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Between formal and informal: the shakeout in China’s online video industry Elaine Jing Zhao Introduction Chinese media is often characterised by a lack of autonomy and dependence on conservative regulatory bodies. Until the mid-1990s the Chinese government defined all broadcast media as public institutions (shiye); in addition to being owned by the state media ‘units’ were severely restricted by the Chinese Communist Party consensus that their primary role was to educate and enlighten the ‘people’ (renmin). Many approaches to China’s media have therefore focused on the regulatory architecture that governs, and in many cases hinders China’s media from being competitive (Brady, 2008; Donald et al., 2002; Lee, 2000; Lynch, 1999; Yu, 2009; X. Zhang and Zheng, 2009; Zhao, 1998, 2008; Zhu and Berry, 2009). These ‘traditional’ structures have come under increasing pressure as China has engaged with the global internet economy. As a result of its entry into the World Trade Organization (WTO) in December 2001 and commitments made to liberalise media markets, Chinese media industry players have seen a version of ‘creative destruction’ playing out: namely significant changes in industry boundaries and entry barriers; reform of regulatory frameworks limiting competitive entry; an erosion of protected market positions; and the destruction of technological assumptions (McKnight et al., 2001). This article focuses on a period following a much publicised government crackdown on infringing video sites in 2008. It begins with a brief introduction of formal and informal media economies and their development in the Chinese audio- visual market. Next it provides a further discussion of media piracy in China. It then explains the background behind the Administrative Provisions on Internet Audio- Visual Program Service. This article argues that the shutdown of infringing online video sites caused a loss of cultural diversity; in particular it discouraged the communities of practice that had grown up around user-generated content (UGC) in China. This article also shows how the crackdown led to a resurgence of street vendor piracy (Yan, 2010). Next it looks at changes in industry boundaries and

structures as infringing players and other well-financed new players attempted to move into the formal sector and play by the new rules. Following this the article examines responses of the formal sector and consequences of professionalization. The competition in professional content acquisition following the new regime resulted in skyrocketing costs in copyright content purchase, which pressured industry players to experiment with alternative content strategies and business models. Finally, this article looks at means by which UGC is being reconstituted. Reflecting the theme of creative destruction, there is an increasing rapprochement between professional and user-created content, leading to a new relationship between formal and informal sectors.

Formal and informal media economies Against a backdrop of unprecedented change in media industries globally ongoing tension is evident between formal and informal media economies. While formal economic activity is generally understood as lying within the legally sanctioned media economy, informal media economy is located outside of state statistics and regulatory scope (Lobato and Thomas, 2011). However, the two are not totally separated. Cunningham (2012) notes that the boundaries between the market and household sectors are increasingly blurring and there is a rapid co-evolution of the two sectors in the media landscapes of many developed economies. In order to understand the transformation of the media market in China, it is important to consider both formal and informal world, as well as the dynamics between the two. While most current literature on the informal economy in China is drawn from labour sociology (e.g. Guang, 2005; Huang, 2009), the transformations brought by digital technologies and the role of the state in the dynamics between the informal and the formal economy in the post-WTO era have much to offer in research. This dynamism is linked to the exponential growth of China’s online community, now estimated at over 530 million (CNNIC, 2012).

Over the past two decades the audio-visual market in China has been dominated by a few key institutions backed by the government; due to stringent censorship controls content innovation has been relatively stagnant and distribution geographically constrained. The dominant players have been China Central TV (in television) and the China Film Group (in cinema). Alongside the formal structures, the media landscape of China is characterized by complex informal markets; these range from peripatetic street vendors to backrooms of legitimate DVD and video stores. Over the past decade restrictive censorship and strict import quotas on overseas content have created a vacuum, leading to the growth of pirate VCD and DVD. In 2001, the average price of legitimate Blu-ray disc was between 80RMB-200RMB while pirated versions were available between 10RMB-20RMB (Chen, 2011). Consumers could purchase pirated DVD movies at 7 to 10 RMB, or rent TV dramas from rental stores at daily fees ranging from 0.5 to 3 RMB per disc (Rong, 2008). In the emerging internet economy, however, where an expanding range of content is increasingly available online and less geographically constrained, the picture is different. Most viewers no longer bothered with DVDs; they could simply share and access film and TV online. A host of powerful players have moved center stage: these include Tudou and Youku, independent online video service providers; as well as Baidu, China’s dominant search engine; Sohu, an internet service provider; and Shanda, a leading interactive entertainment company. To a large extent these internet-based companies have exploited informal media economies and have begun to build alliances with a range of content providers including traditional media channels. In the informal sector, major players include BTChina, VeryCD, and Xunlei which were based on peer-to-peer sharing technologies.

