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.

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Jason Lim

Jason is an Australian born Chinese living in Beijing, specializing in entrepreneurship, start-ups and the investment eco-system in China, especially in the tech and social area.