An unfolding drama for online video sites

Large deficits

"When we discussed charging users to watch movies online with movie production companies a year ago, none of them supported this business model. They were afraid of losing money at the box office if they allowed Web users to watch and pay for online videos. But now, many film companies are cooperating with us to provide subscription-based services. This is a big change for the industry," Zhu said.

The total revenues of Chinese online video services reached 2.66 billion yuan in the third quarter of 2012, a rise of 37.2 percent year-on-year, according to statistics released by iResearch, a research company that focuses on China's Internet industry.

Youku, Sohu and Tudou remain the top three in the online video market, according to the latest rankings published by iResearch in October. Youku leads with 31.4 million unique visitors per day who watch at home and at the office, while Sohu TV has 22.77 million daily unique visitors and Tudou 20.21 million.

However, behind the figures lurks the uncomfortable fact that most online video service companies are still running large deficits. Youku, for example, incurred a net loss of $27.3 million in 2011.

The desire for profit has prompted some online video websites to launch subscription-based services to offset the high costs of film production and licensing.

"If we keep providing copyrighted movies online for free, the advertising revenue will barely cover our licensing costs. But by offering paid content, users will make a much greater financial contribution to our business," said Yang Xianghua, vice-president of iQiyi. Yang's company gained more than 100,000 subscribers after launching its subscription-based services in May 2011, presenting around 550 foreign and domestic films and nearly 400 military-themed documentaries.

Subscribers watch slightly more than four movies per month on average, at a cost of 19.8 yuan.

During the past two years, iQiyi's subscription revenues have grown rapidly, and the company has already covered its licensing costs for this year. The copyright owners usually receive a minimum payment and will get 50 to 70 percent of the extra income if the revenue from their movies overtakes the minimum payment.

"We hope that subscription and pay-per-view services will eventually account for a significant part of our business, and we also look forward to the revenues from subscription-based services exceeding our advertising income," Yang said, adding that the target will be met in about three years.

Wu Wencong and Yang Wanli contributed to this story.

Contact the reporter at jiangxueqing@chinadaily.com.cn