The cultural contradictions of piracy in China In China the production, distribution and consumption of counterfeit, fake and knockoffs is pervasive (Pang, 2008). Products range from copycat designer clothing, ‘shanzhai’ mobile phones (Keane and Zhao, 2012) to pirated VCD and DVDs of

overseas films. These economic activities are usually located in the realm of an informal economy (Lobato and Thomas, 2011). As in the case of most other Asian countries, lack of IP laws and weak implementation of laws are major contributing factors in China (Bettig, 1997). In terms of the supply and demand, Yar (2005) and Karaganis (2011) show that the high price of content has been a contributing factor in piracy activities. Wang (2003) explains how cheap labour and long coastlines make production and export viable. On a cultural level, Alford (1995) notes how the notions of individual creativity and ownership of ideas were in contrast with Confucian concepts of creativity, knowledge and learning, which contributes to infringing behaviour among consumers. The increasing adoption of digital technologies now means easier reproduction and distribution of online content, including online piracy. Industry bodies like The Motion Picture Association of America (MPAA) claim that the exponential growth of piracy costs the industry significant losses. However, many have argued that data needs to be treated with caution. This is because extrapolation from detection, seizure and conviction counts are problematic; pirate copies do not necessarily displace a sale at a standard market price; moreover, reduction in ‘gross revenues’, rather than on net loss to the industries, is often exaggerated (Wang, 2003; Yar, 2005). Similarly, Anderson (2009) argues that piracy should be estimated not so much in terms of loss but more in terms of ‘lesser gain’. Choi and Perez (2007) argue that online piracy is an important source of technological and strategic innovation to both industry incumbent and newcomers. Similarly, Lobato suggests that piracy can be an alternative distribution system for media content, better understood as ‘an enabling energy’ rather than - or as well as - a form of economic parasitism’ (Lobato, 2008: 33). More recent research by Karaganis (2011) demonstrates that the growth of digital piracy has disrupted a wide range of media business models and has created opportunities in emerging economies for price and service innovations.

Complicating the issue, moreover, is the knowledge that piracy networks remain part of the formal economy (Nordstrom, 2000). Wang maintains that they ‘operate through and around formal institutions such as the state, its regulatory and enforcement capacities, and its sovereignty’ (2003: 74-75). The interdependent and often complex relationships between formal and informal economies therefore require closer examination. As Cunningham and Silver suggest, ‘downloading and P2P file sharing needs to be analysed in its own right, as well as in its complex relations to off-line piracy... the way in which it forces change in the formal economy and engenders state action; and the extent to which it has to be factored into the business models of on-line distribution companies’ (2012: 59).

Online video distribution in China

Free video downloading in China can be traced back to the launch of eDonkey in 2000. Various BitTorrent platforms soon emerged after that, including BTChina which was launched in 2003. The main target for online piracy is overseas films and TV serials, mostly Hollywood productions and US, European, Japanese and Korean TV serials. These sites attracted a large number of users and leading domestic brand owners have sought to enlist overseas stars for celebrity endorsement (The Economist 2010). Not long after the launch of YouTube in 2005 and its acquisition by Google one year later, online video sites mushroomed in China. A multitude of service providers began to address different user needs: these included video sharing site reliant on UGC, either original or remixed works, and sites specialising in video-on-demand (VOD) and live broadcasting of professionally produced content. Online video sites became an alternative distribution channel for TV and films. According to the annual report on the progress of China’s media industry released by the State Administration of Radio Film and Television (SARFT) (2009a), the gap between the release windows of online and cinema distribution was narrowing.

