Online Video Industry China 2018

Online Video Industry

China 2018

Online Video Industry – China 2018

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Table of Contents PREFACE .................................................................................................................................................... 4

1. EXECUTIVE SUMMARY ....................................................................................................................... 5

1.1. CHINA TV MARKET OVERVIEW ...................................................................................................................... 5 1.2. CHINA PAY TV MARKET OVERVIEW ................................................................................................................ 5 1.3. CHINA TELECOM INDUSTRY OVERVIEW ............................................................................................................ 6 1.4. CHINA’S ONLINE VIDEO LANDSCAPE ................................................................................................................ 6 1.5. NEW DEVELOPMENTS IN CHINA’S ONLINE VIDEO INDUSTRY ................................................................................ 7 1.6. VIDEO CONTENT PIRACY IN CHINA .................................................................................................................. 7 1.7. REGULATORY ENVIRONMENT ......................................................................................................................... 8

2. CHINA TV MARKET OVERVIEW.......................................................................................................... 11

2.1. TV MARKET OVERVIEW ..............................................................................................................................11 2.2. FREE-TO-AIR TV IN CHINA ..........................................................................................................................11 2.3. TV ADVERTISING .......................................................................................................................................12 2.4. SMART TV OWNERSHIP ..............................................................................................................................13 2.5. GENERAL TV AND ONLINE VIEWING BEHAVIOR IN CHINA ..................................................................................13 2.5.1. VIEWING HABITS AND CONTENT PREFERENCES ...........................................................................................14 2.5.2. TRENDS IN DIGITAL VIDEO CONTENT VIEWING ...........................................................................................15

3. CHINA’S PAY TV INDUSTRY ............................................................................................................... 19

3.1. PAY TV MARKET OVERVIEW ........................................................................................................................19 3.1.1. TYPES OF CHANNELS IN CHINA .................................................................................................................20 3.1.2. PROVINCIAL SATELLITE TV BROADCASTERS (“PSTVS”) ................................................................................21 3.1.3. CITY SATELLITE TV BROADCASTERS (”CSTVS”)...........................................................................................23

4. OVERVIEW OF CHINA’S TELECOMS INDUSTRY ................................................................................... 24

4.1. CHINA’S MOBILE INDUSTRY OVERVIEW .........................................................................................................24 4.1.1. MOBILE SUBSCRIBER NUMBERS ...............................................................................................................24 4.1.2. MOBILE INDUSTRY REVENUES ..................................................................................................................26 4.1.3. MOBILE OPERATORS’ NEAR-TERM STRATEGIC PRIORITIES ............................................................................27 4.2. CHINA’S FIXED BROADBAND INDUSTRY OVERVIEW ..........................................................................................28 4.2.1. FIXED BROADBAND SUBSCRIBERS .............................................................................................................28 4.2.2. FIXED BROADBAND INDUSTRY REVENUES...................................................................................................30 4.3. CHINA’S TELECOM OPERATORS’ ONLINE VIDEO INITIATIVES ..............................................................................31

5. CHINA’S ONLINE VIDEO LANDSCAPE ................................................................................................. 33

5.1. ONLINE VIDEO LANDSCAPE - OVERVIEW ........................................................................................................33 5.2. MAJOR ONLINE VIDEO PLAYERS IN CHINA ......................................................................................................35 5.2.1. IQIYI ...................................................................................................................................................37 5.2.2. TENCENT .............................................................................................................................................39 5.2.3. YOUKU ................................................................................................................................................39 5.3. OTHER ESTABLISHED ONLINE VIDEO PLATFORMS IN CHINA ...............................................................................40

6. NEW DEVELOPMENTS IN CHINA’S ONLINE VIDEO INDUSTRY .............................................................. 45

6.1. LIVE STREAMING IN CHINA ..........................................................................................................................45 6.2. DESCRIPTION OF MAJOR LIVE STREAMING PLATFORMS ....................................................................................47 6.3. ESPORTS IN CHINA .....................................................................................................................................49 6.4. SHORT VIDEO PLATFORMS IN CHINA .............................................................................................................51


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7. VIDEO CONTENT PIRACY IN CHINA .................................................................................................... 55

7.1. SUMMARY OF KEY FINDINGS ON PIRACY IN CHINA ...........................................................................................55 7.2. CONSUMER VIDEO CONTENT PIRACY IN CHINA ...............................................................................................55 7.3. CLOUD PIRACY IN CHINA .............................................................................................................................56 7.4. ACTIONS TAKEN TO STOP PIRACY BY REGULATORS ...........................................................................................57

8. REGULATION OF THE CHINESE ONLINE VIDEO INDUSTRY ................................................................... 60

8.1. KEY STAKEHOLDERS IN CHINESE TV REGULATION ............................................................................................60 8.2. LICENSING REQUIREMENTS ..........................................................................................................................62 8.2.1. LICENSES NEEDED FOR OPERATING ONLINE VIDEO SERVICES .........................................................................62 8.2.2. INTERNET AUDIO-VIDEO PROGRAM TRANSMISSION LICENSE REQUIREMENTS ...................................................63 8.2.3. THREE-WAY CONVERGENCE PROGRAM .....................................................................................................65 8.2.4. REGULATOR INTERVENTIONS ON ONLINE VIDEO PLATFORMS.........................................................................65 8.3. REGULATIONS ON FOREIGN CONTENT............................................................................................................65 8.3.1. APPLICATION PROCESS FOR FOREIGN CONTENT PERMITS ..............................................................................66 8.4. LIVE STREAMING REGULATIONS ....................................................................................................................67 8.4.1. REGULATOR INTERVENTIONS ON LIVE STREAMING PLATFORMS ......................................................................68


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Table of Exhibits: Exhibit 1 TV advertising spend in China, 2016–2020 ...........................................................................12 Exhibit 2 Smart TV ownership in China, 2015–2020F ..........................................................................13 Exhibit 3 Platforms used to watch video content (daily) ....................................................................14 Exhibit 4 Most watched video by country of origins ...........................................................................14 Exhibit 5 Most watched video by country of origins by age ...............................................................15 Exhibit 6 Time spent watching video content on mobile phones daily ..............................................16 Exhibit 7 Genres most watched on mobile phone in China ................................................................17 Exhibit 8 Genres most watched on mobile phone in China ...............................................................17 Exhibit 9 Top three mobile website/apps used to watch video content on mobile (%) ....................18 Exhibit 10 Breakdown of respondents that have subscribed to SVOD by platforms .........................18 Exhibit 11 China’s pay TV subscribers, 2016–2022F ............................................................................19 Exhibit 12 Breakdown of cable TV monthly basic fees by regions ......................................................20 Exhibit 13 Types of channel in China ....................................................................................................21 Exhibit 14 Provincial TV broadcasters in China ....................................................................................21 Exhibit 15 Top five audience rating of provincial TV channels ............................................................22 Exhibit 16 China’s mobile penetration growth ....................................................................................24 Exhibit 17 China telecom operators’ 3G and 4G subscribers, 2016 ....................................................25 Exhibit 18 China telecom operators’ mobile subscriber base, 1Q15–2Q17 .......................................25 Exhibit 19 Smartphone penetration rates in China, 2013–2020F .......................................................26 Exhibit 20 Telco operators’ mobile revenue, 2014–2016 and market share by revenue, 2016 ........26 Exhibit 21 Comparison of mobile monthly ARPUs across selected Asia Pacific countries, 2016 .......27 Exhibit 22 Total fixed broadband subscribers in China, 2013–2018F .................................................28 Exhibit 23 Breakdown of total fixed broadband subscribers by technology, 2013–2017..................29 Exhibit 24 China’s fixed broadband average download rate and video download rate ....................30 Exhibit 25 Fixed broadband subscribers by China telecom operators, 2016 ......................................30 Exhibit 26 Fixed broadband monthly ARPUs for each telecom operator, 2015–2016 .......................31 Exhibit 27 Number of online video paying users, 2013–2018E ...........................................................33 Exhibit 28 User-generated revenues of China’s online video platforms, 2014–2018 ........................34 Exhibit 29 Monthly active users of Top 10 premium long-form content online video platforms, 2016–2017 .............................................................................................................................................35 Exhibit 30 Time spent per day on the top premium long-form online video platforms, June 2017 .35 Exhibit 31 Market share of Chinese online markets by industry verticals, 2017 ...............................36 Exhibit 32 iQiyi subscription benefits and returns by selected titles ..................................................38 Exhibit 33 Breakdown of iQiyi revenue, 2015–2017............................................................................38 Exhibit 34 Sohu video advertising revenue, 2015–2017 ......................................................................43 Exhibit 35 Types of live streaming videos viewed by internet users in China, Dec 2016 ...................46 Exhibit 36 Daily time spent watching live streaming video in China, Aug 2016 .................................46 Exhibit 37 Total live streaming revenue in China, 2015–2019 ............................................................47 Exhibit 38 Monthly active users for top 6 live streaming platforms, 2016–2017 ..............................48 Exhibit 39 Number of China’s mobile eSports viewers and gamers, 2015–2019 ...............................50 Exhibit 40 Revenue of China’s mobile eSports games, 2015–2019 .....................................................51 Exhibit 41 Top 10 short video platforms’ penetration rate, in Jun 2017 ............................................52 Exhibit 42 Downloads on Apple’s App Store globally, Q1 2018 ..........................................................53 Exhibit 43 B.A.T. ownership and investment in short video platforms (non-exhaustive), Dec 2017 53 Exhibit 44 Usage & preference of video content by source – pirated sources are marked w/ red violator ..................................................................................................................................................56


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Preface

Information Validity The information contained in this report is prepared from data gathered in the first half of 2018 and believed to be correct and reliable at the time of writing. Whilst Pioneer Consulting Asia has exercised all reasonable endeavors to ensure that the contents of the report are accurate and up to date, it does not accept liability for any information which may not be accurate. Our Approach This report focuses on China’s online video market. Descriptions of Free-to-Air (FTA) TV and pay TV are brief and intended to provide context to the reader. It should be understood that some information contained in the accompanying report was obtained verbally from third parties without written documentation. In certain cases, publicly available sources were not available for independent verification. Where possible, Pioneer Consulting Asia has sought to verify the information supplied by checking multiple sources. Pioneer Consulting Asia agreed to provide results of its own primary research in this report. The study was conducted in urban areas across China and only included respondents who had access to the internet via a mobile or fixed line connection. The study comprised of a quantitative online survey as well as qualitative interviews with selected online survey respondents to provide a more in-depth understanding of their video viewing behaviors. Use of Information The report has been prepared for information purposes only and is intended for the Asia Video Industry Association (AVIA) and its members. The report must not be acted on or relied upon for any investment decisions or other specific actions without further study.


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1. Executive Summary

1.1. China TV Market Overview Broadcast television has long played an important role in China both as a medium for entertainment and the spread of government approved ideology thanks to its wide reach. According to the latest official government statistics, the percentage of households in China that owned a TV set was 99% in 2014. That is equivalent to 455 million households at the end of 2014 and 495 million at the end of 2017 assuming the penetration rate held steady. Currently, there are more than 2000 television stations in China including FTA and pay TV stations. Advertising on FTA channels is estimated to have generated US$12.5 billion in 2016 and is forecast to shrink slightly to US$12.3 billion by 2020. Parallel to the preparation of this report, Pioneer Consulting Asia (PCA) conducted a consumer study on the topic of general audience trends/preferences in China and agreed to share with AVIA and its members some of the findings in this report. Below is a summary of consumer viewing trends in China from this research:

• High daily incidence (91%) of urban online consumers viewing video on their mobiles

• Significant amounts of time spent watching video on mobile devices with over 60% of respondents watching over 30 minutes of video per day on their mobiles

• Content preferences of respondents to watch both short-form and long-form content on their mobiles

• Dominance of iQiyi, Tencent and Youku respectively both in terms of online viewers and paying subscribers

1.2. China Pay TV Market Overview The overall size of the pay TV market across all technologies was estimated to be 325 million subscribers at the end 2017, roughly equivalent to 65% household penetration which makes it the largest pay TV market in Asia Pacific by subscriber numbers. This number was up 3.8% from 313 million households in 2016. By 2022, the number is expected to grow to 353 million, representing a CAGR of 2.4%. Cable TV is the most widely adopted pay TV distribution technology in China. It is estimated that around 160 million households were subscribed to cable pay TV services in June 2017 representing a household penetration rate of 35%. Licensed IPTV has been growing rapidly in recent years and reportedly reached 102 million households in June 2017, a household penetration rate of 22%. To be a licensed IPTV provider in China with permission to provide domestic subscription television, platforms must obtain an “Information Network Audio-visual Program Broadcast Permit” which requires the platform to have a private ecosystem that is not linked to websites on the public internet.


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Household penetration of any form of pay TV reaches over 90% for urban areas in China. However, in rural areas, licensed Satellite TV is more widely used and overall reaches an estimated 63 million households. It should be noted that the size of the unlicensed satellite TV market in China is estimated to be comparable in size to that of the licensed market. Unlicensed satellite TVs in China receive channel signals that are officially being targeted at foreign countries such as Taiwan and Thailand, hence the content is not censored by regulators and fees for the content do not get distributed to the rightful IP holders. Advertising on pay TV platforms generated revenues of US$5 billion in 2016 and represented 29% of total TV advertising in that year.

1.3. China Telecom Industry Overview Our overview of China’s telecom industry covers two major services:

• Mobile • Fixed broadband

China’s mobile penetration rate was 76% of the total population in 2016 and is expected to grow to 86% of the total population by 2020. It’s worth noting that penetration at end-2014 was only 48% but by the end of 2015, this had increased by almost 52% to reach 73%. This fast increase in penetration can primarily be attributed to the construction of an extensive 4G network and heavy promotions of 4G-compatible handsets. In 2017, it was estimated that 73% of mobile subscribers were on a 4G network and China’s smartphone penetration was 71% of all phone users in 2016. This latter figure is expected to grow to 74% by 2020. With widely available 4G and smartphone devices, all three major mobile operators in China have built their own online video & entertainment platforms to capitalize on the digital lifestyle of Chinese consumers but take up of these services has been limited. China’s fixed broadband growth has been driven by a national strategic initiative known as “Broadband China” which has set a 2020 target for fixed broadband to reach 70% of households with broadband speeds in cities and rural area of 50 megabits (“Mbps”) and 12Mbps respectively. China’s fixed broadband subscriber numbers experienced annual growth of 9% between 2013 and 2016, growing from 185 million subscribers to 241 million. By the end of 2018, fixed broadband subscriber numbers are forecast to reach 268 million, representing an annual growth rate of 6% from 2016.

