'China's YouTube' pries path through profit puzzle

Youku.com is courting advertisers while opening other small streams of revenue

Youku.com, China's leading video sharing Web site, faces a challenge shared by YouTube and other rivals worldwide. The Web site has worked to expand its revenue from video ads, mobile downloads and elsewhere, and it claims a massive audience of 25 million visitors each day. But despite all that, Youku -- like YouTube and similar sites worldwide -- has yet to become profitable.

Investors have pumped millions of dollars into online video companies like Youku on the belief that they will eventually start turning profits, and the companies have tried building different revenue models to reach that goal. Youku is now "on the path to profitability," Victor Koo, CEO of Youku, said in an interview. But an ongoing challenge is winning advertisers that have traditionally spent most of their marketing funds on television. Television claims a much larger piece of advertising budgets in China than it does in developed countries, said Koo.

"We're trying to get advertisers to see us as what we are, which is Internet TV," Koo said. "That is still, I think, a work in progress."

Youku's ad revenue is growing quickly thanks to a sales team that started full operating early last year, Koo said. Youku, launched three years ago, now has 250 advertisers and expects to comfortably surpass its revenue goal of 100 million yuan (US$14.7 million) this year. Its advertisers include big brands like Coca-Cola, Audi and Chinese PC maker Lenovo.

Advertisers can buy display ads on Youku's Web site or video ads that run before downloaded clips. Some ads appear on top of paused video clips or during episodes of serial dramas, which Youku hosts through deals with copyright holders. Youku has sought such deals to gain more of the professional content that often attracts advertisers.

Youku also pulls some revenue from ads beside search results on its site, provided by Google and Chinese search engine Baidu.

But the company has started supplementing its advertising income with revenue from elsewhere. Merchants on Taobao, an auction site dubbed "China's eBay," can pay Youku a fee to place video clips in their for-sale item listings.

Youku also receives some revenue from traffic to its new mobile phone portal. Deals with China's three mobile operators give Youku a slice of the subscription fees users pay to download videos on the portal. The portal is still in beta, but Koo expects it to start bringing in more revenue next year as China's carriers build their numbers of 3G subscribers.

Youku launched a Web site tailored for the iPhone months ago, and it is working with handset makers like Nokia and Sony Ericsson to embed Youku applications on some of their phones.

Ads are likely to remain Youku's main source of revenue. Companies need convincing to try advertising on Internet video sites instead of television, said William Bao Bean, a partner at venture capital firm Softbank China & India Holdings.

Force of habit and difficulty measuring the effectiveness of online video ads have deterred some advertisers, but a growing number are also experimenting with them, he said.

"Now it's just a matter of getting those guys to spend a larger piece of the pie," said Bean. "I think that's happening, it just takes time."

One of Youku's Chinese rivals, 56.com, is working on plans to start charging users for some content next month. Users who upload videos will be able to choose to charge viewers and split the money with 56, Wang Jianjun, CEO of 56.com, said by phone. The details of the plan are not finalized, but it is mainly aimed at users who create niche videos and do not post them elsewhere online, Wang said.

Youku does not charge users. It could consider charging subscription fees to viewers of high-definition videos in the future, but currently has no such plans, said Koo. Users rarely look for videos that require a very high resolution on streaming Web sites, he said.

"They're not watching Transformers on our site, trust me," Koo said.

Users appear to spend more time on visits to Youku than on visits to its closest Chinese rivals, Tudou.com and 56.com. Viewers spent over 100 million hours on Youku in May, more than half the total time users spent on video sharing sites overall, according to iResearch, a Chinese Internet consultancy.

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