Editor’s Note: The piece was written by Yang Wang, who is currently the brand and media director at Chemical Industry Press. He has published and translated seven books, and several of his works have been translated and published in areas such as Taiwan and South Korea. Yang has also contributed pieces and columns to The Beijing News and other major media outlets.  In regard to technology, he is mainly interested in the changing face of media as well as the business side of the industry. Originally from Beijing, Yang moved to California with his family before coming back to his native city after receiving a degree in Communication from the University of California, San Diego. 

There is speed, and there is Chinese speed. Everything seems to happen faster in China, and such seems to be the same for online video sites. Only last year, these sites were flushed with cash, and they were paying obscene amount of money for contents. This year, however, has been a different story. Money seems to have disappeared like Houdini, not only are the sites lowering their offer for TV dramas and movies, but many of them seem to be incapable of carrying on.

This has been the primary reason behind the various mergers and acquisitions of recent days. Youku, the biggest player in the game, has acquired Tudou, and there is rumor that Sohu is in hunt for PPS.

By combining its operations with Tudou’s, Youku claim it could save a lot of money in areas such as content acquisition, thereby lowering its loss. From appearance, Sohu is also following suit.

This may well work. Youku lost 8 US$ million dollars in the fourth quarter of 2011; in part because the company spent 14.4 million dollars acquiring contents. In the same period, Tudou lost 26.5 million dollars, while spending 10.6 million dollars acquiring contents. The economy of scale achieved though their combination will surely drive the cost down on all fronts, especially on acquiring contents, since the companies no longer have to bid against each other and could share licensing.

However, while moves like this certainly make sense, they fail to address a more fundamental question: will these sites ever make money?

The logic in China has always been: if you build it (and spend enough time and energy killing off your opponents), you’ll eventually be making money. If eventually you can make a ton of money by monopolizing a certain activity (in this case, online video viewing), then it makes sense for you to spend, spend, spend in the very beginning.

Yet two questions remain unanswered in this search for the Holy Grail: what if the wait is too long, and what if they do not come at the end? Both seem to be the case with Chinese online sites.

All of the online video sites essentially run into the same problem in attracting viewership: while Americans spend a good deal of time watching cats “breading”, Chinese prefer mainstream contents online. That’s why all the sites spend gigantic amount of money to acquire premiere movies and TV shows. An episode of popular TV drama used to cost 10,000 Yuan in 2008, but the cost rose to as much as 300,000 Yuan last year because of fierce bidding.

With the price for online advertising still low, the revenue these shows generate is not enough to cover the cost. This is one reason why all the sites have sustained huge losses. Mergers and acquisitions could solve this problem to a certain degree, as it lowers costs and increases viewership (hence the advertising rate and revenue).

However, a bigger problem still lingers: Chinese people rarely pay for content. Even if the new Youku/Tudou can outlast its competitors, there is no reason to believe there is light at the end of the tunnel.

Unlike American and European consumers who are used to paying for contents, Chinese have long gotten used to the price of “free”. This means that if a company charges content, the viewers will migrate. This is what happened to Tiansheng, a Chinese cable company who foolishly thought that by monopolizing the popular English Premier League, it could make a bundle by charging the League’s legion of faithful fans for watching the games. Instead, the viewers simply watched something else, or more common, watched the games on free services such as PPTV, and Tiansheng is rumored to be on the verge of bankruptcy.

That is the long term dilemma facing the online video sites. For now, they do not have the luxury of thinking that far ahead. Survival is the top priority, and mergers and acquisitions certainly help.

TechNode Guest Editors represent the best our community has to offer: insight and perspective on how technology is affecting business and culture in China

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