1.4. China’s Online Video Landscape China’s online video market size by number of active users was estimated to be 596 million at the end of June 2017. This represented roughly 76% of the online population, highlighting that online video viewing is one the most common online activities in China. Revenues for the online video sector have grown by a factor of five over the last three years, from RMB 10 billion in June 2014 to an estimated RMB 50 billion in June 2017.


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The evolution of China’s online video market has seen it transition from services with links to piracy, to legitimate services driven by advertising and, more recently, to subscription driven services. At the end of 2017, there were an estimated 74 million paying video users, up from only 8 million in 2014. The 2017 figure represents approximately 12% of the entire online video user base, up from 2% in 2014. A one-month subscription to an online service in China ranges between RMB 20 to RMB 40 depending on the platform and type of package selected. While the online video space is made up of more than 200 players, the premium long-form content space is dominated by just three players: iQiyi, Youku and Tencent Video. These players are owned by the three largest internet companies in China, Baidu, Alibaba and Tencent respectively (commonly referred to as B.A.T.), who aggressively compete head-to-head across a range of digital businesses. Other established online video platforms in China include both native online players and the online platforms of traditional FTA broadcasters. Rounding out the Top 10 premium long-form content video platforms in terms of monthly active users (MAUs) are MangoTV, LeTV, Bilibili, Sohu, PPTV, Hanju TV, and Migu TV.

1.5. New Developments in China’s Online Video Industry Three emerging developments in the online video industry are live streaming, eSports and short video. The live streaming user base in China grew 60% from 194 million in 2015 to 310 million in 2016. However, growth forecasts for the next three years have dropped to 12% largely due to stricter regulatory enforcements which have severely reduced the amount of live streaming content that is considered too risqué. The phenomenon of eSports has also seen tremendous growth in China since 2015, with the number of eSports viewers and gamers growing 81% year on year from 87 million to 285 million by 2017. By 2019, it is estimated that number will reach 351 million. Industry revenues have also expanded quickly, increasing 198% per annum from RMB 5.2 billion in 2015 to RMB 46.2 billion in 2017. Short videos as a genre are becoming increasingly popular in China driven by the number of viewers watching content on their mobile phones while out-of-home. The number of viewers watching video on dedicated short video platforms was expected to reach 242 million at the end of 2017, up from 151 million in 2016, and forecast to grow to 352 million by the end of 2018. A key success driver for platforms offering short-form content is the algorithms they use to serve the right content to each individual user in order to keep them engaged for longer periods of time. On average, online video users click on short video platforms five to six times daily, spending an average of 44 minutes per day watching short videos.

1.6. Video Content Piracy in China According to one estimate, revenue losses in China due to video piracy will increase from US$5.5 billion in 2016 to US$9.8 billion in 2022. (Figures only take into account TV episodes and films and do not include sports). This accounts for roughly 17% and 19% respectively of the estimated global cost of piracy in those years. Based on our research


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it was reported that the most frequently used sources of pirated content in order of usage are cloud site downloads, unauthorized streaming sites and torrents. While these pirated sources were used in the past six months by 50%–68% of total survey respondents, Free Official Websites (iQiyi, Tencent, Youku) were the most cited source for video usage on a daily basis at 41% of respondents. Given the size of the piracy issue in China, regulators have started to take a more active approach to enforcement. In 2009, the regulator released a provision that requires operators to enhance their processes for protecting copyrights and to take appropriate measures to protect the rights and interest of copyright holders. In November 2016, an anti-piracy campaign known as the Jianwang Operation resulted in a seizure of 1.5 million pirated publications, the shutdown of 1,655 websites containing pirated content and the removal of 274,800 pirated links. In May 2017, the Beijing court awarded one of the highest fines ever issued (US$1 million) for a case of copyright infringement against an online platform. Below is a summary of the findings on piracy from our research:

• 68% of respondents said they used cloud downloads to access pirated content in the last six months, making this the most commonly used source of piracy in China

• The highest proportion of respondents using pirated sources on a daily basis drops to 9% for pirated DVDs, followed by 8% of respondents for cloud downloads, indicating that most viewers are not visiting pirated sources on a daily basis

• Based on our interviews, respondents aged 18-24 were more likely to watch pirated content than other age segments, reporting incidences of 2-3 times per week

• While both males and females reported using pirated sources, males reported higher incidences overall across age groups

• The primary reasons given for watching pirated content were: o It was difficult to find legitimate versions of western shows and movies o Pirated content was easy to use and find online as it is very prominent in

search listings o Pirated content is free

• In terms of respondents’ views on piracy, our respondents who watched pirated content fell into two camps:

o The first camp expressed support for copyright laws saying they should be observed but said pirated sources were the only way to obtain a lot of content that they could not find on legitimate websites

o The second camp expressed the sentiment that everyone watches pirated content and that they do not really care if it is illegal and therefore were not concerned whether the content was available legally or not

1.7. Regulatory Environment Our overview of the regulatory environment in China related to digital content focuses on four areas: 1. Key stakeholders in Chinese TV regulation 2. Licensing requirements for online platforms


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3. Regulations on foreign content 4. Live streaming regulations Below we have provided a summary of each of these areas: 1. Key Stakeholders in Chinese TV Regulation

There are four key government organizations that oversee broadcast content in China:

i. State Council ii. Ministry of Culture iii. State Administration of Press, Publication, Radio, Film and Television (“SAPPRFT”) iv. Cyberspace Administration of China

Content censorship in China has historically been primarily overseen by SAPPRFT. Oversight of TV content in particular, is viewed as vital to the government’s efforts to communicate key messages and influence public opinion as TV’s reach spans the entire nation and is hence tightly regulated. As a relatively new medium, professionally produced online content has had less comprehensive censorship guidelines applied to it with lax enforcement in the past, but the government has undertaken a number of enforcement campaigns over the last two years. This more active approach to enforcement is likely to continue as online video viewing becomes more pervasive in the country making it a greater threat to the country’s social fabric in the government’s eyes. In another move widely seen as further tightening the government’s control over the media sector, it was announced in March 2018 that SAPPRFT would be abolished and replaced by three new bodies that would report directly to the State Council:

1. The State Administration of Radio and Television (“SART”) 2. The State Bureau of Film (Film Bureau) 3. The State Administration of Press and Publication (“SAPP”)

2. Licensing requirements for Online platforms In December 2007, SAPPRFT issued the Administrative Provision of the Internet Audio-Video Program service or the Audio-Video Program Provision, which came into effect in January 2008 and was later amended in August 2015. The Audio-Video Program Provision defines “internet audio-video program services” as the producing, editing and integrating of audio-video programs, supplying audio-video programs to the public via the internet, and providing audio-video programs uploading and transmission services to a third party. Providers of internet audio-visual program services must obtain an Internet Audio-Video Program Transmission License to provide their services.

There are two types of Audio-Video Program Transmission Licenses that internet audio-video program services can apply for as highlighted below:

I. Integrated license • Integrated licenses are needed for content providers to load their video

applications on IPTV/streaming boxes • There are seven integrated licenses – three were awarded in 2010 and

four more in 2015


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II. Internet Audio Video Program Transmission License

• All online platforms that distribute content online are required to possess an Internet Audio Video Program Transmission License

As a result of the stringent criteria for an Internet Audio-Visual Programming License, many platforms are either forming partnerships with existing licensees or acquiring companies who have the license. 3. Regulations on foreign content Another key regulation affecting online platforms in China is the restriction on foreign content which requires operators of online video platforms to obtain permits for all foreign and TV dramas per title before they are transmitted via internet. To obtain approval for a serialized show, applicants must submit the full season to the regulator for review. The impact of this is that the release date of legitimate content significantly lags the release date in the country of origin which inevitably leads to a higher incidence of piracy. In addition, online video platforms must import foreign films and television dramas for use on their own websites and not exclusively to resell to others. Finally, the annual import quantity of foreign films and television dramas may not exceed 30% of the total hours of content an online video platform purchased in the previous year. 4. Live Streaming Regulations In a bid to regulate the live streaming industry, SAPPRFT issued the notice on Strengthening the Management of Live Services of Internet Audio-Visual Program Services in September 2016. This ultimately resulted in 19 articles specifying the regulations and codes of conduct for operating a live streaming platform in China which were designed to restrict popular live streaming content that was seen as not promoting desired social values. In May 2017, the Ministry of Culture launched inspections of live streaming sites that were operating without a license or allowing restricted content to be streamed on their platforms. This enforcement campaign resulted in ten live streaming platforms being closed. In addition, 48 live streaming operators were subject to administrative punishments. The following month, in June 2017, the Ministry of Culture reviewed 10,562 mobile live broadcast applications and required another 12 of them to be closed down.


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2. China TV Market Overview

In this chapter, we set out

2.1 TV Market Overview 2.2 Free-to-Air TV in China 2.3 TV Advertising 2.4 Smart TV Ownership 2.5 General TV and Online Viewing Behaviour

2.1. TV Market Overview

Broadcast television has long played an important role in China both as a medium for entertainment and the spread of government approved ideology thanks to its wide reach. According to the latest official government statistics available, the percentage of households in China that own a TV set was 99%1 in 2014. That is equivalent to 455 million2 households at the end of 2014 and 495 million 3 at the end of 2017 assuming the penetration rate held steady. Currently, there are more than 2000 television stations in China including FTA and pay TV stations. The exact number of broadcasters varies from source to source as stations are consolidated, merged, separated or even reopened following a closure. In almost all cases, these stations are linked to government entities through their shareholding structure. The three categories of broadcasters in China are:

• National TV Broadcaster (e.g. CCTV) • Provincial Satellite TV Broadcaster (e.g. Hunan TV, Jiangsu TV, Zhejiang TV) • City Satellite TV Broadcaster (e.g. Nanjing TV, Hangzhou TV)

While the National TV Broadcaster channels are available free-to-air, all other channels in China require a subscription. Approximately 65% of households4 in China subscribe to what amount to pay TV services which offer both Provincial Satellite TV and City Satellite TV channels.

2.2. Free-to-Air TV in China

CCTV is the only national FTA TV broadcaster in China. Known as Beijing TV prior to May 1978, it was officially launched in September 1958. Thanks to its ubiquitous availability, CCTV is the most watched channel in the country and over the years, has expanded the number of channels it operates. Today, it broadcasts a total of 15 free public channels each focusing on a specific theme:

• CCTV1 – General

1 http://www.stats.gov.cn/tjsj/ndsj/2016/indexeh.htm 2 http://www.stats.gov.cn/tjsj/ndsj/2015/indexeh.htm 3 https://www.ceicdata.com/en/china/population-no-of-person-per-household/population-average-household-size 4 All View Cloud(AVC),"2017 China OTT Big Screen Industry Trends Analysis," March 31, 2017


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• CCTV2 – Finance • CCTV3 – Variety • CCTV4 – Asia, Europe, US • CCTV5 – Sports • CCTV6 – Movies • CCTV7 – Military and agriculture • CCTV8 – TV series • CCTV9 – Documentary • CCTV10 – Education • CCTV11 – Opera • CCTV12 – Society and law • CCTV13 – News • CCTV14 – Kids • CCTV15 – Music

In March 2018, the Chinese government announced that CCTV will merge with two state radio platforms, China Radio International (CRI) and China National Radio (CNR) to form one entity called the “Voice of China”. The new entity will be under the direct supervision of the State Council and will be led by the Publicity Department of the Communist Party China. This is widely seen as a move to tighten government control on public sentiment and to expand efforts to improve China’s global image.

2.3. TV Advertising Advertising on FTA channels generated US$12.5 billion in 2016. Advertising on pay TV platforms generated revenues of US$5.1 billion in 2016 and represented 29% of total TV advertising in that year. FTA advertising is expected to drop to US$12.3 billion in 2020 while pay TV advertising is forecast to grow to US$5.5 billion in 2020 as can be seen in Exhibit 1. Exhibit 1 TV advertising spend in China, 2016–2020

Source: Magna Global

71% 69%

29% 31%

02468

101214161820

2016 2020

US$

bill

ion

FTA TV revenue PayTV revenue

17.6 17.9


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2.4. Smart TV Ownership

One indicator that the country is rapidly digitalizing is the number of households that owned smart TVs in 2016 which was estimated to be 165 million or 36% of total households. That number is expected to reach 72% by end of 2020 as shown in Exhibit 2. Exhibit 2 Smart TV ownership in China, 2015–2020F

Source: All View Cloud (AVC)

2.5. General TV and Online Viewing Behavior in China Results from the Pioneer Consulting Asia 2018 Market Research Study show that highly digital viewing habits have already taken a strong hold in China. The overall trends identified in the market research related to digital viewing behavior were:

• High daily incidence (91%) of urban online consumers viewing video on their

mobiles • Significant amounts of time spent watching video on mobile devices with over

60% of respondents watching over 30 minutes of video per day on their mobiles

• Reported viewing of both short-form and long-form content on mobiles • Dominance of iQiyi, Tencent and Youku respectively both in terms of online

viewers and paying subscribers

These factors further substantiate the rising traction of online video platforms in China and foreshadow their progression towards becoming the primary destinations for video entertainment in the country. The following sections set out the key findings of the online viewing study.

28%36%

45%53%

64%72%

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60%

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2015 2016 2017F 2018F 2019F 2020F

% o

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2.5.1. Viewing Habits and Content Preferences The study showed that mobile viewing of video content has become a daily activity for most urban Chinese. While respondents who reported watching FTA, cable/satellite and IPTV platforms daily were split relatively evenly with 38%, 42% and 34% respectively, viewing on mobile phones was reported by 78% of respondents. This finding was broadly similar across age groups and genders. Details are provided in Exhibit 3. Exhibit 3 Platforms used to watch video content (daily)

Source: Pioneer Consulting Asia In terms of the most viewed content by country of origin, Chinese content reigns with 74% of respondents indicating that it was the content they watched the most. In second place was Western content from the US and UK with 39% of responses. Korean at 16% was closely followed by Japanese at 15% as shown in Exhibit 4. Exhibit 4 Most watched video by country of origins

Source: Pioneer Consulting Asia

5%

78%

34%

42%

38%

I do not watch TV

Mobile video platforms

Internet TV (eg IPTV)

Satellite / Cable TV

FTA TV

% o

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ents

39%

16%

15%

74%

Western (US, UK)

Korea

Japan

China

% o

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A clear trend that emerged when this question was split by age segment was the higher preference for Western content among respondents aged 18 to 34 as seen in Exhibit 5. Almost half of all respondents between 18-34 watched Western content while closer to only one third of all respondents in the older age categories watched Western content. Interestingly, those under 18 (13-17 year olds) watched Western content in similar proportions as those 35-44, but had a much higher preference for Japanese content than the older age segment. In interviews with respondents, this preference was confirmed to be related to the viewing of Japanese anime series. Exhibit 5 Most watched video by country of origins by age

Source: Pioneer Consulting Asia In qualitative interviews, Western shows most often mentioned as watched by respondents were:

• Game of Thrones • Sherlock • The Vampire Diaries • Blue Planet • Peppa Pig

2.5.2. Trends in Digital Video Content Viewing

Having established that mobile viewing has become a daily habit in China, the market research looked at how much time was spent viewing video content on mobile devices daily. The data showed that 60% of respondents were watching more than 30 minutes per day as seen in Exhibit 6.