The development of online distribution of films and TV series can be attributed largely to the unmet demand in theatres and on TV and the rapid development of digital technologies. In the film market, there are a limited number of screens to service the population. From 2005 to 2008 box office revenue in China grew 29%, but the number of screens only grew 15% (Wang, 2009). As theatrical distribution cannot meet the demand of increasing number of movie goers, online distribution helps both big and small productions reach the mass market. Until recently China maintained a tight import quota of 20 foreign films a year. In February 2012, about one year after the deadline given by the WTO for China to lift its film import quota, the number of premium format films entering screen space was raised by an extra 14. In effect, the quota is still in place (Abrams, 2012). Limiting international access to China’s market while allowing foreign investment and skill transfer is an important strategy of the government to help domestic industry to develop a competitive advantage (Montgomery, 2010). Tight import quotas have had the effect of driving many viewers to access overseas productions through online video services. The efficiency of the online subtitling communities makes it easier for viewers with less foreign linguistic literacy. As overseas movies and television shows are rarely shown on Chinese television channels, Chinese youth turn to the internet for a greater variety of programs (Lee, 2009). Strict censorship has also limited the number of films available to viewers, which creates market opportunities for online video distribution. The Sixth Generation directors’ underground films, often banned by the government while winning prizes at international film festivals, are viewed on pirated DVDs and via online downloading (Tudou, 2011). Similarly, despite a large number of TV production companies in China, broadcasting is still tightly controlled by the state (Xu, 2012). Further, the development of broadband and file-sharing technologies has made for easier transmission of big videos online. Online distribution of films and TV series has increased significantly. According to the 27th Statistical Report on Internet Development in China (CNNIC, 2011a), by the end of December 2010, 62% of

internet users watch videos online. Film and TV drama were the most favoured content by users, attracting 93% and 87% of online video users respectively by the end of 2010 (CNNIC, 2011).

A watershed moment: reform of regulatory boundaries In 2008 , the Administrative Provisions on Internet Audio-Visual Program Service (the Provisions) released by the State Administration of Radio, Film and Television (SARFT) and the Ministry of Industry and Information Technology (MIIT) (SARFT and MIIT, 2007), dealt a blow to the large number of privately held BT-based online video websites. As SARFT explained on its official website: In recent years some web sites spread a large number of pirated films, TV dramas and other programs publicly… The Chinese government has been called upon and urged both nationally and internationally to take legal actions against these web sites. BT sites were distributing audio and video content and didn’t have the ‘Information Network Communicated Audio-Video Program License’ issued by the SARFT. They were unauthorized to provide Internet audio-visual program services (SARFT, 2009b). While the legal grounds for the new measures were framed as an issue of licensing, clearly pressure from domestic and international copyright owners caused the state to move. In addition to international commercial interests, internal political demands were a factor in the attempts to demolish the piracy market; this is evident from several big antipiracy propaganda campaigns that the government carried out. Pang (2006) notes however that unmet demand from audiences and attendant enforcement difficulties—including corruption at the provincial level in the street raids and transnational mobility of the production and distribution networks—have severely hampered the state’s anti-piracy efforts. Moreover, abundant job opportunities provided by the piracy market are another factor in weak enforcement of copyright law by the state.

