China indeed has a fiercelycompetitiveonlinevideomarket. Last month it was reported that the number one video site, Youku acquired the number two video site Tudou. Shortly after, news broke out of the newly formed alliance between Tencent’s v.qq.com, tv.Sohu and Baidu’s iQiyi. A big reason for the flurry of M&A activity has been the difficulty to make profit due to rising operating costs, forcing some players to succumb to stronger players. To win in the long run, companies must achieve profitability and notjustburnmoneyformarketshare. To become profitable, these video sites must dramatically reduce operating costs.

In operating an online video site that supports thousands of simultaneous videos being watched, two major costs are contentlicensesandbandwidthcosts. According to Bloomberg, Youku incurred a net loss of 49.6 million yuan ($7.9 million) in the fourth quarter of 2011. Bandwidth costs rose to 109.7 million yuan, or 35 percent of sales, from 34 percent a year ago. Content costs were 20 percent of revenue in the quarter, up from 17 percent in the same period of 2010.

Knowing that bandwidth costs make up a large and growing proportion of costs, how do video sites reduce it?  One young ambitious Beijing start-up called CloudAcc has the answer. In fact, they have proven that their technology can reduce bandwidth costs by 50%; a dramatic saving that can push video sites towards profitability. This reduction in bandwidth expenditure, allows companies to re-invest the money into more value added services like buying popular content.

Traditionally, individual viewers watching an online video receive data from only one server at a time in the Content Delivery Network (CDN), paid for by the video site. When millions of videos are being watched daily, this often puts high demand on the CDN servers, resulting in lag and poor user experience for the viewers. The sheer quantity of videos being streamed from the CND server is also expensive for the video sites.

CloudAcc’s unique technology changes that by using in-browser P2P or Peer to Peer technology. Similar to BitTorrent where an individual file is broken up into parts and made available for simultaneous download from separate peers, CloudAcc’s technology enables a viewer to simultaneously download parts of the video file that she is viewing from multiple sources, such as the server and other people watching the same video within the network. The benefits are twofold, for the video sites and the viewers. For video sites, there is an overall decrease in the amount of data streamed from CDN servers, hence, video sites get to save money. For viewers, since there are more sources for the video, they get a more stable download. Also, instead of being stuck with progressive download, where a video must be downloaded linearly from second to second, CloudAcc’s in-browser P2P technology also enables parallel downloads, hence reducing the instances where viewers experience buffer or lag.

To illustrate this with an example, if I started watching Big Bang Theory on tv.sohu.com at 10 p.m. and another viewer opens her browser to watch the same clip at 10.05 p.m., part of the data in my five minutes of video will become available to her. Effectively, she now can get data for her video from Sohu’s servers and me. Should I decide to stop watching and close my browser, she’s unaffected since she can still receive data from the server, or some other peer in the network who  is also watching the same video on his internet browser. As a feature of parallel downloading, even if the viewer is currently watching the second minute of the video, she could be downloading the third or tenth minute, or any video segments that she has yet to see.

The graph below illustrates the difference between the amount of streaming that is supported by CloudAcc’s in-browser P2P compared to normal CDN.

The concept is simple but brilliant! CloudAcc has totally flipped the relationship between the number of simultaneous viewing and bandwidth on its head. Traditionally, the more people watching, the more bandwidth needed. But now, with the in-browser P2P technology, the more people watching the same video, the less bandwidth is needed.

Barely over a year old, CloudAcc has achieved impressive success. Understanding the value of cutting bandwidth costs in half, many of China’s top video streaming sites have already adopted CloudAcc technology. In one case they saved a company US$1.4 million in monthly bandwidth costs, while also lowering the instances where viewers experience buffering from 10% down to 5-7%.

The revenue model is to charge for bandwidth and CloudAcc offer is 50% cheaper than other CDN providers like Dnion and China Cache. For companies like Youtube or Hulu wanting to use CloudAcc, it only requires one week and two engineers to set up the service.

CloudAcc also has a classic start-up story that makes them more interesting. The two co-founders, Xuan and Sen were both top computer science graduates from China’s top universities, Tsinghua and the University of Science and Technology China. While both studying for their PhD at Yale University, they began hacking in their dorm rooms just to experiment if they could make in-browser P2P streaming work. After six months they cracked the code and built a P2P technology that can be realized in-browser without any additional installations other than a Flash player. Stumbling upon a huge commercial opportunity, they quit Yale, turned down lucrative offers from Google and Facebook and came back to Beijing to start CloudAcc in January 2011. After much resistance from their parents, they have now raised US$2Million from IDG and have built a fifty person team of the best Chinese computer engineers.