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45%

23%

19%

70%

45%

18%

18%

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34%

16%

9%

81%

25%

6%

6%

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18-24 25-34 35-44 45 and above

36%

14%

20%

65%

Western(US, UK)

Korea

Japan

China

% o

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ents


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Exhibit 6 Time spent watching video content on mobile phones daily


While 30 minutes and over is enough time to watch long-form content, the type of content that most respondents say they watched were short-form clips which include ‘Music’ and ‘Short video clips’ that were user-generated. Another popular genre that was highlighted in the research was ‘Original video clips’ which are professionally produced short-form content. This is an area which has gained significant traction in China over the last two years and a number of video platforms, such as Douyin and Toutiao, have recently emerged to capture the demand for this type of content. In terms of long-form content viewed on mobile, ‘Sports’ was a popular choice as sports viewers want to catch their favorite match or event regardless of where they might be. Interestingly, the next highest response for long-form content watched on mobile was ‘Western movies’ despite local content being the most popular overall genre of content. Based on our interviews with respondents, the rationale behind this was that many online video platforms (including pirate sites) offer Hollywood content on demand whereas this content is not as readily available on FTA or pay TV channels. More details of top genres consumed on mobile devices can be seen in Exhibit 7.

7%

9%

21%

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Exhibit 7 Genres most watched on mobile phone in China

Source: Pioneer Consulting Asia When split by gender, ‘Sports’ was the most cited content watched on mobile phones for men whereas women chose ‘Music’ as the content they watched most often followed by ‘Short video clip’s and then ‘Western TV series’. The remaining Top 10 genres by gender are highlighted in Exhibit 8. Exhibit 8 Genres most watched on mobile phone in China


0%1%1%

9%12%

16%18%

20%23%

25%26%

26%27%

28%28%29%

36%37%

EducationalVariety

ReligiousKorean movies

International documentaryeSports

Korean TV seriesChinese documentary

Chinese film & TV seriesLifestyle

Live streamWestern TV series

AnimeWestern movies

Original video clipsSports

Short video clipsMusic

% o

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pond

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22%

23%

26%

28%

29%

31%

34%

37%

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50%

Lifestyle

Western TV series

Anime

Western movies

eSports

Original video clips

Live stream

Short video clips

Music

Sports

% o

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Male

19%

26%

26%

27%

28%

28%

29%

30%

36%

37%

Chinese documentary

Chinese film & TV series

Original video clips

Western movies

Lifestyle

Anime

Korean TV series

Western TV series

Short video clips

Music

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The top three most-cited platforms for watching online video content were iQiyi, Tencent Video and Youku reaching an impressive 73%, 70% and 59% respectively of total respondents as can be seen in Exhibit 9. Preference for the top three platforms did not materially differ by age or gender. Exhibit 9 Top three mobile website/apps used to watch video content on mobile (%)

Source: Pioneer Consulting Asia Our survey also aimed to identify which platforms consumers had paid a subscription to in the past three months. As displayed in Exhibit 10, iQiyi was also the leader in this category with 38% of respondents having signed up for a service. Tencent was second with 30% of viewers and Youku third with 25% of viewers. In distant fourth place was MangoTV with 9% of viewers, highlighting the dominance of the top three players. Once again, preference for the top platforms by paying subscribers did not materially differ by age or gender. Exhibit 10 Breakdown of respondents that have subscribed to SVOD by platforms


59%

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Tencent Video

iQiyi

Youku Tudou

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3. China’s Pay TV Industry In this chapter, we set out

3.1 Pay TV Market Overview 3.1. Pay TV Market Overview

At the end of 2016, China had 313 million pay TV subscribers, making it the largest pay TV market in the world by subscriber numbers. The forecasted number of pay TV subscribers by the end of 2017 was 325 million. By 2022, the number is expected to grow to 353 million, representing a CAGR of 2.4% as seen in Exhibit 11. Exhibit 11 China’s pay TV subscribers, 2016–2022F

Source: All View Cloud (AVC)

Cable TV is the most widely adopted pay TV distribution technology in China. It is estimated that around 160 million households5 were subscribed to cable pay TV services in June 2017 representing a household penetration rate of 35%. Licensed IPTV has been growing rapidly in recent years and reportedly reached 102 million households in June 2017, a household penetration rate of 22%6. To be a licensed IPTV provider in China with permission to provide domestic subscription television, platforms must obtain an “Information Network Audio-visual Program Broadcast Permit”. Household penetration of any form of pay TV reaches over 90% for urban areas in China7. However, in rural areas, authorized Satellite TV is more widely used and overall reaches an estimated 63 million households. It should be noted that the size of the unlicensed satellite TV market in China is estimated to be comparable in size to that of the licensed market. Unlicensed satellite TVs in China receive channel signals that officially are being targeted at foreign countries such as Taiwan and Thailand, hence the content is not

5 https://pandaily.com/chinas-cable-tv-is-strongly-impacted-by-iptv/ 6 https://pandaily.com/chinas-cable-tv-is-strongly-impacted-by-iptv/ 7 JP Morgan online video report 2017

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censored by regulators and fees for the content do not get distributed to the rightful IP holders. Due to a regulatory requirement, there can only be one cable TV service per area. These cable TV companies are regulated by SAPPRFT and owned by the State. The channels that are available on cable TV platforms include CCTV, provincial satellite TV channels and local ones. Subscribers are required to pay maintenance fees for a pay TV service every month. This fee is set by the regulators and does not change often. Any changes to the fees require an extensive process which include a local public hearing. The fees (as shown in Exhibit 8) are considered extremely low compared to other South East Asian markets. This is due to the fact that these companies are owned by the government which views pay TV services as utilities that should be available to the masses. Exhibit 12 Breakdown of cable TV monthly basic fees by regions

Source: Company data and JP Morgan research

The pay TV industry has experienced increasing competition since 2005. In 2005, the government’s three network convergence initiative allowed the country’s telecom operators, China telecom and China Unicom, to provide IPTV services. IPTV services are typically given as a complementary service with these operators’ broadband offerings and is a direct substitute service to cable TV. It can broadcast similar TV channels to cable TV providers and has better interactive functions and value-added services designed by operators.

3.1.1. Types of Channels in China

Channels available on pay TV platforms are a combination of National TV stations, Provincial Satellite TV (PSTVs) and City Satellite TV Broadcasters (CSTVs). Examples of each are provided in Exhibit 13.

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Exhibit 13 Types of channel in China

Source: IHS Technology

3.1.2. Provincial Satellite TV Broadcasters (“PSTVs”)

PSTVs are defined as television stations owned and operated by Chinese provincial governments but available to Chinese audiences nationwide. There is a total of 24 provincial operators in China as per the following list in Exhibit 14: Exhibit 14 Provincial TV broadcasters in China

Source: IHS Technology In Exhibit 15, we have provided the top five Provincial Satellite TV broadcasters by audience rating from 2014–2017.

Type of channels Channels

National TV station CCTV, China education television

Provincial Satellite TV Beijing TV, Hunan TV, Dragon TV, Jiangsu TV, Zhejiang TV

City Satellite TV Shenzhen, Amoystar, Sansha, Yanbian

Other terrestrial channels All others


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Exhibit 15 Top five audience rating of provincial TV channels

Source: CMS Media Research Below we provide more details on the top five key PSTV channels by TV audience rating: Hunan TV, ZhejiangTV, Shanghai (Dragon) TV, Jiangsu TV and Beijing TV.

Hunan TV

Zhejiang TV

Dragon TV

Hunan TV is the most popular provincial TV station in China. It is China’s second most watched channel after CCTV. The channel, formerly known as Golden Broadcasting System, launched in January 1997. Hunan TV focuses on targeting youth and has produced a number of popular original TV dramas and variety shows. Examples of notable programs include “Happy Camp” (one of China’s first variety shows), “Super Girl” and the drama series, “In the Name of the People”, which received the highest audience rating (7.3%) in China in 2017.

Zhejiang TV was launched on October 1960 and started broadcasting nationwide in January 1994. Zhejiang TV was initially focused on producing news content but over the years has shifted its focus to variety shows. The channel also frequently purchases format rights and broadcasting rights from foreign players. Some of the notable variety programs it has acquired and produced include “Running Man China” and “The Voice of China”.

Dragon (Shanghai) TV, previously known as Shanghai Metropolitan TV, was launched in October 1998 and renamed Dragon TV in October 2003. The channel focuses mainly on all day news and includes a number of live news programs presented at standard times across the day.


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Jiangsu TV

Beijing TV

3.1.3. City Satellite TV Broadcasters (”CSTVs”)

City Satellite TV Broadcasters (CSTVs) are owned by city governments across China. The total number of operating channels is hard to keep track of due to a continuous stream of corporate actions such as acquisitions, mergers, closures, and re-openings. It is estimated that there are approximately 2000 CSTVs in China. These are also available on pay TV platforms but only in the cities and nearby suburbs where they originate from.

Jiangsu TV, a provincial channel based in Nanjing city, was launched in December 1997. It is very active in producing news content on the social media platform known as Weibo, China’s equivalent to Twitter. However, the channel’s main focus is on producing variety shows. One of the most popular variety shows produced by Jiangsu channel is a dating show called “If You Are the One”.

Beijing TV, a provincial channel based in Beijing city, was launched in May 1979. One of the oldest provincial TV channels in China focused mainly on news, educational and variety shows.


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4. Overview of China’s Telecoms industry The following chapter gives an overview of China’s telecoms landscape and its key players. It provides a summary of business scope, descriptions of strategies, and key financial highlights. In this chapter, we set out:

4.1 China’s Mobile Industry Overview 4.2 China’s Fixed Broadband Industry Overview 4.3 China’s Telecom Operators’ Online Video Initiatives

4.1. China’s Mobile Industry Overview

4.1.1. Mobile Subscriber Numbers

China’s mobile penetration rate was 76% of the total population in 2016 and is expected to grow to 86% of the total population by 2020. It is worth noting that penetration at end-2014 was only 48% but by the end of 2015, this had increased by almost 52% to reach 73%. The rapid increase in penetration can primarily be attributed to the construction of an extensive 4G network and heavy promotions of 4G-compatible handsets by mobile operators. In 2017, it was estimated that 73% of mobile subscribers were on a 4G network and China’s smartphone penetration was 71% of all phone users in 2016. Exhibit 16 highlights the growth in China’s overall mobile penetration as well as the forecast penetration rate by 2020.

Exhibit 16 China’s mobile penetration growth

Source: GSMA Thanks to the wide availability of broadband capable networks (3G and above) and the wide adoption of smartphones, China boasts the largest online population in the world with an estimated 772 million internet users at the end of 2017, equating to 56% of the population.

46% 48%

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There are three nationwide mobile telecoms operators in China:

1. China Mobile 2. China Unicom 3. China Telecom

The largest mobile operator by total number of mobile subscribers is China Mobile, which had 638 million customers as at the end of 2016. China Unicom followed with 264 million subscribers and China Telecom trailed with 215 million subscribers at end-2016. As China Mobile was the biggest investor in the nation’s 4G networks, it currently has 70% of the 4G subscriber market share in the country. China Unicom has the biggest 3G subscriber base in the country with 45% market share. A detailed breakdown by subscriber numbers is provided in Exhibits 17 and 18.

Exhibit 17 China telecom operators’ 3G and 4G subscribers, 2016

Source: Company annual reports

Exhibit 18 China telecom operators’ mobile subscriber base, 1Q15–2Q17


815 817 823 826 834 837 844 849 856 867

295 289 288 287 259 261 262 264 266 269190 191 194 198 203 207 212 215 222 230

0100200300400500600700800900

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In general, the wide availability of both 3G and 4G networks in combination with inexpensive prices have encouraged the take up of smartphones in China. China’s smartphone penetration was 71% in 2016 and is expected to grow to 74% by 2020. The largest jump in smartphone penetration occurred between 2013 and 2014, growing from 39% to 57%. Exhibit 19 provides historical and forecast smartphone penetration rates in China from 2013 to 2020. Exhibit 19 Smartphone penetration rates in China, 2013–2020F

Source: GSMA

4.1.2. Mobile Industry Revenues

Overall mobile industry revenues in China experienced growth at an annual rate of 3% per year between 2014 and 2016. In 2016, total mobile revenues were RMB 1334 billion, up from RMB 1264 billion in 2010. Of the 2016 total, China Mobile’s mobile revenues accounted for 53% or RMB 708 billion. A breakdown of the major mobile operators’ revenues and related market share is provided in Exhibit 20. Exhibit 20 Telco operators’ mobile revenue, 2014 – 2016 and market share by revenue, 2016


39%

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Average monthly revenue per user (ARPU) for Chinese mobile users is approximately RMB 54. This has recently dropped due to more intense competition between the players. Exhibit 21 provides a comparison of mobile ARPUs across selected Asia Pacific countries.

