Why its Difficult to Make Money from Chinese Users – Online Video Example

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Everyone in the TMT industry likes to compare Chinese companies to its American counterparts and leaders, like China’s Google is Baidu, China’s Facebook is RenRen, China’s Twitter is Sina Weibo etc. In the online video market, China’s Youtube is often regarded as Youku.

But I investigated a bit further to see how Chinese video sites really compare with an American online video giant – Hulu. Hulu is a very popular online subscription service offering ad-supported on demand streaming video of TV shows, movies, webisodes and other new media, trailers, clips, and behind-the-scenes footage from NBCFoxABC, and many other networks and studios.

I compared revenue and number of unique monthly active users across 3 Chinese video sites – Youku, Qiyi and Xunlei versus America’s Hulu. The clearest observation is that all the Chinese sites have clearly more users but vastly lower revenues compared to Hulu with only 30 million unique monthly active users but a much higher revenue base of US$240m.

The stark contrast between the Chinese companies and America’s revenue vs. user base ratios clearly indicates that American users are much more willing to pay for service compared to Chinese. Hulu makes US$8 per user but its Chinese equivalents can’t even make US0.5 per user.

This reinforces what everyone already knows about Chinese netizens – they whenever possible never pay for software or online service, they’d rather copy it or rip it off from somewhere else. There are exceptions to this, such as online dating sites where social pressure pushes them to get married and pay for it.

This cultural behavior can easily be replicated across any software based industry. This is why mobile app developers find it much harder to monetize from paid downloads, but instead rely on advertising revenue, which is much lower, less direct and harder to generate.

This is one of the biggest challenges for software and online service companies in China – how to monetize consumers. Microsoft is a prime example of how it has tried to deal with piracy in the mainland. For now, most companies see no other option but to generate most of its income from advertising. Perhaps this is not such a bad strategy, after all that’s how Google makes most of its money.

Some believe that this trend is changing and with the rising affluence of China and its speedy economic development, Chinese people will pay for software and online service when they see value in it.

On that note, I will leave a question for you to ponder upon:

Will Chinese consumers ever be prepared to pay for software or online service? When and Why?

 

  • http://themarketingstudent.com David Fallarme

    Framing this issue in terms of Chinese vs Western seems like the wrong approach to me. That implies that there is a cultural reason (vs a market reason) for low ARPUs in China.  I view the hurdles to be based more around incentives. Western ARPUs were abysmal – if not nonexistent – in the early 2000s because the market wasn’t developed yet. Lots of companies with horrendous, unsustainable business models. But now the incentives for paid service have lined up and we’re starting to see the benefits. 
    Napster VS iTunes = people pay for tracks through iTunes because of brainless integration with your iPod and near-instant availability. Before iTunes, the incentives to pay for music were not very compelling.torrents VS Hulu/Netflix/etc = the latter provide near-instant HD content with an impressive  back catalogue for a reasonable price.Point being, the day will come when Chinese consumers will pay for online services – once the market matures and figures out the right incentives for this market. I don’t believe that this is an argument that boils down to “Chinese netizens are too stingy or poor”.

    Maybe the Chinese web needs to undergo its own dot-com boom and/or bust; throw a bunch of business models at the wall and see what sticks. We don’t need to look further than Japan or South Korea to see working web business models in an Eastern context.

    @Jason – what changes do you think need to happen so that the Chinese web becomes a significant player (in terms of dollars) in the internet economy?

    • Jason Lim

      I didn’t necessarily compare Chinese and American companies to prove that Chinese netizens are stingy. I found the result interesting and compelling. Of course it’s natural for people to want something for free if they can but I think this is more of an issue of what is fair and reasonable for everyone.

      I agree with you that the time will come when China in general will pay for services but I still believe culture plays a big part of it. I think it’s wrong to consider, all things being equal China will exactly follow the West in terms of willingness to pay. Context and culture play a big role in how people behave. I’m not saying they will never pay.

      I think there are a number of factors that will boost China’s ability to become a significant player ($ terms) in the web economy. One of the major things is enforceable copyright laws. If these video sites acquired more licensed content, they would have to pay for it and therefore pass on some of the costs to users. Another factor is Chinese companies’ belief that they can in fact charge money. If there service is valuable and you can’t get it for free or cheaper anywhere else, they can and should charge for it. But it seems many Chinese companies are scared to even try charging in fear that customers won’t use them. It’s impossible to serve every type of customer so they shouldn’t try. This is likely how the freemium model in the West developed, where people can try before they buy. Overall probably the biggest factor is time and development.

  • http://larrysalibra.com/ Larry Salibra

    If you adjust these revenue per user numbers on a GDP per capita basis Hulu and Youku’s revenue per user is pretty close to the same $8 versus about $5.  Easily explained by the fact that Hulu is owned several television networks/content producers and has better access to content than Youku which competes with CCTV.

  • Anonymous

    “Will Chinese consumers ever be prepared to pay for software or online service? ”

    When you have a solid answer, please tell me also. :)

    We have found that (some) Chinese users are willing to pay for software and online services, only if they see the value. Be it a VIP membership, or to download an app, Chinese users are willing to pay. But, it has to fit a need AND it has to be of value to the user.

    That said, I don’t think a lot of Chinese IT services have a clear goal (as a  lot only concentrate on growth and  analytics)- and then offer services that cater to the general masses, instead of focusing on a core group of users.

    Apple in the US has done wonders for online purchasing – basically they simplified the payment process and made it (services/apps/music)  fairly inexpensive – since Apple products were designed well AND expensive, a lot of their users felt loyal to their products and services.

    Having an easy payment service and offering value at an affordable price, should help further the process.

    • Great_human

      I can’t agree any more. I think if the companies work out a good way to divide their consumers and provide different services for free and non-free users, they will be more easy to get revenue. Chinese users always like measuring themselves against each other and are eager to get special treatment even if it is rechargeable.

  • Adele jones

    http://www.shoesforless.biz/zara-leisure-shoes-for-less-2024.html hat this trend is changing and with the rising affluence of China and
    its speedy economic development, Chinese people will pay for software
    and online service when they see value in it.

  • Adele jones

    http://www.shoesforless.biz/zara-leisure-shoes-for-less-2024.html hat this trend is changing and with the rising affluence of China and
    its speedy economic development, Chinese people will pay for software
    and online service when they see value in it.