In effect the Provisions attempted to both appease the international community and extend domestic ideological control online. It also reflected the state’s intention to capture the opportunity in online video distribution when the market had grown big enough. The Provisions required online video business operators to obtain programming permits or shut down their businesses. Companies applying for internet audio-visual service permits had to be ‘legal persons, fully state-owned or state ownership-controlled, with no law breaching records in the prior three years’. The ‘state-ownership’ requirement only applied to video websites launched after the Provisions was released. This signalled an exemption for existing privately owned video websites. The Provisions subsequently served as a protective barrier. It is undeniable, however, that the Provisions raised the entry barrier of the industry and almost put an end to the businesses in the informal sector. As a result of the state intervention, widely adopted peer-to-peer sharing sites such as BTChina, btbbt and yyets were either shut down by the government, or gave up download services. The shutdown of the major BitTorrent-based sites came as a shock for users, as they saw the letters to users and the dead links on the frequented sites. Overnight the shutdowns became a hot topic among users in a wide range of online forums. Some viewers even initiated online mourning for the websites, uploading portraits for the deceased and expressing their disappointment and sadness. One of the often-seen quotes was ‘How can I live without you – BT!’ (Yan, 2010). Apart from user disappointment, the disappearance of the infringing sites was a serious blow to cultural diversity of the online video market. Overseas content and genres including time-travel, fantasy, and reality shows, which were banned or restricted by SARFT, became hard to access again. From being allowed to break the limitations on space, time, language and culture and have some degree of autonomy (Gubbins, 2012), viewers were thrown back to a market dominated by a limited range of domestic productions.

The crackdown also hurt the collaborative culture emerging from the peer-to-peer sharing sites. Viewers used these sites to build an online library of content which could not be found elsewhere. Fansubbing groups voluntarily devoted time and effort to translating, editing and uploading subtitles for overseas productions. The coordinated efforts of the volunteers across different parts of China became a public service for the fans of American or other overseas films and TV dramas. The sharing spirit and collaborative culture was a part of online users’ lives, restructuring their social relationships and lifestyle. Overall, the wave of shutdowns diminished the role of piracy as a cultural mediator for Chinese viewers who desire modernity (Pang, 2006). The sudden loss of community was a significant stumbling block for service providers who need to attract users in a competitive market. While the closure of unlicensed websites directed users to licensed ones, that did not, however, mean an end to infringing content. The shutdown of BT websites led to the resurgence of pirate DVDs found in subway stations or on street corners, which had died down to some degree when piracy moved online (Yan, 2010). The vendors were clearly aware of the shutdown of BT sites, and the price of a piece of D9 DVD rose from 9RMB to 10RMB (Luo, 2009). This resurgence of street vendor piracy reveals close relationships between online and offline informal economies. The rise of the price of pirate DVDs further reflected strong consumer demand. For the state, this migration of piracy back to the offline domain adds to the difficulty of control, and did not serve the intended purpose of the crackdown. Furthermore, the shutdown of BT sites did not put an end to downloading and sharing technologies, and other ‘traditional’ ways of sharing, such as exchanging hard drives for the content. That being said, the state action did impact on both formal and informal sectors, which will be discussed further below.

Changes in industry boundaries and entry barriers The licensing requirement accelerated the industry shakeout. Under the Provisions, SARFT closed down 162 websites that did not obtain legal licenses to operate by 31

March 2009 (Liao, 2009). Some of the most popular destinations such as BTChina.net and bt.ydy.com were shut down in December 2009. BTChina’s founder Huang Xiwei established the website out of personal interest in 2003, offering popular TV shows and movies, particularly the latest US shows and Hollywood hits. The site attracted more than 250,000 visits daily according to Alexa internet ranking. Huang was not very surprised at the shutdown as BTChina was effectively an informal operation (Sheng and Gu, 2009). With the Provisions stipulating that only wholly state-owned or state-held corporations can apply for the license, a host of new players entered the sector. By December 2008, SARFT granted 332 licenses to online video service providers (SARFT, 2008), the majority of which were state-owned TV stations, radio stations, and news media at national, provisional, and local levels. For those private companies wishing to continue operation, they were pressured to apply for the license and seek a path to the formal sector. A few companies including K6, Tudou and Youku were among the first of this group to have gained the license. VeryCD, a Bit-Torrent download site, submitted its application in December 2009 and had not obtained the license until August 2012, after putting a stop to its downloading service and opting for streaming legitimate content (VeryCD, 2012). One of the most noteworthy service providers who made their way to the formal sector with legitimate content was Xunlei. It is the provider of the popular Xunlei download manager, which allows users to download a wide variety of TV programs and films at a fast speed. When this product was launched in 2003 it attracted a large population of users. According to iResearch, it became the most popular download acceleration application in China with a 78.7% market share in China’s download software market as of February 2011 (Xunlei, 2012). However, most content that users downloaded was infringing content. In 2007, under pressure from copyright holders, Xunlei announced a service called ‘Claim Copyrights’ that enabled copyright owners to claim their content on Xunlei's platform, which would then be taken down (Qiu, 2007).