Exhibit 21 Comparison of mobile monthly ARPUs across selected Asia Pacific countries, 2016


4.1.3. Mobile Operators’ Near-Term Strategic Priorities

Globally, mobile operators are facing reduced margins as Over-The-Top messaging services accessible via broadband data networks enable consumers to reduce their dependency on the mobile operators’ core services of voice calls and messaging. China’s mobile operators face similar challenges and their strategic priorities over the next 2-4 years, which are provided below, highlight how they plan on overcoming these:

China Mobile

• Transition from voice centric to data centric operations • Shift core focus from mobile communication service to digital services

including content media and IoT for enterprises • Focus on expansion of 4G network - optimising network architecture to

migrate 2G/3G network to 4G network

China Unicom • Focus on 4G network development and upgrades with the goal of increasing

data revenues • Offer enhanced OTT solutions such as Video-on-Demand (VOD) • Develop enterprise segment to diversify revenue streams

China Telecom

• Enhance rural and overseas markets • Build up digital services including Video, M2M platform and Cloud services

2.4 2.4 2.4

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India Indonesia Philippines Thailand China Malaysia Singapore

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Shared themes amongst at least two of the operators are improving 4G networks to drive data revenues, offering digital services such as content, and developing new enterprise opportunities. The former two bode well for the video industry:

• Enhanced data networks will provide a better user experience which encourages more video usage

• Focus on digital services has already manifested itself in the form of multiple partnerships with video platforms to provide less expensive access via promotional data rates.

It should also be noted that all three telcos have launched their own OTT video services in the country, although to date, none has gained significant traction in the market. More details are provided in Section 4.3.

4.2. China’s Fixed Broadband Industry Overview

4.2.1. Fixed Broadband Subscribers

China’s fixed broadband growth has been driven by a national strategic initiative known as “Broadband China” which has set a 2020 target for fixed broadband to reach 70% of households with broadband speeds in cities and rural area of 50Mbps and 12Mbps respectively. On the back of this initiative, China’s fixed broadband subscriber numbers has experienced annual growth of 9% between 2013 and 2016, growing from 185 million subscribers to 241 million as seen in Exhibit 22. By the end of 2018, fixed broadband subscriber numbers are forecast to reach 268 million, representing an annual growth rate of 6% from 2016. Exhibit 22 Total fixed broadband subscribers in China, 2013–2018F

Source: HSBC Industry report Prior to its recent fixed broadband push, China had limited rollout of fixed broadband infrastructure consisting of xDSL, LAN, and hybrid fiber and copper (HFC) cables. The result of this initiative is that China today has a high fiber-broadband-to-legacy-

185205

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technology ratio of more than 75%, a figure comparable to the proportion of fiber in Singapore, a global leader in fiber deployment and a country only a fraction of the size of China. Exhibit 23 provides a breakdown of the market share of each technology. With widely available access to fiber and relatively new infrastructure for other technologies, more than 80% of fixed broadband subscribers in China have subscribed to plans with over 20Mbps access speeds although actual speeds may vary. Exhibit 23 Breakdown of total fixed broadband subscribers by technology, 2013–2017

Source: China Academy of Information & Communications Technology In terms of actual fixed broadband speed performance, average download speed over the second quarter of 2017 was recorded at 14.1Mbps. This was up from an average download speed of 5.1Mbps measured over Q1 2015. The speed of video downloads was noticeably slower in Q2 2017 at 10.3Mbps. The reason for slower download speeds for video content is likely due to a combination of the following reasons:

1. Poor configuration of video servers 2. Video servers’ uplink bandwidth was small 3. Too many visitors at a given time resulted in reduced speed during testing 4. The video servers were too far away from the network where the testing

device was located

Despite the lower speed, 10.3Mbps is still fast enough to provide a quality viewing experience considering video in 1080p resolution requires a minimum of 6Mbps. However, this speed would not be suitable for 4K content for which the recommended download speed is 13Mbps. Exhibit 24 shows the growth in China’s overall fixed broadband download speeds and video download speeds between 2015 and mid-2017.

41% 34%21%

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75% 83%

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Exhibit 24 China’s fixed broadband average download rate and video download rate

Source: China Statistical Yearbook In 2016, China Telecom was the market leader in fixed broadband with 127 million fixed broadband subscribers as displayed in Exhibit 25. Exhibit 25 Fixed broadband subscribers by China telecom operators, 2016

Source: HSBC Industry Report

4.2.2. Fixed Broadband Industry Revenues

China Telecom also had the highest fixed broadband ARPU in 2016, which was RMB 54, while China Mobile had the smallest fixed broadband ARPU in 2016 as seen in Exhibit 26.

5.1 6.1

7.9 8.3 9.5

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Exhibit 26 Fixed broadband monthly ARPUs for each telecom operator, 2015–2016

Source: Company annual report

4.3. China’s Telecom Operators’ Online Video Initiatives

In efforts to promote convergence between traditional and new players in the media space, the State Council of China launched the three-way convergence program in 2015, which is designed to encourage telecom operators, television broadcasters and internet firms to interact and provide their own services in each other’s respective fields if possible. As all three telecom operators in China have identified digital services as a strategic priority, they have all launched their own digital video initiatives under this new program. These are described below in more detail. China Mobile Migu Culture Technology (Migu) was established as a subsidiary of China Mobile to launch digital services for mobile internet usage. Migu is responsible for the integration and supply of digital content, operations and services to China Mobile. It focuses on five types of digital content: music, video, books, games and animation. The product available to subscribers is named Migu+, which aggregates all of Migu’s content onto one platform. Since the beginning of 2015, Migu started acquiring well-known video content titles and in 2017 had acquired titles such as “Despicable Me 3”, “Fast and Furious 8”, “Spider-Man: Homecoming”8 and “Kingsman: The Golden Circle”. For this last film, Migu was reportedly cooperating closely with Fox on promotional efforts. In February 2018, Migu acquired more than 2,200 hours of BBC content across factual, lifestyle and preschool genres.9 Migu Video offers free, time-based and monthly billing access. The fee per use can range from RMB 0.5 or RMB 1 while monthly packages range from RMB 6 per month to RMB 10. To drive usage of Migu video, China Mobile promotes connectivity packages with

8 http://www.chinadaily.com.cn/business/2015-01/16/content_19333325.htm 9 https://www.rapidtvnews.com/2018022150993/china-s-migu-video-acquires-2200-hours-of-bbc-content.html#axzz5JVq9YG4e

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exclusive perks for Migu products through its sales channels. These include bonus data quotas for customers who sign up to Migu monthly packages for Migu Video usage.

China Mobile has also leveraged Migu to launch an overseas video business in October 2017 which translated to English is called “Watch Freely Overseas”. By subscribing to this service, China Mobile subscribers who travel abroad can enjoy a variety of video content from domestic TV broadcasts to news and popular short videos by paying RMB 1 per day for access to the content. Users of “Watch Freely Overseas” websites will not be charged extra content fees and can enjoy the same benefits as Migu Video members. Despite its acquisition of popular Hollywood titles, Migu’s overall library is described by users as small compared to other mainstream video services in the country and traction of the service remains limited with an estimated viewership share of only 0.45% of online viewers. Migu’s market share is widely viewed as the highest among all the telecom operators’ video platforms. While traction for Migu has been low, China mobile views Migu as its priority for long-form content and has not formed any major partnerships with other long-form platforms. However, they have issued requests for proposals for partnerships with live streaming and short video platforms.

China Unicom China Unicom launched a promotional offer specifically around “Unlimited Video Enjoyment” to promote its transition to a “data + content” business model. The offer relates to data quotas for usage on video services China Unicom has partnered with which include Tencent, iQIYI, Youku, LeTV, BesTV, Mango TV, Huashu and others. Once a user subscribes to any of these services through China Unicom’s direct carrier billing option, the user can watch videos (at 480p resolution) without paying data usage fees.

At the same time, China Unicom has also launched its own service, “WO Video”, a mobile video platform independently developed and operated by China Unicom. In May 2017, the number of users of WO Video had reportedly reached 12 million, of which active monthly users constituted 30%. Similar to Migu, Wo Video purchased and promoted big Western titles but their overall library remains relatively small compared to other native video services. China Telecom China Telecom has partnered with a host of online video services to offer unlimited video streaming with purchase of data bundles of a certain size. Examples of their online video service partners include iQiyi, Youku, LeTV, PPTV 10, Douyu TV11 and Hujiao TV 12. The impact of these bundles on revenue or acquisition is not yet clear. China Telecom also established its mobile online video platform business, Tianyi Video Media, in March 2011. The service’s traction is generally seen as limited and trailing that of China Mobile’s Migu although official numbers are not released.

10 http://www.chinaz.com/mobile/2017/0426/692411.shtml 11 http://cservice.client.189.cn:9092/douyucard/douyucard_index.html?ct=0 12 http://news.qudong.com/article/428413.shtml


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5. China’s Online Video Landscape

The following section provides information on China’s online video landscape and covers overall market size and growth trends, key players, revenues, business models and content offerings. The online video initiatives of telcos in China have been covered in a separate chapter. In this chapter we set out:

5.1 Online Video Landscape Overview 5.2 Major Online Video Players in China 5.3 Other Established Online Video Platforms in China

5.1. Online Video Landscape - Overview China’s online video market size by number of active users was estimated to be 596 million in June 201713. This represented roughly 76% of the online population, highlighting that online video viewing is one the most common online activities in China. In June 2014, the number of active video users was already estimated to have reached 431 million. Revenues for the online video sector have grown by a factor of five over the last three years, from RMB 10 billion in June 2014 to an estimated RMB 50 billion at end June 2017. In the 2017 figure, 50% is attributed to advertising revenues14 while the remainder is composed of other revenues such as user payments (subscription and one time) and copyright/IP sales. The evolution of China’s online video market has seen it transition from services with links to piracy, to legitimate services driven by advertising and, more recently, to subscription driven services. At the end of 2017, there were an estimated 140 million paying video users, up from only 8 million in 2014 as shown in Exhibit 27. The 2017 figure represents approximately 24% of the entire online video user base, up from 2% in 2014. Exhibit 27 Number of online video paying users, 2013–2018E


13 BDR report 14 http://wreport.iresearch.cn/uploadfiles/reports/635932899870684807.pdf

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In 2017, the size of user-generated revenue (subscription or one-time transactions) in the online video market was estimated to be RMB 14 billion, up by a factor of ten from 2014’s revenue of only RMB 1.4 billion as highlighted in Exhibit 28. Despite paying users only accounting for just over one tenth of overall online video users, the proportion of revenue they generate already accounts for close to 28% of the market, highlighting the strategic importance of user-generated revenue in the online video space. Exhibit 28 User-generated revenues of China’s online video platforms, 2014–2018

Source: BDR

Mirroring initiatives seen in the global online video market, Chinese video platforms have shifted content budgets towards original productions as they believe there is a high correlation between original content and subscription revenue growth. There is also the added benefit that original content can generate additional revenue through distribution rights. As such, the market is likely to see growing investments in original production in the coming years as online players seek to differentiate themselves and cultivate their paying subscriber bases. The online video player space is made up of more than 200 players, with many serving targeted niches or offering specific types of content such as live streaming or short videos. Some recent entrants have leveraged new technology, such as virtual reality (VR) to differentiate their offerings from the competition. In the premium long-form content space, despite the wide array of choices, the market is dominated by three key players: iQiyi, Tencent and Youku. Together, the number of active users on these sites make up 83% of the users across the Top 10 platforms in the country. Exhibit 29 provides a breakdown of users and year-on-year growth by site for the ten most visited premium long-form content video sites in China.

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Exhibit 29 Monthly active users of Top 10 premium long-form content online video platforms, 2016–2017

Source: BDR

In terms of time spent by platform, Youku is the leader with an average of 32 minutes per day followed by MangoTV and LeTV at 30 and 27 minutes per day respectively. Exhibit 30 shows the top eight platforms by time spent. Exhibit 30 Time spent per day on the top premium long-form online video platforms, June 2017

Source: BDR

5.2. Major Online Video Players in China The top three players in China’s online video market, iQiyi, Tencent and Youku are owned by some of the largest technology companies in China:

• iQiyi is owned by Baidu, China’s largest search engine • Tencent is owned by Tencent, the company behind China’s most popular chat

application, WeChat, • Youku is owned by Alibaba, China’s largest ecommerce platform

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Baidu, Alibaba and Tencent (B.A.T.) are all publicly listed and have a market capitalization of US$87 billion15, US$490 billion16 and US$451 billion17 respectively. As highly diversified businesses, their online video platforms account for only a small proportion of their overall revenue but they leverage their content portfolios to drive synergies with other internal business units. Exhibit 31 highlights the main businesses B.A.T. operate and their approximate market share in each. Exhibit 31 Market share of Chinese online markets by industry verticals, 2017

Source: The Economist, 2018 While still in the midst of a highly competitive battle in China, B.A.T. have also taken the fight overseas, bringing them head to head not only with each other but also with the American tech leaders, most notably Amazon, Google and Facebook. However, the Chinese companies’ approach has been markedly different than their American counterparts. American firms tend to vie for dominance in new markets under their own brands while B.A.T. have generally moved into new markets via investment into domestic players. While Amazon has been stamping its brand on markets from the Middle East to India, not many Indonesians or Indians for that matter would immediately know Alibaba. Yet the company already has major stakes in established leading players across both countries from Paytm and BigBasket in India to Tokopedia in Indonesia. Tencent is also placing bets in companies abroad across a slate of online and digital businesses including ride hailing and payments. And these investments are increasing. Tracxn, a data services firm that tracks start-up funding globally, reported that, in 2017, Chinese tech firms invested US$5 billion in India, up from just US$930 million in 2016. The

15 https://www.bloomberg.com/quote/BIDU:US as at 2/7/2017 16 https://www.bloomberg.com/quote/BABA:US 2/7/2017 17 https://www.bloomberg.com/quote/700:HK 2/7/2017

https://www.bloomberg.com/quote/BIDU:US

https://www.bloomberg.com/quote/BABA:US

https://www.bloomberg.com/quote/700:HK


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market research firm, Forrester, estimates that Chinese tech firms invested another US$6 billion in South East Asia alone in 2017. Although Baidu has been less active in its foreign investments, on the video front, it has already launched iQiyi in Taiwan and there has been speculation that it will soon expand this service to South East Asia.

