is the dominant category featured by online TV websites,
these sites also carry a significant amount of overseas programs, including popular
shows from South Korea or hit TV shows from the US and UK. TV programs or films
often features Chinese subtitles, broadening the appeal to the mass market. Sports
events are also featured. The NBA has cooperated with UUSee for example in
offering live games.

12. China’s online video industry has quickly grown to become a
mass medium
Company Established Registered Daily Video Daily Video Online Advertising
Names Dates Users Views Uploads Revenues
Tudou April, 2005 17 million 77 million 40,000 per day N/A
Youku Dec, 2006 N/A 100 million N/A N/A
100,000 RMB 1 million
56.com April, 2005 25 Million 100 million
per day per month
• China’s online video market has grown within just two years from a niche user base of early
enthusiasts into a mass-medium viewed by tens of millions of Internet users every day.
• Tudou, Youku and 56.com are leading Chinese online video sharing sites.
• Online video sharing sites are almost exclusively dependent on online advertising, but for most
of them revenue is very limited.
• Meanwhile the bandwidth costs are high for providing video services. Therefore capital support
is critical to the online video companies.
Source: BDA analysis, company information Note: data as of year-end 2007

13. December 2007: The Empire Strikes Back
• Dec 27th 2007: MII and SARFT issue a joint statement that effective end
January 2008 all online video/audio operators be majority state-owned.
• The regulation pertains to the production, editing, and aggregation of audio
and video content and dissemination to consumers over both the Internet and
mobile networks.
• In addition to majority state-ownership, sites must carry out a comprehensive
censorship system and being funded by approved (“legal”) sources.
• Video sites which transmit news content are required to obtain an additional
“Internet News Information Service License” and sites broadcasting
entertainment content such as talk shows, interviews or independently-
produced online dramas or films would need a “Radio/TV Broadcasting
Production License”.

14. Reactions to the Dec 2007 measures
• Majority state-ownership: Expropriation?
– 8 sites at that point had USD 190 million in foreign VC, valuing sites at several USD
billion – would the State come up with the cash to own 51%?
• Domestic media reaction
– The Oriental Morning Post in Shanghai: “clearly an act of establishing administrative
licensing” which constitutes a violation of Article 15 of China’s Administrative License
Law – supposedly restricted in scope to areas as national security, public safety and
the public interest.
– An editorial in Southern Metropolis Daily: an “icy wind is cutting across the Internet
as we enter the New Year”.
• Industry reaction:
– Predictably executives in the online video companies interviewed were more
sanguine. Attempting to put a brave face on the regulations, a theme of “the move
will be good for the industry” was common, and that this would help “clean up” the
sector and “separate the large players” from the rest.

15. February 2008: Government climb-down? Or change in
strategy?
• On February 3rd MII and SARFT convened a joint press conference to address
industry concerns including those expressed by the operators of the online
video sites.
• SARFT and MII effectively grandfathered the hundreds of existing players
already in operation and instead stated that the new rules would apply only to
new market entrants.

16. Since February 2008: Licenses to smaller players but not to
larger players, some of whom experience “server outages”
• Licenses issued to selected sites: April 2008 (23 licenses) and June 2008
• Sites apparently punished – for varying durations - by government
- Offline for one day in March 2008
- Offline since June 3rd 2008
- May 2008:
Sarft shuts down 8 smaller sites permanently
for pornography, violence or content quot;harmful
to social stability.quot;

17. Future for online video in China?
• Regulatory uncertainties will not go away
– Traditional media such as state-owned television broadcasters will use
regulatory interventions to protect their position
• Larger issue remains the lack of profitability
– Server costs
– Bandwidth costs
– Advertising revenues are growing but not sufficient to cover costs
– Will wireless revenues emerge?
– Piracy remains a key driver for online video content

18. Contact Details
duncan.clark@bdaconnect.com
Tel: +86 10 8529 6164
www.bdaconnect.com