Later that year, the company launched Xunlei Kankan, an online video streaming service, which claimed to host only licensed content. This move reflects a trend for service providers to move from downloading to streaming service, which has the distinct advantage in reducing burdens of storage space. Such a trend is already evident in international music and film markets, contributing to the decline of ownership of media content (Gubbins, 2012). According to iResearch, Xunlei Kankan became one of the top 3 video streaming portals in China with 120.7 million monthly unique visitors as of April 2011 (Xunlei, 2012). Xunlei’s desire to operate formally is illustrated by an investment of 100million RMB in copyright content purchase in 2010; and a further investment in film copyright of 200million RMB was made in 2011 (Tang, 2010). The transition from the illegal to legal was, however, not smooth. While a large user population supports its subscription business, as well as online advertising, the legacy of piracy is continuously raising copyright concerns. In addition to litigation warnings from MPAA (Symonds, 2008), domestic online video service providers have also sued Xunlei for copyright infringement. There were 234 copyright infringement cases brought against the company in 2009 and 2010 (Pilarowski, 2011), a major reason why Xunlei withdrew its IPO application in a suspicious market in 2011. Despite the cancellation of IPO, Xunlei has raised U.S. legislators’ attention, with one Representative asking: ‘Does the Commission have a standing policy regarding the approval of foreign companies to be listed on U.S. exchanges where there is evidence that a company’s business model is likely to be in violation of U.S. law’ (Tweney, 2011)? Other BT sites such as yyets.net and uubird.com announced their plans to end BT services and focus on subtitle translation or film/TV reviews. As a result, traffic decreased by 32% in the first weekend of December 2009 compared to the first weekend in November (Xue, 2009). It is evident from this data that video sharing and downloading services are core values for user communities. It turned out to be hard to maintain community loyalty with peripheral offerings such as subtitle translation or reviews.

Rising copyright cost and the erosion of market positions In addition to the changing industry boundaries, accompanying the transition to the formal sector was a change in business models. With the video-sharing model based on UGC proving hard to monetize despite high-volume traffic, the novelty effect of UGC waned. Service providers began to reconsider their business models under the mounting pressure of revenue gains. Professional content from traditional TV and film producers became highly sought-after, with a concomitant sharp increase in licensing costs. For example, Tudou, the Chinese equivalent to YouTube, separated copyrighted high-definition professional content from UGC that was of less revenue-generating capability or had extant copyright issues. Tudou branded the former as heidou (black bean) in order to realize commercial benefits from advertising, while the site has retained other channels for UGC. At the launch, heidou offered more than 10,000 programs including film, TV series and entertainment shows (Xin, 2008). The number of unique visitors reached one million within a month and the copyrighted HD content attracted many advertisers, mainly in FMCG (fast-moving consumer goods), sports apparel, and consumer electronics (Zhang, 2008). Since then the site has secured major Chinese content partners including China Film Group, Polybona, Shanghai Film Group, Enlight Pictures, BTV, SMG, as well as international partners including MBC in Korea, SET in Taiwan, Star TV, TVB, and ATV in Hong Kong. The advertising revenue grew to 443.3 million RMB by the end of 2011(70.5 million USD) (Tudou, 2012b). Another leading video-sharing site Youku also serves as a good example of this transition. Since 2008 it has secured deals with more than 1000 TV production companies, including mainland companies as well as TVB (Hong Kong) and SBS, KBS and MBC (South Korea) (Youku, 2008). By the end of 2011 the site had attracted 505 advertisers and advertising revenue had reached 851.3 million RMB (135.3 million USD) (Youku, 2012b). Advertising is a substantial part of the site’s overall revenue, contributing more than 90% to it (Youku, 2012a). Youku has also tried to expand its premium content library by licensing from Hollywood partners to derive revenue