5.2.1. iQiyi Formerly known as Qiyi, iQiyi was founded by Baidu in 2010 and is currently the largest online video site in China by monthly active users and in terms of total hours spent on its service - reportedly 5.579 billion hours per month. The service offers millions of hours of professionally produced content across movies, dramas, factual, anime and kids genres. The majority of its content is Chinese but it also carries an extensive western content library. In April 2017, iQiyi signed a content licensing cooperation with Netflix to offer TV series, animation, documentaries, reality shows etc. The content is available only for iQiyi paying users. Famous dramas and adventure reality shows such as Ultimate Beastmaster have recently become available or will be in the near future. Black Mirror 4, Stranger Things 2, and Netflix’s new drama Mindhunter are available via iQiyi on the same day as the rest of the world. iQiyi offers users the option to watch its content free with ads. However, not all content will be available to non-paying users. For ad-free viewing and access to certain pay-walled content, viewers need to sign up for a paid subscription, termed a VIP membership. As a result of having a large free user base and small but growing paid user base, China’s video platforms have started employing content windowing, which mirrors the way content has traditionally been sold to pay TV and FTA broadcasters. iQiyi will place its latest premium content behind its paywall for a period of up to three months, although it can range from a few weeks to indefinitely. After the windowing period, most content becomes available to unpaid users. In addition, iQiyi will offer different benefits for different titles. These benefits may include same day viewing or full access to all episodes at once instead of limited to once per week. More examples are provided in Exhibit 32. In June 2015, iQiyi reported only 5 million paid subscribers but, by June 2016, that number had quadrupled to over 20 million, largely driven by the launch of exclusive content. In March of 2016 for instance, iQiyi exclusively broadcast the popular Korean series, Descendants of the Sun, which resulted in a 5 million increase in the number of paid subscribers by end of April 201618. Other exclusive titles and their impact on paid subscriptions are also shown in Exhibit 32.

18 https://m.21jingji.com/article/20180228/herald/39f796170972d28f6ed871a4cb9d5770.html


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Exhibit 32 iQiyi subscription benefits and returns by selected titles

Source: iQiyi website, PCA analysis

iQiyi’s overall content budget in 2016 was estimated to be RMB 7.9 billion. With exclusive content’s ability to drive subscription revenue proven, iQiyi has started to invest in self-produced content. It is estimated that iQiyi will invest between 40% of its overall content budget into originals in 2018, growing to 50% by 2019. iQiyi’s cost per episode of self-produced content has ranged from under RMB 1 million to a high of up to almost RMB 4 million. For instance, 48 episodes of a series entitled, “The Mystic Nine”, had a total budget of RMB 168 million, an average of about RMB 3.5 million per episode. Due to the high content cost (accounted for 69.5% of total revenues in 2015 and 72.6% of total revenues in 2017), iQiyi had an operating loss of RMB 3.7 billion in 2017. However, iQiyi experienced double-digit revenue growth from 2015 to 2017 with membership service and online advertising being the key drivers of revenue. A breakdown of iQiyi’s revenues is provided in Exhibit 33.

Exhibit 33 Breakdown of iQiyi revenue, 2015–2017

Source: iQiyi annual report

19%33%

38%64%

50%

47%

7%

4%

7%

10%

12%

9%

02000400060008000

100001200014000160001800020000

2015 2016 2017

RMB

mill

ion

Membership service Online advertising Content distribution Others

5319

11,237

17,378


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5.2.2. Tencent

The online video portal of Chinese internet giant Tencent, Tencent Video, is a mainstay in the Chinese online video market. Tencent Video offers millions of hours of professionally produced content across popular genres such as movies, dramas, factual, anime and kids. The majority of its content is Chinese but it also carries an extensive Western content library. As HBO’s exclusive online partner in China, Tencent has the sole online rights to shows such as Game of Thrones, The Wire and other HBO productions. Tencent also has a hybrid business model combining AVOD and SVOD. Tencent Video’s paid subscribers increased from 5 million in November 2015 to over 20 million in December 2016 putting it in close competition to iQiyi. Its content budget in 2016 was estimated to be RMB 8.6 billion, the largest among B.A.T. platforms. In addition to its exclusive content acquisition, Tencent has also entered into the original production space to help grow its subscription business. In 2016, it produced two series, Candle in the Tomb (12 episodes) and Novoland (28 episodes) for RMB 60 million each, or RMB 5 million and RMB 2.1 million per episode respectively19. Tencent has also launched a subsidiary called Tencent Pictures to invest in high profile movie productions, often in partnership with major Hollywood studios. It has partnered with the international production arm of 20th Century Fox to co-produce ten Chinese-language, feature-length movies (which span genres ranging from suspense and thriller to action, fantasy, romance and comedy) for online distribution in China. These films will be produced under a sub-brand of Tencent Pictures named Ivy Film Lab which produces content that targets China’s online youth market.

5.2.3. Youku

Youku was formed as the result of the 2012 merger between China’s two biggest online video streaming websites at the time, Youku and Tudou. Youku-Tudou, as it was known, was subsequently acquired by Alibaba Group at the end of 2015 with the purpose of giving Alibaba access to an even larger user base, adding to its growing portfolio of media interests and strengthening its already dominant position in the Chinese digital industry. In terms of content offering, Youku was initially known as the YouTube of China, offering mostly user-generated content. Through its user uploads, it also housed a large offering of pirated content. However, more recently it increasingly offers professionally produced premium content across content genres with a large selection of both Chinese and western titles. It has signed a partnership with the BBC for drama and documentaries and acquired the majority of its kids content from Disney and Time Warner in 2017. As it has legitimized its content portfolio, it has also started to enforce IP content violation bans on its site. Of the big three platforms, it has the smallest content budget, estimated at RMB 2.7 billion in 2016. Youku spent an estimated 30% of this budget on original productions

19 JPM Online Video Report


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including Ten Deadly Sins which reportedly cost between RMB 2 and RMB 6 million per episode20. Despite a lower overall content budget than its two other major competitors, Youku has reported the highest number of paid subscribers in 2016, claiming they exceeded 30 million in December 2016, or three times the 10 million reported in December 2015. However, PCA believes this number is not directly comparable to the other platforms’ subscriber numbers as Alibaba may have included paid subscriptions it offered as incentives to online purchases on its ecommerce platforms.

5.3. Other Established Online Video Platforms in China Other established online video platforms in China include both native online players and the online platforms of traditional FTA broadcasters. More details on the online services that rank in the top nine sites by number of monthly active users follows. Migu, which ranks tenth in terms of monthly active users has already been described in a separate chapter. MangoTV Established on May 26, 2006 in Changsha, Hunan, Mango TV is a Chinese internet company operated by mgtv.com Corporation, a wholly-owned subsidiary of Mango Media. Mango TV’s controlling stake holder is Hunan Broadcasting System, the broadcast and film group that operates China’s second most viewed linear channel after CCTV21. Thanks to its ownership structure, Mango TV has exclusive rights to all licenses and content copyright works from Hunan Broadcasting Systems and Hunan Satellite TV. Several of the major international events that Mango TV has exclusive broadcasting rights to are the Oscar Awards, Emmy Awards, Golden Globe Awards and Grammy Awards22. Aside from providing content that is presented on Hunan TV channels, Mango TV also specializes in creating online videos. Examples of original productions include The Gold Matchmaker in 2014 (web series) composed of twenty 15-minute episodes, and Crime Scene in 2016 (variety show)23. Even though Mango TV is not focused on foreign content, it formed co-production partnerships with foreign content providers such as BBC Worldwide and Lionsgate in 201524. In early 2017, Mango TV announced plans to do a backdoor listing on the Shenzhen Stock Exchange via a reverse merger with listed company – TV shopping firm, Happigo Home Shopping25. The listed company officially acquired Mango TV in September 2017 for RMB 9.5 billion according to a stock exchange filing by Happigo.26 However, Mango media retains control over Mango TV as it is also the largest shareholder of Happigo (Mango Media owned a 43% stake in Happigo before the acquisition). The acquisition was done

20 JPM online video report 21 http://corp.mgtv.com/about/#1st 22 https://www.dealstreetasia.com/stories/83200-83200/ 23 https://www.revolvy.com/main/index.php?s=Mango%20TV 24 http://variety.com/2015/tv/asia/bbc-worldwide-signs-co-operation-pact-with-chinas-mango-tv-1201615740/ 25 https://technode.com/2016/08/24/chinas-mango-tv-seeks-back-door-listing/ 26 https://www.chinamoneynetwork.com/2017/09/29/happigo-fully-acquires-chinese-online-video-platform-mango-tv


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to build an integrated media ecosystem that combines new media (Mango TV) with an ecommerce platform (Happigo)27. LeTV LeTV, once known as the “Netflix of China”, was initially part of Leshi Internet Information and Technology, a company founded by Jia Yueting in 2004. It was listed on the Shenzhen Stock Exchange on Aug 2010, the first online video company to go public in China28. LeTV subsequently shifted its strategic focus to create an ecosystem that vertically integrated its online video platform with content, devices and applications. The company was subsequently renamed LeEco in 2016. Following an ambitious geographical and product line expansion, the company is currently facing financial difficulties. When the platform first started, its greatest strength was its large content library. It had almost 5,000 films and 100,000 TV episodes in 2014, larger than Youku, the online video market leader at the time, which was estimated to have 4,500 films and 3,600 TV episodes29. However, foreseeing the increased need for differentiation, LeTV ventured into producing original content. The company first acquired Chinese TV production studio, Dong Yang Huaer Entertainment in 2014 for RMB 900 million30. One of the most successful self-produced dramas broadcast on LeTV was “Go Princess Go”. The show generated 50,000 new paid subscribers for LeTV in 2015. However, the show was taken offline in January 2016 following a request by the regulators31. In 2016, LeTV had advertising revenue of RMB 3.98 billion, terminal products revenue of RMB 10.1 billion and membership revenue of RMB 6.73 billion. It had also launched its e-commerce business. LeEco’s approach of spinning off affiliated companies in order to raise funds as independent companies eventually backfired when its questionable accounting practices were flagged in 2017. Auditors saw an increase in related party transactions which were suspected to be tactics to inflate sales figures. In 2016, sales to affiliated parties were US$1.77 billion, a 655% increase YoY and accounted for more than half of the company’s total revenue. Subsequently, this led regulators in China to scrutinize other companies with the same “sharing ecosystem” approach. In an attempt to carve out a niche in the video segment, LeEco also moved aggressively into sports, acquiring rights for both China and other territories. However, this strategy did not assuage its financial position, instead it had the opposite effect and further exacerbated its financial troubles in the face of expensive sports rights commitments. For instance, in 2016, LeSports, the sports video streaming service arm of LeEco, signed an agreement with events broadcast firm Tiao Power to gain exclusive global online multimedia broadcast rights of the Chinese Super League (CSL) in a deal was worth RMB 2.7 billion. The deal allowed LeSports to stream CSL matches in China, the US, Canada and much of South East Asia32.

27 https://www.yicaiglobal.com/news/happigo-home-shopping-plans-buy-new-media-assets-its-controlling-shareholder-usd173-billion 28 http://aboutus.le.com/index.html 29 https://www.nakono.com/tekcarta/company-profiles/letv-ott-tv/letv-business-model-user-growth-and-analysis/ 30 https://www.chinatechnews.com/2014/03/19/20373-letv-com-acquires-full-stake-in-huaer-entertainment-for-cny900-million 31 http://qz.com/600616/this-viral-internet-comedy-about-time-travel-and-bisexuality-has-suddenly-been-banned-in-china/?utm_content=buffere470b&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer 32 http://europe.chinadaily.com.cn/business/2016-02/24/content_23615675.htm


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Despite exclusive rights to broadcast CSL matches online, fans in China were able watch the matches on FTA television and LeEco was ultimately unable to attract sufficient new paid users33 in China and abroad. Eventually, it defaulted on its payments which led to PPTV taking over the deal to exclusively show CSL matches for the 2018/2019 season34. In another example, LeEco acquired the exclusive rights in China to screen Asian Football Confederation (AFC) games from 2017 to 2020 in a deal reportedly worth US$100 million. The games included the Asian Champions League and qualifying matches for 2018 World Cup35. In February 2017, LeEco lost their exclusive rights after failing to make payments on the contract36. China Sports Media (CSM) took over the rights from 2017 to 2020 after AFC terminated the contract with LeEco’s sports division37. LeEco also acquired rights to show English Premier League (EPL) matches on its platform in China through a sub-licensing deal with Super Sports Media for the 2016/2017 season. This deal also encountered issues when in 2017 LeEco was lagging behind its payment of US$30 million. Both companies eventually reached a compromise that allowed LeEco to continue screening live matches over a limited period38. In 2015, LeEco had similarly obtained exclusive broadcasting rights to screen the EPL games in Hong Kong for three seasons starting 201639 through its Hong Kong subsidiary LeSports HK for a reported US$400 million.40 The EPL rights were due to expire 2018/2019 but LeSports HK went into liquidation41 in March 2018 and the rights for the 2018/2019 EPL season were acquired by PCCW42.

Bilibili Bilibili, also known as “The B-station”, is an online video platform established in January 201043. It is owned by Shanghai Hode Information Technology. Bilibili was floated on the NYSE on 27 Mar 2018. In 2017, its net revenue was RMB 2.5 billion with a net profit of RMB 549 million. The majority of its costs directly related to revenue was driven by server/bandwidth costs and content costs. Bilibili’s content strategy focuses on anime, comics and games (ACG) targeting specifically Generation Z (those born between 1990 and 2009)44. It specializes in Japanese animation, acquiring more Japanese animation content than any other site in China including the top three platforms (iQiyi, Tencent Video, Youku Tudou)45. Aside from Japanese animation, the platform also carries Chinese animated films, user-generated content and live streaming content.

