Qvod, or Kuaibo in Chinese, was recently sued for video rights infringement and is required to pay RMB260 million (roughly US$42mn) fine. What’s interesting is it turns out the lawsuit was filed by companies led by Tencent, the Chinese Internet giant based in the same city with Kuaibo, Shenzhen. Tencent is joined by Youku, LeTV and state-backed movie site m1905.com.

Founded in 2007, Kuaibo has a business model different from most of other Chinese online video businesses. Most of existing Chinese online video sites have been buying video rights and begun producing original videos, making a majority of revenues from advertising and a minority from paying users.

Kuaibo positions itself as a search engine that indexes content from video sites. But different from average search engines who encourage existing websites to make their webpages indexable, Kuaibo offers tech support for building video sites. What’s more, it even provides a tool for small video sites to source videos across the Web. Qvod takes cuts of revenues generated from advertising on those sites.

The business model works well — It works like online travel search Qunar which also enables transactions within its system — and Qvod has been one of the popular video services in China. But the problem is those video sites never paid the original sources for video rights. Qvod didn’t build a channel for them to pay, either.

After being sued, Qvod argued that it was just a search engine — like how Baidu argued years ago when it was sued by music labels for returning illegal MP3 song files in search results.

When online video sites just emerged in China several years ago, like what happened to digital music and digital books, illegitimate videos were available on almost all of those sites. It’s not that every video Tencent’s online video site offered was legitimate from day one, either.

Along the way when many Chinese video sites, such as Youku, Tudou and LeTV, would make increasingly more revenues and go public in the U.S. or China, the major Chinese services had to get rid of illegal content and begin paying for video rights. There was a time that the prices of hot TV dramas skyrocketed — LeTV, who moved earlier and bought a lot of video rights before everyone else did so, made a fortune during this time.

According to Tencent, they found videos they had exclusive streaming rights in content featured by Qvod. The site of Qvod has been taken down. The statement on the site reads that Qvod has been transforming the business model — from tech-centric company to a legal content provider — and will pay the fine.

As the consolidation in online video seems ending in China, almost all videos sites backed by big companies or investors have a happy ending: Youku and Tudou have been merged into one company and recently invested in by Alibaba Group; Baidu-backed iQiyi has gained much traffic from its parent company’s search engine and is planning for a US IPO; Baofeng, backed by investor IGD, is about to go public in Shenzhen, China; Xunlei, also a tech-centric video company, went public in the U.S. earlier this year with Xiaomi the largest share holder.

For tech-centric companies, such as Xunlei, Baofeng and Qvod, who work with third-party sources they need to work very hard to filter out the illegal content. And now they need money to buy video rights. While Xunlei has raised funding with an IPO and Baofeng will soon, Qvod has such a bad luck. It’ll be very hard if it wants a turnaround.

What’s unusual is Tencent isn’t known as a company that would bother to sue a small company for copyright infringement. It’s unknown whether it has something to do with the fact that Kuaibo is funded by Zhou Hongyi, who is a famous angel investor in China and CEO of Qihoo. Since 2010 when Qihoo developed software to manipulate Tencent’s QQ IM, the two companies became enemies. Being aggressive, Qihoo is actually disliked many Chinese Internet companies including Baidu, Kingsoft, Xiaomi and so on.

Tracey Xiang

Tracey Xiang is Beijing, China-based tech writer. Reach her at traceyxiang@gmail.com

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