from user subscription. It has established partnership with Warner Bros. to introduce over 400 to 450 movies over a three-year period starting 2011, offering pay-per-view or subscription services on Youku Premium platform (Lee, 2011). Other Hollywood partners include Paramount, and 20th Century Fox. Most movies on this platform cost 3 to 5 RMB to watch; a monthly subscription cost is 20 RMB. For online video service providers, therefore, the strategy of collaborating with professional content producers to secure premium copyright content is critical to the business model based on advertising as well as to attracting users. Meanwhile, professional content gained further importance as new players in the online video sector joined in the hunt. Among these new players, deep-pocketed internet service providers were well- placed in the game. For instance, the top search engine in China, Baidu, launched its video site Qiyi.com in early 2010. It provides viewers with a variety of licensed and advertising-supported HD content including TV series, films, and variety shows for free without foraying into UGC. Current content partners include China Film Group, Huayi Brothers Media Group, Hunan Satellite TV, Beijing Satellite TV, and Zhejiang Satellite TV. The Baidu-backed site also has a movie channel which has a library of more than 500 movies, both back catalogue and new releases, from Warner Bros., Disney, Sony, Paramount, and Fox. The growing demand for copyrighted professional content resulted in continuously escalating acquisition costs. In 2006, service providers could purchase the online copyright of 1,000 movies for 300,000 RMB; in 2011 this amount could only fetch one episode of a TV drama (Zhang, 2011). For overseas copyright content, the costs are even higher. Yet this did not prevent the well-financed service providers from investing in overseas copyright. For instance, after acquiring ku6, Shanda announced together with Sohu in December 2009 that they would invest 10 million USD in a new fund to purchase Hollywood film and TV content licenses (Li, 2009). For weakly financed online video sites, the licensing fees of American content are excessive (Zhang, 2010). Meanwhile, the less expensive acquisition costs for East Asian content, such as those from Korea and Japan, means that East Asian pop

culture gains more presence on online video sites in China. Together with cultural proximity this availability further solidifies the positioning of East Asian content in China. Moreover, the difficulty of obtaining certain content enhances the cultural capital of those who can access such content. This in turn generates a sense of cultural superiority, echoing a widely circulated internet meme ‘disdain chain’ [bishi lian] (Shen, 2012). In the case of TV drama, users share the view that UK soap opera buffs look down upon American soap opera fans, who in turn think themselves superior to fans of Japanese and Korean soaps. Following at the end of the chain are people who are fans of Hong Kong and Taiwan dramas, Chinese domestic productions, and finally Thai dramas. This suggests the demand for western content remains underserved. It also reflects stratification among viewers because of the knowledge and resources required to access such content. While professional copyright content promises to serve consumer demand and expand the market, skyrocketing costs exerted mounting pressure on online service providers. As the majority of viewers still enjoy a free lunch hopping between different service providers for content, there is an urgent need for the service providers to cope with the pressure of escalating costs.

The responses of the formal sector Because of the huge investment costs in server and bandwidth, diseconomies of scale have long haunted online video service providers. The rising costs of copyright content acquisition make this problem more acute. Therefore service providers have started to experiment with alternative business models to offset the pressure.