33 https://www.scmp.com/business/china-business/article/2071492/lesports-pptv-bidding-online-rights-chinese-super-league 34 https://www.reuters.com/article/us-china-sports-broadcast/game-on-suning-leads-chinas-2-billion-soccer-rights-frenzy-idUSKBN1AA0OC 35 https://www.caixinglobal.com/2017-02-28/101060340.html 36 https://www.straitstimes.com/sport/sports-world-lesports-afc-tv-deal-off-after-default 37 https://www.eurosport.com/football/csm-steps-in-after-afc-ends-china-broadcast-deal_sto6075069/story.shtml 38 https://uk.reuters.com/article/uk-leeco-soccer/leeco-sports-unit-reaches-deal-over-unpaid-english-soccer-rights-bill-idUKKBN14H04T 39 https://gbtimes.com/letv-acquires-hong-kong-premier-league-rights 40 https://www.scmp.com/sport/soccer/article/1897899/hong-kong-pays-most-asia-premier-league-tv-rights 41 https://www.scmp.com/news/hong-kong/economy/article/2137381/hong-kong-tv-channel-lesports-closes-amid-overdue-rent-and 42 https://www.sportbusiness.com/sport-news/pccw-picks-premier-league-rights-hong-kong 43 http://ir.bilibili.com/phoenix.zhtml?c=254699&p=irol-irhome 44 http://ir.bilibili.com/phoenix.zhtml?c=254699&p=irol-irhome 45 http://variety.com/2017/biz/asia/china-animation-platform-bilibili-eyeing-u-s-ipo-report-1202585461/


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Sohu Sohu TV is the in-house video service of Sohu and was established in 2004. It was also the first platform in China that allowed users to upload their own videos online. Sohu Video was once a competitive player in China’s online video industry and was strong in U.S. dramas and self-produced dramas, but has been losing market share over the past few years due to increased competition from iQiyi, Tencent Video and Youku. Currently, Sohu TV content includes premium purchased video content from Chinese and international content providers, self-developed video content and user-generated content. In 2015, it shifted its content strategy to focus on developing professionally generated content. Advertising revenue of Sohu Video has been falling since 2015 as highlighted in Exhibit 34. Exhibit 34 Sohu video advertising revenue, 2015–2017

Source: Company annual report

PPTV PPTV, also known as PPLive, was established in May 2005 by Shanghai SynaCast Media Tech. In its early years, PPTV broadcast content acquired from PPS (owned by Shanghai Zhongyuan Network) illegally. Subsequently PPTV and PPS threatened to take legal action against each other. However, in 2011, both PPS and PPTV formed an alliance with five other video platforms (LeTV, qq.com, joy.cn, Xunlei and Baofeng) to share and stream legitimate films for a standardized fee46. As the industry became more competitive with B.A.T. entering the video space, PPTV was subsequently acquired by Suning Commerce Group in September 2013 for US$420 million47. Departing from its early roots in piracy, PPTV has been securing costly legal content licenses and partnerships in recent years. In 2015, PPTV secured a multi-year exclusive licensing deal with CBS Studios International. In addition to the line-up of foreign dramas and variety shows, PPTV also shifted its content focus in 2016 to sports events broadcasting, both local and international. It has reportedly spent nearly US$2 billion48 to

46 http://variety.com/2011/digital/news/chinese-vod-sites-form-alliance-1118034110/ 47 https://www.crunchbase.com/acquisition/suning-acquires-pptv--c146b244#section-overview 48 http://chinafilminsider.com/online-streaming-media-fifa-world-cups-next-target-china/

213

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secure a number of exclusive soccer competitions broadcasting rights including English Premier League for which it reportedly paid US$700 million from 2019 to 202149, Spanish La Liga, Italian Series A, AFC Champions League, and Chinese Football Association Super League (CSL).50 Hanju TV Following the rise in popularity of Korean content, Hanju TV was established in May 2016. It focuses on acquiring Korean content including Korean drama, variety shows and movies. The platform also provides reviews of shows, description of shows and original soundtrack downloads. Aside from providing content related services, Hanju TV also provides additional services such as South Korean tourism services and an online Korean community. Below, we have provided a summary of the pricing and the key content offerings of the Top 10 long-form content online video platforms in China:

Source: Company annual report, PCA analysis

49 https://www.warc.com/NewsAndOpinion/News/Suning_is_winning_the_battle_for_soccer_rights_in_China/39039 50 https://technode.com/2017/03/03/pptv-snaps-up-rights-for-2017-chinese-football-association-super-league/


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6. New Developments in China’s Online Video Industry

The following chapter discusses emerging trends, technologies and services that are impacting China’s online video Industry. These include live streaming services, eSports and short video platforms. In this chapter we set out:

6.1 Live Streaming in China 6.2 Description of Major Live Streaming Platforms 6.3 eSports in China 6.4 Short Video Platforms in China

6.1. Live Streaming in China Live streaming content is defined as content that is occurring live and being streamed to an end-user over a video platform operating on an internet-connected device. Live streaming can be the digital feed of a live event such as a music concert or sports match. However, recent technology also enables individuals or small groups of people to live stream their activities at any given time. While live streaming sports or eSports events are the most popular in China, the buzz of live streaming has been centred on individual broadcasters which has led to the emergence of new celebrities known only for their live streams. They are often referred to as Key Opinion Leaders (KOLs). The live streaming user-base in China grew 60% from 194 million in 2015 to 310 million in 2016. It was estimated to have reached 392 million at the end of 2017 51 . The live streaming user forecast for 2019 is 452 million, a decline in annual growth to 12% between 2016 and 2019. This decline is largely attributed to the reduction of content availability resulting from strict regulatory enforcements as discussed in Section 8.4. The most popular genres of live streaming videos watched are sporting events or gaming sessions followed by celebrity videos and music concerts as highlighted in Exhibit 35.

51 iMedia research


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Exhibit 35 Types of live streaming videos viewed by internet users in China, Dec 2016

Source: China internet network information (CNNIC)

As shown in Exhibit 36, almost 40% of live streaming viewers watch for more than 20 minutes per day. Exhibit 36 Daily time spent watching live streaming video in China, Aug 2016

Source: China internet network information (CNNIC)

The revenue model for live streaming sites is a combination of advertising and virtual gifts. The mechanics of virtual gifting are as follows:

• Viewers purchase virtual items on a live streaming platform and “gift” these to their favourite live streaming hosts as a show of appreciation and to initiate some form of interaction with the host. This could take the form of a written thank you in an adjacent messaging board or a live response in the video

• When an item is gifted, the price the user paid for the gift is split between the host and the live streaming platform

37%

9%12%

19%

23%

% of live streaming users

20+ Min 16-20 Min 11-15 Min 6-10 Min 2-5 Min

15%

20%

20%

31%

0% 5% 10% 15% 20% 25% 30% 35%

Concerts

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Gaming sessions

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According to one source, the average monthly salary of college-aged live streamers on Huajiao, a live streaming platform in China, was about RMB 16,000 in 201752. For context, China's monthly disposable income per capita in 2017 was RMB 2,16453.

In addition to banner ads and virtual gifts, brand owners in China are often eager to work with popular KOLs to promote their products as KOLs’ followers are seen as very open to the KOLs’ recommendations. The fees KOLs charge brands for sponsored videos can easily run into six-figure sums in US dollar terms for videos that can be less than one minute long. Typically, although not always, hosts are young men and women dressed provocatively and pushing the boundaries of socially accepted moral behaviour. This has led to concern from the regulators and the shutting down of numerous sites. The stricter regulatory requirements put in place in 2016 have reduced the number of live streaming platforms and stifled the growth of investments in live streaming platforms from a peak of 14 investments in Q2 2016 to only four investments in Q4 2016. Despite the more restrictive regulatory environment, live streaming has a strong foothold in the Chinese market and revenues generated by sites that meet regulations are expected to grow fast from 2017 through the end of 2019 at a CAGR of 61% as seen in Exhibit 37. Exhibit 37 Total live streaming revenue in China, 2015–2019

Source: iResearch

6.2. Description of Major Live Streaming Platforms Due to the rise in popularity of live streaming among the Chinese, many live streaming platforms have emerged in China. The top six platforms by monthly active users are YY, Inke, Douyu TV, Hualiao, Huya and Panda TV. Exhibit 38 provides a breakdown of users and year-on-year growth by site for the six most visited live streaming sites in China.

52 http://en.people.cn/n3/2017/0727/c90000-9247494.html 53 CEIC Database

224

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Exhibit 38 Monthly active users for top 6 live streaming platforms, 2016–2017

Source: Questmobile, globaltimes, yicaiglobal, sohu, huya, thestandard, chozan

YY Live YY Live was launched in 2012, by the YY Entertainment Division of YY. YY started as an online gaming portal and has morphed into a live streaming portal and purveyor of short videos. YY Live focuses on user content production such as self-produced live streams, in the genre of entertainment, gaming, and others. The total number of registered users on YY had exceeded 1 billion with revenue reaching up to US$518 million and net income of US$70.8 million in the first quarter of 201854. Inke Live

Launched in May 2015, Inke Live is one of the most popular live streaming platforms with more than 1,000 star artists and 5,000 influencers55. Aside from acquiring local influencers to stream on their app, Inke Live has also formed tie ups with international celebrities. For instance, in 2016, Inke Live broadcasted BigBang’s exclusive live interview where viewers can watch, participate and win prizes.

Douyu TV Douyu TV was officially launched in January 2014. Formerly, it was known as AcFun. It is a live streaming platform focused on eSports. Douyu TV has sponsored several top eSports clubs such as Team WE, Royal Club and OMG. In 2016, it received investments from Sequoia Capital, Nanshan Capital, Phoenix Capital as well as Tencent Corporation. In March 2018, Tencent Corporation invested another US$630 million into DouyuTV56. HuaJiao HuaJiao was launched in June 2015 by Beijing Minjing Hefeng Technology. It is a live streaming platform focused on user-generated content. Content genres includes sports, tourism, fitness, variety shows, sitcoms, talk shows, and band performances. Since 2016,

54 http://ir.yy.com/news-releases/news-release-details/yy-reports-first-quarter-2018-unaudited-financial-results 55 https://baike.baidu.com/item/%E6%98%A0%E5%AE%A2%E7%9B%B4%E6%92%AD 56 https://baike.baidu.com/item/%E6%96%97%E9%B1%BCTV/13464367?fromtitle=%E6%96%97%E9%B1%BC&fromid=17199575

6.57.8

3.1

9.4 9.9

24.9

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9 1013

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PandaTV Huya HuaJiao DouyuTV Inke YY

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HuaJiao has introduced several unique functions to improve users’ experience on their platform. For instance, in June 2016, HuaJiao introduced a VR live broadcast platform and created a unique face change function57 similar to the one popularized by Snapchat. Huya Huya TV, a subsidiary of YY, was officially launched in November 2014. It is a live streaming platform focused on eSports, acquiring live broadcasting rights for domestic and international events. In addition, Huya also sponsors eSports teams and trains eSports anchors. In March 2018, Huya received US$462 million in its second major round of funding led by Tencent. It was listed on the New York Stock exchange in May 201858. Panda TV Panda TV was established in July 2015 by Wang Sicong, son of Wang Jianlin (CEO of Dalian Wanda Group, China’s second richest man)59. It is a live streaming platform focused on broadcasting live eSports events. Live streamers on Panda TV include eSports players such as League of Legends’ Da Nai Qiang, Ruo Feng, Dota’s Wu Sheng 2009, Hearthstone’s IG Prisoner, Wa Li La, Master Wang and other popular celebrities such as Angelababy, JJ Lin, T-ara, EXID. In May 2017, Panda TV raised RMB 1 billion in its second round of venture capital funding60 and was valued at RMB 3.6 billion in July 2017, an impressive figure for a two-year-old company.

6.3. eSports in China eSports, which is defined as the playing and watching of organized video game competitions, has established itself as a major genre in the video entertainment space. The phenomenon of eSports has also seen tremendous growth in China since 2015, with the number of eSports viewers and gamers growing 81% year on year from 87 million to 285 million by 2017. By 2019, its estimated that number will reach 351 million as highlighted in Exhibit 39.

57 https://baike.baidu.com/item/%E8%8A%B1%E6%A4%92%E7%9B%B4%E6%92%AD 58 https://baike.baidu.com/item/虎牙直播 59 www.scmp.com/tech/apps-gaming/article/1855986/son-chinas-richest-man-launch-panda-tv-e-sports-streaming-service 60 https://baike.baidu.com/item/%E7%86%8A%E7%8C%AB%E7%9B%B4%E6%92%AD/20162439


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Exhibit 39 Number of China’s mobile eSports viewers and gamers, 2015–2019

Note: eSports viewers and gamers refer to players with one or more of the following behaviours: 1) Watch or participate in a core mobile esport competition (including professional and non-professional competitions) for one or more times in the recent half year, or, 2) Frequently play core mobile eSports games or watch live eSports streaming every week Source: iResearch

In line with the rapid expansion of the eSports user base, industry revenues have also expanded quickly, increasing at 198% per year from RMB 5.2 billion to RMB 46.2 billion in 201761. While the growth will normalize over the next two years, it is still expected to grow at a respectable 21% per annum to reach RMB 73 billion as seen in Exhibit 40. It should be noted that revenues from video games sales or in-game purchases are not included in this figure as they are classified as a separate industry from eSports. According to one source, the three most popular eSports platforms in China are Douyu, Huya and Panda TV 62. Other live streaming platforms that focus on eSports include Penguin TV, Longzhu.com, Chushou TV, Zhangqi TV and Quanmin TV.

61 http://www.iresearchchina.com/content/details7_33544.html 62 http://k.sina.com.cn/article_6079827613_16a62ce9d001005up2.html

87119

285320

351

0

50

100

150

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250

300

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400

2015 2016 2017 2018e 2019e

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Exhibit 40 Revenue of China’s mobile eSports games, 2015–2019

Source: iResearch

6.4. Short Video Platforms in China Short videos as a genre are becoming increasingly popular in China driven by the number of viewers watching content on their mobile phones while out-of-home. The number of viewers watching video on dedicated short video platforms was expected to reach 242 million at the end of 2017, up from 151 million in 2016 and forecast to grow to 352 million by the end of 201863. On average, online video users click on short video platforms five to six times daily, spending an average of 44 minutes per day watching short videos. The majority of short video viewers are females (62%) and 52% of the short video viewers are below 30 years old. Exhibit 41 provides the penetration rate of the Top 10 short video sites in China and highlights that the vast majority of viewers are going to the top four sites after which there is significant decline in penetration.

63 iMedia research

5.2

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2015 2016 2017 2018e 2019e

RMB

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Exhibit 41 Top 10 short video platforms’ penetration rate, in Jun 2017

Source: Analysys

Short-form content production is starting to shift away from just user-generated content to include professional generated content – there are reportedly over 25,000 professional short video producers in China but the ten most popular control one quarter of the entire audience. One popular short-form platform, Douyin, is owned by Bytedance which recently acquired the international app Music.ly. Douyin mostly serves repeating 15-second videos set to music. The content is diverse and can include snapshots of daily city life such as teenagers eating lunch to more rural scenes of farmers and their animals. A key component of Douyin and other platforms like it are the underlying algorithms that serve up the right content to keep viewers engaged for longer. While this type of content may not sound like it has mass appeal, QuestMobile, a data provider, estimated that in early 2017 users began to spend more time on Douyin and other short video apps, than they did on Tencent’s news and video offerings. Thanks to its success in China, Bytedance launched a similar app to Douyin called Tik Tok internationally. Its early traction has been touted as a success, in the first part of 2018, it became the world’s most downloaded iPhone app, excluding games and is particularly popular in South East Asia as shown in Exhibit 42.

