After spending millions to buy licensed TV shows and movies, China's top online video site is facing a surge in piracy from a new crop of offenders threatening to cut into its business.
Last year, Chinese site Youku Tudou spent US$118 million on "content costs" to increase its video offerings. In return, the company hosts licensed TV shows, both local and foreign, including brand new episodes of "The Walking Dead", "The Vampire Diaries" and "Modern Family" with Chinese subtitles.
Selling the content has helped U.S. production studios earn revenue in a market well-known for its piracy. But for Youku Tudou, the investment is threatened by a growing number of smaller Chinese video sites offering large collections of pirated content.
Last month, the company found that 1,995 small-scale sites in China had streamed unlicensed videos, an increase from just 500 sites eight months earlier, said Lu Changjun, legal director for Youku Tudou. The streamed content included TV series that Youku Tudou had exclusively acquired from copyright holders, he said.
Most of these small-scale sites operate by using a peer-to-peer (P2P) video sharing software developed in China, called "Kuaibo", according to Lu. The software works by allowing the sites to stream pirated content over a browser, without the hefty costs of paying for video bandwidth.
"Youku is a legitimate site, so all the videos we upload are licensed. But the number of videos that we can buy licenses for is still limited," Lu said. Video sites involved in the piracy, however, are streaming the same content offered by Youku Tudou and its competitors. In addition, the sites are uploading pirated copies of the latest movies and TV shows that have yet to officially arrive in online markets.
"This kind of business model is very threatening to us," Lu added. "They don't have to spend any money to buy licensed videos."
Shenzhen QVOD Technology Co. is the developer behind the Kuaibo software, but the company denies helping local Chinese video sites stream pirated content. The Kuaibo software is an open source tool, and the company is solely focused on developing technology, said one of its employees, who declined to disclose his name.
"We are not helping these sites, and we are not responsible for them," he added.
Youku Tudou, however, plans to take action. The company is working with local authorities to bring down select video sites engaged in piracy using the Kuaibo software. But the number of sites using the file-sharing technology remains vast, and Youku Tudou fears the piracy could worsen.
The concerns around Kuaibo resemble the criticism of BitTorrent, another P2P file sharing software linked to online piracy. Although the file-sharing technology is legal, authorities worldwide have been cracking down on sites cataloging BitTorrent links for illegal downloads.
Shenzhen QVOD Technology has so far fended off piracy-related lawsuits in local Chinese courts, according to Lu. Youku Tudou's talks to mitigate the problem with Kuaibo's developers have also fallen through, he added.
Chinese authorities have been slow to stop online piracy, giving file-sharing software such as Kuaibo ample room to grow, said Zhang Fan, an analyst with Beijing-based research firm Analysys International. Small video sites offering the pirated content, can keep their costs low, while drawing in revenue through online advertisements, he said.
Larger mainstream sites including Youku Tudou, however, are losing out on potential profits, especially as they try to offer users paid services for exclusive online video content. Users will instead resort to visiting pirate video sites, Zhang said.
"There hasn't been an effective way to control the P2P technology yet," he added. "If there's little supervision over it, then the piracy will continue."