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The Cultural Revolution - The Rise and Rise of Legal Online Video in China

Consider home video in China and the first things that spring to mind for many are pirate DVDs and illegal online video sites. However, things are changing rapidly. The Chinese home video market is in the midst of a cultural revolution and this is largely occurring in the minds of the young, with the growing acceptance and uptake of legal paid-for SVoD services.

Legal video websites are nothing new in China, but the notion of paying for online video content is, with the legal market having long been dominated by ad-funded on-demand services.
 
Gradually, however, the concept of SVoD has taken hold and is being driven by some heavyweight Chinese companies; notably the world’s largest retailer Alibaba which acquired the Youku Tudou SVoD service in 2015, Chinese search engine giant Baidu, which owns the largest SvoD service iQiyi, on-line gaming and social media platform Tencent and leading technology company Le TV. Each is estimated to have in excess of 10 million paying subscribers and is continuing to grow fast. 

SVoD is another battleground in the fight for consumers between Baidu, Alibaba and Tencent which has seen them compete on an increasing number of services, including music streaming, web browsers, cloud storage solutions, map/navigation services, on-line payments and social media.

Notable in their absence are the major global SVoD players Netflix and Amazon Prime Video. The expansion of both services into China is hamstrung by local legislation dictating that 70% of the content carried must be local content and that overseas organisations operating online in China must use local data storage facilities and domestic equipment. 
In addition to ownership regulations stipulating that foreign companies establishing an operation in China must be part of a joint venture with a Chinese company, foreign companies can only hold a maximum 51% stake in the venture. 
As a consequence, the major domestic SVoD services have marched ahead establishing in-house content production divisions and augmenting their local content offering through licencing deals with the major Hollywood studios; Tencent with Paramount and Sony, Youku with Universal and iQiyi with Fox. 

Traditionally, the video on demand sector has been relatively free of the strict censorship controls that have impacted the TV and feature film segments, but indications over the past 12 months are that the Chinese government is beginning to tighten regulations in line with the rest of the media industry. 

Nevertheless, US and international feature film content is a key driver for consumer SVoD adoption with 56% of Chinese SVoD users in Futuresource’s ‘Living With Digital’ survey (published in Q3-2016) citing this as the main reason for subscribing to an SVoD service.

SVoD uptake is being driven by the younger consumer group. Futuresource’s ‘Living with Digital’ consumer research highlighted that 66% of SVoD users are in the 16 to 35 age group. This is a demographic that is increasingly interested in high quality, premium content. In addition, they are not deterred by the concept of paying for access. 

With monthly subscription costs typically ranging between RMB 10 and RMB 20 (US$ 1.50 to US$3.00) the threshold to subscribe is relatively low compared to other territories, making a subscription an increasingly attractive proposition.
Looking ahead, the Chinese SVoD market has huge potential for growth driven by the desire for premium content and as the generational shift in consumer behaviour adopts SVoD as the norm. 

Online piracy both in terms of illegal streaming and downloads remains an issue in China and add to that unauthorised account sharing. Nonetheless, the concept of legal, paid-for services is gaining a stronger foothold amongst consumers. 

Broadband penetration continues to increase reaching 54% of Chinese households by the end of 2016. In addition, use of connected devices is increasing. The installed base of Digital Media Adaptors reached almost 44 million units at the end of 2016, representing approximately 10% of households, but this is dwarfed by the growth in Smart TV’s which were in close to 32% of households.   

The growth in the market will occur with or without Netflix and Amazon. Both have currently stepped back from China, although looking forward they may yet aim to enter the market. But there are issues to resolve and the major domestic players may well be too entrenched with consumers and in terms of content deals. 

Amazon may have the edge over Netflix in launching in China, having been active under the Amazon brand since 2011 and having launched the Prime Delivery service in autumn 2016.  Consequently it will have a strong consumer database in addition to an established brand awareness. 

Further details on the development of the Chinese Home Video market will be available in the forthcoming China Video Insights Report and additional consumer insight can be obtained from Futuresource’s Living With Digital Service.   

About the author

Michael Boreham

About Us

Here at Futuresource Consulting we deliver specialist research and consulting services, providing market forecasts and intelligence reports. Since the 1980s we have supported a range of industry sectors, which has grown to include: CE, Broadcast, Entertainment Content, EdTech and many more.