59%

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39%

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Exhibit 42 Downloads on Apple’s App Store globally, Q1 2018

Source: The Economist, 2018

The fast growth of the sector has caught the attention of B.A.T. who have all invested into various short-form platforms as shown in Exhibit 43. B.A.T. have also committed funds to short-form content production. Tencent announced in February 2017 that it will dedicate RMB 1 billion into subsidising producers of original short videos over the year. Tudou, the subsidiary of Alibaba, announced in May 2017 a scheme to reward the best 2,000 short videos, with 2 billion RMB in cash and Baidu announced in June 2017 it has set up a RMB 500 million fund for short-form video. Exhibit 43 B.A.T. ownership and investment in short video platforms (non-exhaustive), Dec 2017

Source: China tech insights, Everbright Securities

Advertising revenue is the primary revenue stream for short video platforms and includes banner advertising, product placement and ad insertion before and between videos. Following is a short description of the top five short video platforms by monthly active user numbers:

28

29

31

32

34

35

46

0 10 20 30 40 50

WeChat

Facebook

Instagram

Messenger

WhatsApp

YouTube

Tik Tok (Douyin)

Mill

ions


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Miaopai Miaopai was founded in June 2011 by Hyun (Beijing) Technology. The company changed its logo and slogan in 2014 and started encouraging users to produce short videos that were limited to ten seconds, a format which has been very successful given the current popularity of the platform. In July 2018, regulators found that Miaopai was broadcasting short videos that were in violation of content standards. The platform has announced that it will look at strengthening its content management capabilities moving forward64. Kuaishou Kuaishou, initially known as “GIF Kuaishou”, was established in March 2011. The platform was initially used to create and share animated pictures (GIF pictures). Following the rise in popularity of short-form videos, Kuaishou revamped its platform in November 2012 to focus on providing short-form video functions. Similar to Miaopai, Kuaishou has also faced issues with regulators regarding the censorship of users’ video content65. Xigua Video In order to expand its product offering beyond news aggregation (Today’s Headline), ByteDance Technology launched three short video platforms in 2016 including Xigua Video. This platform focuses on aggregating popular online short-form videos from other sources. It aims to differentiate by providing personalised recommendations to users through its artificial intelligence technology66. Meipai Established in May 2014, Meipai is one of the most popular online short video platforms in China and is operated by Xiamen Meitu Network Technology. While Meipai started off as a short video platform, the platform expanded its functionality to include live streaming and virtual gifting services in 2016. In June 2018, Meipai was also found to broadcast videos that do not conform to the regulatory guidelines. This resulted in the temporary removal of the mobile application from Chinese app stores for 30 days67. Tudou Video Tudou Video was one of the earliest online video platforms in China, launched in April 2005, and focusing on user-generated video. In August 2012, Tudou Video merged with Youku to form Youku Tudou Group. This was followed by an acquisition by Alibaba in October 201568. The platform which is run separately from Youku continues to be popular for user-generated short videos.

64 https://baike.baidu.com/item/%E7%A7%92%E6%8B%8D/339256?fr=aladdin 65 https://baike.baidu.com/item/%E5%BF%AB%E6%89%8B/19678032?fr=aladdin 66 https://baike.baidu.com/item/%E8%A5%BF%E7%93%9C%E8%A7%86%E9%A2%91/20843304 67 https://baike.baidu.com/item/%E7%BE%8E%E6%8B%8D/6038737?fr=aladdin 68 https://baike.baidu.com/item/%E5%9C%9F%E8%B1%86%E7%BD%91/10880550?fr=aladdins


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7. Video Content Piracy in China

The following chapter discusses trends, issues and findings from our research relating to consumer piracy habits in China. In this chapter we set out:

7.1 Summary of Key Findings on Piracy in China 7.2 Consumer Video Content Piracy in China 7.3 Cloud Piracy in China 7.4 Actions Taken to Stop Piracy by Regulators

7.1. Summary of Key Findings on Piracy in China Parallel to the preparation of this report, AVIA commissioned a consumer study on the topic of general audience trends/preferences in China. Below is a summary of the findings from our primary research on piracy in China:

• 68% of respondents said they used cloud downloads to access pirated content in the last six months, making this the most commonly used source of piracy in China

• The highest proportion of respondents using pirated sources on a daily basis drops to 9% for pirated DVDs, followed by 8% of respondents for cloud downloads, indicating that most viewers are not visiting pirated sources on a daily basis

• Based on our interviews, respondents aged 18-24 were more likely to watch pirated content than other age segments, reporting incidences of 2-3 times per week

• While both males and females reported using pirated sources, males reported higher incidences overall across age groups

• The primary reasons given for watching pirated content were: o It was difficult to find original versions of western shows and movies o Pirated content was easy to use and find online as it is very prominent in

search listings o Pirated content is free

• In terms of respondents’ views on piracy, our respondents who watched pirated content fell into two camps:

o The first camp expressed support for copyright laws saying they should be observed but said pirated sources were the only way to obtain a lot of content that they could not find on legitimate websites

o The second camp expressed the sentiment that everyone watches pirated content and that they do not really care if it is illegal and therefore were not concerned whether the content was available legally or not

7.2. Consumer Video Content Piracy in China Exhibit 44 is a summary of the different sources of video content that are popularly accessed. This includes both authorized and illicit sources, mixed together in one list. We asked respondents to rate which ones they used most frequently, and to flag which ones they have not used in the past 12 months (to eliminate non-users). Also marked with a red violator icon are the options that are considered illicit or pirated.


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Exhibit 44 Usage & preference of video content by source – pirated sources are marked w/ red violator


Interestingly, more people used ‘Official websites’ in the last six months (such as iQiyi, Youku) at 97% of respondents versus FTA TV at 84%. The next most popularly used source was ‘Cable TV’ which is evidently very established in China. In fourth place was ‘Unauthorized content download sites’ (such as Baidu Cloud) which consumers presumably used to source illegally downloaded content. Torrents were the next most used source of illegal content at 50% while unauthorized sites and pirated DVDs followed in third and fourth place respectively among unauthorized sources. As this question allowed for multiple responses, the sum of responses do not add up to 100% but based on the number of responses across unauthorized sources, it is possible that all respondents could have accessed content from unauthorized sources in the last six months. Another noteworthy finding was that “Official DVDs” scored relatively high, indicating there is still a sizeable portion of viewers tied to DVD players in China.

7.3. Cloud Piracy in China Our survey showed that one of the most popular ways of downloading pirated content in China was through shared links to pirated content stored in cloud services. The mechanics of this form of piracy are via an illegal distributor who would upload the content on his or her cloud storage and set a password. This password is then provided along with the download link to the others through forums and social media69. These links often lead to independent websites which monetize the traffic via advertisements. An example of the illegal distribution of video content via a cloud link can be seen below for the Korean series, Descendants of the Sun, which was uploaded via Baidu Cloud and then linked to the below page (English indicators and arrows are PCA’s annotations).

69 http://eng.kofice.or.kr/c00_hallyuInsights/c00_hallyuInsights_02_list_view.asp?seq=13546&page=3&tblID=reporter&bunho=20

97%84%

68%

34%

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28%36% 35%41%

23%8%

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0%

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Official VideoSites

Free TV Unauthorisedcontent

downloadsites (Baidu

cloud)

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Torrent Cable TV Official DVD Pirated DVD VOD VPN

Past 6 Months DailyUnauthorised sources


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Source: Sub HD

7.4. Actions Taken to Stop Piracy by Regulators

While China has historically been associated with lax enforcement of copyright infringements, the government has started to take more tangible steps to attempt to reduce the rampant use of piracy in the country. In March 2009, SAPPRFT issued a Notice on Strengthening the Administration of Online Audiovisual Content (March 2009 SAPPRFT notice). This notice required operators to enhance their processes for protecting copyrights and to take appropriate measures to protect the rights and interests of copyright holders. It also stipulated that operators need to have the copyright licenses for all the content they are broadcasting. However, despite the issuance of the notice, the piracy situation did not improve significantly due to weak enforcement. Determined to have more of an impact on the piracy situation, the National Copyright Administration (NCA), in cooperation with other administrative departments, local governments and law enforcement, launched a five month long anti-piracy campaign spanning July 2016 to November 2016, known as the Jianwang Operation. The campaign resulted in a seizure of 1.5 million pirated publications, the shutdown of 1,655 websites containing pirated content and the removal of 274,800 pirated links70. In addition, the Beijing court has started taking a stronger stance against copyright infringements. In May 2017, it imposed one of the highest fines (US$1 million) for a case of copyright infringement where Baofeng Technology, an online streaming site, streamed the first six episodes of Season 3 of The Voice of China without permission from Tencent which had the exclusive streaming rights71. In parallel to the anti-piracy campaign in 2016, almost all of the public cloud operators were forced to shut down due to severe issues of illegal file sharing and copyright

70 http://english.court.gov.cn/2017-11/09/content_34306869.htm 71 http://tech.qq.com/a/20170516/049182.htm


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infringement. Only Baidu Cloud was able to survive the crackdown. It devoted significant resources to monitoring links shared and has managed to disable illegal content download links soon after they surfaced72. In addition, Baidu Cloud also put in place measures to encourage responsible usage of the service - users were required to register their Baidu Cloud account with their real identities from June 201773 onwards. However, our research revealed that the Baidu Cloud is still a prime source for pirated content

Another area the government focused on was reducing the supply of illicit internet streaming devices (ISDs). In September 2015, SAPPRFT reiterated regulations 74 and defined illegal TV network receiving equipment to include three types:

1. TV stick and similar sharing equipment 2. Illegal IPTV receiving equipment including TV box, TV, projector and display 3. Equipment used to watch illegal TV and listen to illegal broadcasts through internet,

mobile and TV software

This law stipulates that anyone caught producing or selling hardware or software that enables the reception of illegally broadcast or streamed TV channels, including via online downloads, will be liable for prosecution. To enable the legal IPTV industry to continue its development without being hampered by regulations against streaming devices, Chinese regulators specified that the licensed IPTV content service platforms have to be private, and cannot be linked to websites existing on the public internet. Similarly, the IPTV terminal products have to comply to SAPPRFT standards, and can only be connected to and embedded in the address of the integration platform. The set-top box products produced by the IPTV integration organization and the IPTV set-top box manufacturer shall be produced with the intention to be connected with legal channels, and the geographical scope of the set-top box products shall not be expanded without authorization. Regulators have also made efforts to clamp down on new forms of piracy covering VR and cloud sites. On the VR front, one of the cases for VR content piracy involved OrangeVR, a major VR content distributor. It was found to have provided six unlicensed movies (including Ant-Man and Fast & Furious 7) on its app starting in July 2017. A complaint was filed by the copyright owner through the Motion Picture Association of America, and, while the culprit was found guilty, the penalty was underwhelming; OrangeVR was fined RMB 30,000 (US$4,581)75. With mixed results and inconsistent sentences from the courts, the cost of piracy is still expected to rise dramatically in China in the coming years. According to one estimate, revenue losses in the country due to video piracy will increase from US$5.5 billion in 2016 to US$9.8 billion in 2022. (Figures only consider TV episodes and films and do not include sports)76. This accounts for roughly 17% and 19% respectively of the estimated global cost

72 http://eng.kofice.or.kr/c00_hallyuInsights/c00_hallyuInsights_02_list_view.asp?seq=13546&page=3&tblID=reporter&bunho=20 73 http://www.mesalliance.org/2017/06/28/baidu-cloud-putlocker-no-one-talks/ 74 http://www.sarft.gov.cn/art/2016/3/24/art_106_30293.html 75 http://english.court.gov.cn/2017-11/09/content_34306869.htm 76 https://www.rapidtvnews.com/2017103049467/losses-due-to-online-tv-film-piracy-soar-to-52bn.html#axzz4wzr8B0SU

http://www.mesalliance.org/2017/06/28/baidu-cloud-putlocker-no-one-talks/

http://english.court.gov.cn/2017-11/09/content_34306869.htm


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of piracy in those years77. Hence, additional and more aggressive regulator led anti-piracy campaigns are still required.

77 Digital TV Research


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8. Regulation of the Chinese Online Video Industry This section reviews the various regulatory, policy and implementation guidelines for the Chinese online video industry. Information here is gathered from industry stakeholder interviews and a review of policies. In this chapter we set out:

8.1 Key Stakeholders in Chinese TV Regulation 8.2 Licensing Requirements 8.3 Regulations on Foreign Content 8.4 Live Streaming Regulations

8.1. Key Stakeholders in Chinese TV Regulation

There are four key government organizations that have historically had significant influence over broadcast content in China. These are:

1. State Council 2. Ministry of Culture 3. State Administration of Press, Publication, Radio, Film and Television (SAPPRFT) 4. Cyberspace Administration of China

The relationship of the four key government agencies is shown below:

The summary of the roles and responsibilities of the three key government bodies tasked to monitor and develop the online video industries are set out below:

Regulatory agencies Roles and Responsibilities Ministry of Culture (MOC)

Responsible for cultural policy and activities in the country, including managing museums and monuments; promoting and protecting the arts (including censorship of visual, folk, theatrical, musical, dance, architectural, literary, televisual and cinematographic works); and managing the national archives and regional cultural centers

State Administration of Press, Publication, Radio, Film and Television (SAPPRFT)

• SAPPRFT is an executive branch under the State Council of the People’s Republic of China

• Directly controls state-owned enterprises at the national level such as China Central Television (CCTV), China National Radio, China Radio International, as well as other film and television studios and non-business organizations

• Acts as China’s main media censorship body • Reviews and provides approval for distribution of content


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• Researches and drafts content related regulations • Gathers public views on policies

Cyberspace Administration of China (CAC)/ Office of the Central Leading Group for Cyberspace Affairs

The central internet censorship, oversight, and control agency for the People's Republic of China.

In a move widely seen as further tightening the government’s control over the media sector, it was announced in March 2018 that SAPPRFT would be abolished and replaced by three new bodies that would report directly to the State Council 78 : the State Administration of Radio and Television (SART), the State Bureau of Film (Film Bureau) and the State Administration of Press and Publication (SAPP). Further details are provided below: 1. The State Administration of Radio and Television (SART)

SART was established to regulate radio and television matters but does not have oversight of broadcast news. Specifically, it is responsible for:

• Drafting and overseeing implementation of policies for the radio and

television industry • Managing content review and censorship of radio, television, and online

audiovisual programs • Supervising the importation of radio and television programs • Coordinating and promoting the exposure of Chinese radio and television

programs worldwide As radio and television oversight was previously also under the State Council, observers believe the similar organizational structure of SART may indicate a high likelihood of continuity in regulations concerning radio and television matters.

