China is a fascinating place since it develops and changes so rapidly. Last June I wrote an article saying “Why it’s Difficult to Make Money from Chinese Users – Online Video Example” and I posed the question at the end “Will Chinese consumers ever be prepared to pay for software or online service? When and Why?

The conclusion of the article was that it is difficult because Chinese consumers like cheap things and like free things better. Willingness to pay in China is much lower than in Western countries such as America or in Europe. This was demonstrated in my analysis of online video streaming sites, where based on revenue vs. user base ratios, 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. But things are starting to change.

Until around June last year, many of the large video and music sites were still using unlicensed content. However, they came under fire by large American production companies and the Chinese government for not respecting copyright .This then pushed sites like Tencent Video, Youku, Tudou, Xunlei, Sohu etc. and Baidu Music to stop using pirated content and start paying hundreds of millions of RMB for it. They all realized that the only way to differentiate was to have the best and most popular content, as the ‘content is king’ philosophy says.  Copyrighted content has now become the valuable asset which companies are fighting for, even pushing Tudou and Youku to go to court over who has the rights to what. Ben wrote a great article last month, on” Is Hulu Model the Right and Only Path for China Video Sites?” It explains that right now, China needs high quality and increasingly expensive licensed overseas content, because China doesn’t have a user generated content culture plus Chinese TV and movies are not of a consistently high quality.

A recent Wall Street Journal article, “Web Takes Star Turn in China” explains that since Chinese video sites are starting to give viewers quality content, advertisers are now willing to invest a lot of money. This has driven online video advertising revenue to 1.48 billion yuan ($235 million) in the third quarter, up 48% from the second quarter, according to market-data firm Analysys International. To support rising costs and not just rely on advertising revenue, many sites are looking to charging viewers for watching premium content, “People are getting used to paying for content,” said Gary Wang, chief executive of Tudou, which has about 12 million paying mobile subscribers. This is an encouraging sign that users now value high quality content, are willing to pay for it.

Although factors such as increasing wealth and higher quality content are driving higher willingness to pay for premium content in China, there are some artificial opposing forces. The WSJ, points out that the full potential of quality content has not been released because of Chinese media restrictions, censored content, limiting channels and capping foreign programming. Moreover, the government has cracked down on “excessively casual” entertainment shows, especially dating shows because they don’t respect history, despite their popularity.

So to answer the question I posed last June, I believe Chinese consumers are now more willing to pay. This doesn’t reflect the majority of viewers, but represents a small percentage of people. However this percentage will grow as more quality content is released and fewer restrictions are imposed. The short to mid-term reality for online video sites, is that competition will be fierce and monetizing beyond ad revenue will be difficult.