2. The State Bureau of Film (Film Bureau) While previously the film-related authorities were directly under the State Council, the newly-formed Film Bureau is now within the Propaganda Department of the Communist Party of China. This move enables the Propaganda Department to have more control over theatrical film-related aspects which include areas such as:

• Film administration • Film production • Distribution and exhibition • Content review and censorship of films • Conducting festivals and other film-related events • Carrying out international co-operation including film co-productions

78 https://www.globalpolicywatch.com/2018/07/more-officials-appointed-to-lead-film-and-media-authorities-in-china/

https://www.globalpolicywatch.com/2018/07/more-officials-appointed-to-lead-film-and-media-authorities-in-china/


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3. The State Administration of Press and Publication (SAPP)

With the establishment of SAPP, the press and publishing responsibilities of SAPPRFT were also placed within the capacity of the Propaganda Department. SAPP overseas the following aspects:

• Drafting and overseeing implementation of policies for the press and

publishing industry • Coordinating content review and censorship of publications (including those

containing cartoons) • Supervising the importation of publications

SAPP also takes the title “National Copyright Administration of China (NCAC)”.

The creation of these new bodies has shifted media industry regulation under the direct control of the propaganda department of the Communist Party, leading to a further centralization of power under Chinese President Xi Jinping79.

8.2. Licensing Requirements This section reviews some of the prevailing regulatory issues that affect online video players in China today. These were corroborated by in-depth interviews conducted with key stakeholders in the industry. Content censorship in China is primarily overseen by SAPPRFT. Oversight of TV content in particular, is viewed as vital to the government’s efforts to communicate key messages and influence public opinion as TV’s reach spans the entire nation. As a relatively new medium, professionally produced online content has had less comprehensive censorship guidelines applied to it with lax enforcement. In most cases, it was the online video site’s own teams that ensured the content would abide by the censorship guidelines. However, content that pushed the censorship boundaries was commissioned and streamed by many sites as a way to attract larger audiences with content that could not be seen on TV. This eventually attracted the attention of SAPPRFT which, in early 2016, took action and forced a number of online dramas to be removed from the online platforms offering them. After these events, SAPPRFT indicated that it would be taking a stricter stance on online content, a move that is leading to more homogeneous content across TV and online platforms.

8.2.1. Licenses Needed for Operating Online Video Services

In December 2007, SAPPRFT issued the Administrative Provision of the Internet Audio-Video Program service or the Audio-Video Program Provision, which came into effect in January 2008 and was later amended in August 2015. The Audio-Video Program Provisions defines “internet audio-video program services” as the producing, editing and integrating of audio-video programs, supplying audio-video programs to the

79 https://variety.com/2018/film/asia/china-movie-regulation-communist-propaganda-department-1202732209/


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public via the internet, and providing audio-video programs uploading and transmission services to a third party. Providers of internet audio-visual program services must obtain an Internet Audio-Video Program Transmission License to provide their services. There are two types of Audio-Video Program Transmission License that internet audio-video program services can apply for as highlighted below: I. Integrated License

• Integrated licenses are needed for content providers to load their video

applications on IPTV/streaming boxes • There are seven integrated licenses – three were awarded in 2010 and four

more in 2015 • As SAPPRFT has announced that it does not plan to issue any more licenses,

content providers who want their content to be featured on IPTV/streaming boxes have to rent licenses from the seven licensees. The table below presents examples of online video players who are renting licenses and from which entities the licenses are being rented:

Source: PCA Analysis

II. Internet Audio Video Program Transmission License

• All online platforms that distribute content online are required to possess an online content license

8.2.2. Internet Audio-Video Program Transmission License Requirements

Obtaining an Internet Audio-Video Programming License has become a challenging undertaking as stringent criteria have been put in place by SAPPRFT in 2008. One of the biggest barriers to obtaining the license after 2008 is the requirement that applicants need to be either State-owned or State-controlled. However, companies that were lawfully operating prior to the issuance of the Audio-Video Program


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Provision were allowed to re-register and continue to operate without becoming State-owned or controlled, provided that the operator did not previously break any laws. SAPPRFT has specified that the exemption will not be granted to any service providers set up after the issuance of the provision. Key requirements for the Internet Audio-Video Programming License are set out below:

• Applicant is a corporation, is an exclusive State-owned entity or a State-controlled entity and has not committed any illegal act within the three years prior to the date of application

• Applicant has a sound management system for the safe spread of programs and safety protection technology and measures

• Applicant has legal audio-visual program resources needed by its business. • Applicant has technical capability, network resource and funds required to

operate its business, and sources of such funds are legal • Applicant has technical personnel required to operate its business, and

neither its major investor nor operators have committed any illegal act within the three years prior to the date of application

• Applicant’s technical scheme satisfies the related national standards, industrial standards and technical norms

• Applicant satisfies the overall planning, layout and guidance catalogue for internet audio-visual program service determined by the competent department of radio, film and television under the State Council

• Applicant satisfies the requirements of laws, administrative regulations and other related State provisions

All of the above requirements need to be satisfied in order to be considered for the license. In addition, the license needs to be renewed every three years subject to the same requirements. After being awarded the license, there are a series of rules that licensees need to adhere to as laid out below:

• The audio-visual programs that have been broadcasted should be retained for at least 60 days.

• The audio-visual programs are prohibited from containing content that: i. Is against the basic principles set by the Constitution ii. Endangers national unity, sovereignty and territorial integrity iii. Leaks State secrets, endangers state security or undermines State honor

and interests iv. Incites ethnic hatred, ethnic discrimination, undermines national unity,

or infringes on ethnic customs and habits v. Propagates cults and superstition vi. Disrupts social order and undermines social stability vii. Induces teenagers to commit crimes and render violent, pornographic,

gambling and terrorist activities viii. Insults or slanders others, violates the personal privacy of citizens and

other legitimate rights and interests of others


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ix. Endangers social morality and undermines the excellent cultural traditions of the nation

x. Other content that is forbidden by laws and regulations

As a result of the stringent criteria for an Internet Audio-Video Programming License, many platforms are either forming partnerships with existing licensees or acquiring companies who have the license.

8.2.3. Three-way Convergence Program

In efforts to promote convergence between traditional and new players in the media space, the State Council of China launched the three-way convergence program in 2015, designed to encourage telecom operators, television broadcasters and internet firms to interact and provide their own services in each other’s respective fields if possible. The most immediate effect of this program is the opportunity of qualified telecom operators to engage in:

• Production of radio and television programs (with the exception of current affairs programs)

• Transmission of audio-visual programs on the internet • Broadcast of political news and audio-visual programs • Public internet audio-visual program services (not in the form of radio and

television stations) • Interactive internet TV (IPTV) transmission • Mobile TV distribution services

This has enabled the launch of the three major telcos online video services as well as their IPTV platforms.

8.2.4. Regulator Interventions on Online Video Platforms

On 22 June 2017, SAPPRFT stopped the audio-visual programs of Sina Weibo, AcFun and Phoenix because these websites provided audio-visual program services without the License for Spreading Audio-Visual Programs via Information Network and were broadcasting audio-visual programs about current affairs that were deemed to have negative comments on society. On 28 June 2017, Sina Weibo officially responded to SAPPRFT’s act and released an announcement that it would strengthen its management of audio-visual programs. AcFun also later announced that it would strengthen its management of audio-visual videos.

8.3. Regulations on Foreign Content In response to the third Five-Year Plan to promote the culture of the country and nation,


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SAPPRFT issued a notice in September 2014 that reiterated the provisions concerning the management of online foreign dramas named, “Notice Concerning Further Strengthening the Administration of Online Foreign Audiovisual Content” (2 September 2014, SAPPRFT Notice). The result of this notice has been a significant decrease in the number of foreign content releases on online platforms. It stipulates that operators of online video platforms need to obtain permits for all foreign and TV dramas (and other genres of content including movies) before they are transmitted via the internet in China. The permits required, according to Article 2 of the notice, are as follows: 1. Film Public Screening Permit 2. TV Drama Distribution Permit 3. TV Animation Distribution Permit 4. TV Documentary Film Screening Permit

After obtaining the permits, each website will be subjected to a number of regulations for importing foreign content. The two key regulations for importing foreign content are:

1. Each online video platform can only import foreign films and television dramas for

use on its own website. Also, under the condition that copyright demands are met, these online video platforms can sell foreign content to other online video platforms that hold the relevant and required permits. However, online video platforms are not allowed to import foreign films and television dramas exclusively for sale to other online video platforms that will disseminate them.

2. Individual online video platforms’ annual import quantity of foreign films and

television dramas in terms of hours may not exceed 30% of the quantity of hours of domestically produced films and television dramas the said online video platforms purchased in the previous year. The standard unit of measure by SAPPRFT for one episode of drama equates to 45 minutes while a movie equates to 90 minutes.

8.3.1. Application Process for Foreign Content Permits

The process for obtaining the permit for the dissemination of foreign content is complex and time consuming. SAPPRFT requires platforms to submit in depth details about the foreign content they intend to import in the coming year by December of the current year. If there are any changes to the plans, platforms will have to wait until August when they will be given a chance to submit their adjusted import plan for approval. The key details of foreign content required include:

1. Title of the film 2. Number of episodes 3. Place of production 4. Copyright holder 5. Content outline

To obtain approval for a serialized show, applicants must submit the full season to the regulator for review. The impact of this is that the release date of legitimate content significantly lags the release date in the country of origin which inevitably leads to a higher incidence of piracy.


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Online video platforms are also required to provide evidence of their purchases of domestically produced films and television dramas in the previous year. This is required to ensure that the annual import quantity of foreign films and television drama does not exceed 30% of the quantity by number of hours of domestically produced films and television dramas purchased in the previous years80. After the details are submitted and the preliminary approval is given for the foreign content, platforms can then proceed to negotiate and sign the agreements and contracts with foreign content provider/copyright holders. Once the contract has been finalized, platforms have to provide another list of details to the local provincial level authorities for content inspection81. The list of details required include:

1. A sample of foreign films/television dramas 2. Contracts and agreements signed 3. Copyright proof 4. Plot outlines

Only after passing the two levels of inspection (pre-inspection by SAPPRFT and content inspection by local provincial authorities) will platforms be given the distribution permit. Once approved, each foreign film or drama is also allocated a registration serial number that needs to be shown at the beginning of each program clip. As for the renewal of content contracts of foreign films and dramas for a new term, a new permit is required and the same process must be undertaken.

8.4. Live Streaming Regulations

In a bid to regulate the live streaming industry, SAPPRFT issued the notice on Strengthening the Management of Live Services of Internet Audio Visual Program Service in September 2016. Today, there are a total of 19 articles specifying the regulations for operating a live streaming platform in China. The key regulations 82 , effective on December 2016, are as follows:

1. Live streaming news providers must obtain internet news information service license and act within the scope of their licenses. Other live streaming services such as online performances are also required to obtain relevant licenses

2. Live streaming providers must be able to monitor the live broadcasted content. If there is any violation of the national broadcasting standards, live streaming providers must have the technical capabilities to instantaneously stop the live stream or related interactive elements such as comments

80 dy.chinasarft.gov.cn 81 The standards of the content inspections will be in accordance to article 4 laid out in the appendix 82 https://www.chinalawtranslate.com/%E4%BA%92%E8%81%94%E7%BD%91%E7%9B%B4%E6%92%AD%E6%9C%8D%E5%8A%A1%E7%AE%A1%E7%90%86%E8%A7%84%E5%AE%9A/


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3. Live streaming content producers are required to register with their official identity documents and platforms must examine and verify their identity

4. Live streaming content and users’ information must be recorded and preserved for 60 days

On 23 March 2018, SAPPRFT released another notice banning videos that re-edit content from other works such as classic TV shows and films, a form of content that gets a lot of traction in China on short and streaming platforms. The reasoning provided for this ban was not that this behavior infringed on copyrights but rather that, taken out of context, these videos could create “an extremely bad influence on society”.

8.4.1. Regulator Interventions on Live Streaming Platforms

In May 2017, the Ministry of Culture launched inspections of live streaming sites that were operating without a license or allowing restricted content that did not conform to censorship guidelines to be streamed on their platforms. This enforcement campaign resulted in ten live streaming platforms, including Qianshu, being closed. In addition, 48 live streaming operators were subject to administrative punishments. The overall impact on live streaming content production was the closure of 30,235 live rooms, the equivalent of studios where live streams are produced. In addition, the regulator required 3,382 live rooms to make adjustments to their content so as to conform to approved content guidelines. The Ministry of Culture also took action against 31,371 live performers who were reprimanded for producing restricted content83. The following month, in June 2017, the Ministry of Culture reviewed 10,562 mobile live broadcast applications and required 12 of them to be completely closed down (including Wukong TV). The stringent control and inspections continued in 2018. In April 2018, the Ministry of Culture inspected 4,900 live streaming applications which resulted in the forced removal of 370 such applications from local app stores for failing to comply with regulations. In addition, the Ministry of Culture found 14 companies operating under fraudulent licenses. These companies have been blacklisted by the Ministry of Culture and all 57 live streaming applications operated by these companies were ordered to shut down84. While these interventions had a tangible impact on the number of streaming platforms in operation, it should be noted that the regulator was not targeting copyright violations but rather its primary objective was removing access to materials that it deemed were not promoting approved social behaviors.

83 http://www.gov.cn/xinwen/2017-06/29/content_5206778.htm 84 https://technode.com/2018/04/18/live-streaming-apps/

© 2018. The Asia Video Industry Association holds all rights to this report, and no part thereof may be reproduced or replicated without prior explicit and written permission.

About the Asia Video Industry Association

The Asia Video Industry Association (AVIA) is the trade association for the video industry and ecosystem in Asia Pacific. It serves to make the video industry stronger and healthier through promoting the common interests of its members. AVIA is the interlocutor for the industry with governments across the region, leads the fight against video piracy and provides insight into the video industry through reports and conferences aimed to support a vibrant video industry. AVIA evolved from Casbaa in 2018.

Hong Kong Executive Office20/F Leighton Centre77 Leighton RoadCauseway Bay, Hong KongTel +852 2854 [email protected]

About Pioneer Consulting Asia

Pioneer Consulting Asia is an international management consultancy and research firm, focused on media, telecoms and digital. It has worked with a wide range of clients to develop growth strategies, manage risks and develop organizations for a digital world. It undertakes primary market research across Asia and also provides training and coaching services for executives and their teams.

www.pioneerconsultingasia.com

Online Video Industry China 2018

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