Teaming up to professionalize One strategy is to establish copyright content alliances. In Feb. 2010, Youku and Tudou announced they would jointly air films and television shows previously streamed exclusively on separate websites; they would also unite in the purchase of new, copyrighted content (Xin, 2010). The initiative aimed not only to save costs but also to fend off competition from new entrants, such as Baidu and Sohu. The

partnership eventually led to a merger of the two leading companies into the biggest online video service firm in China, Youku Tudou Inc. in August 2012 (Gao, 2012). Another example of alliance is between Tudou and LeTV. In October 2011, the two parties established a joint venture in an effort to reduce surging content acquisition costs. While Tudou has its origin in UGC and is mainly supported by advertising, LeTV has built one of the biggest copyright professional content libraries in China, more than 50,000 TV series and 4,000 movies (Tudou, 2011). Founded in 2004, LeTV generates revenues mainly through subscriptions, sales of syndicated television programmes and movies, as well as some advertising. The joint company Shanghai Tudou LeTV Movies and Television Ltd. is primarily engaged in licensing video content; it seeks exclusive licensing rights as well as sub-licensing to supplement each company's independent content acquisition strategies (Tudou, 2011). One weakness of such resource sharing and copyright transaction is homogeneity in content offerings. Online video service providers therefore needed to make more effort to promote their content. With the entry of traditional state-owned broadcasters into the online space, joint content promotion benefits both online video service providers and broadcasters. Sohu, for example, invested 50 million RMB in 2011 to promote the New Princess Huanzhu (Xin huanzhu ge ge), a TV serial capitalising on the breakout success of the original Princess Huanzhu (Huanzhu gege), which was broadcast on Hunan Satellite TV in 1998 (Wang, 2011). The serial was acquired as exclusive content for Sohu and Hunan TV. The cost was 30 million RMB, a record for TV drama (Wang, 2011). Despite this new focus on premium content acquisition, exclusive offering is hardly a sustainable business model in China. Copyright reselling is seen as a quicker means to recoup investment, which was what Sohu did. Soon after it bought the rights for New Princess Huanzhu, LeTV, Tudou and Youku acquired the rights reportedly at a cost of several hundred million RMB (Wang, 2011). The demand for premium content from the newly capitalised video service providers ensures that premium titles are becoming even more expensive.

In addition to content acquisition by various means, in-house (co-) production is a way to offset the effect of the soaring licensing costs. Co-production is also a method to manage the risks embedded in the symmetrical lack of information in creative industries (Caves, 2000) and the central type of uncertainty within the film industry, namely, consumer demand (Franklin, 2012). A successful case of in-house content (co-)production is Youku Original, the company's own brand of self-produced online video content launched in April 2010. Under its cooperation with China Film Group, the two parties planned to cooperate in screenplay development, content production and distribution. The first initiative is to work together on 10 short films with a total investment exceeding 10 million RMB (Youku, 2010). Once completed, all of these offerings will be edited together into a longer film to be screened simultaneously in theatres and online. Feng Xiaogang and Ning Hao, two of China's best-known directors, will join as guest producers. In-house content (co)-production proves to be effective in working around the surging licensing cost and the quality issue fraught with UGC. More importantly, sponsored content can be tailored to suit different brand owners and resonate with their target audience, and therefore appeal to advertisers. It enhances the value of online video sites as a marketing platform based on joint content production. On the front of content distribution, a way to reduce costs is multi-platform distribution. For example, Joy.cn distributes its copyrighted content to internet cafes, telecom operators such as China Telecom’s broadband service portal www.vnet.cn, as well as small and medium website affiliations. The multi-platform distribution and accompanying copyright transactions help deliver a better return on copyright investment.

Commercialising UGC As UGC is fraught with copyright issues and inferior quality, it only adds to bandwidth cost without generating revenue. Yet, its value for users in terms of self- expression and a sense of community, as well as its potential for growing revenue cannot be underestimated. The trend of commercializing UGC in China parallels

YouTube’s strategy of promoting the professionalisation and formalisation of amateur media production, which has led to the rise of entrepreneurial vloggers and cultural intermediaries (Burgess, 2012). Some UGC are spotted by advertisers as right content for marketing opportunity. DIY education programs are such an example. Midea, China’s domestic small home appliance brand, spotted ‘Sijia chufang [Private kitchen] as a product placement opportunity to promote its soymilk maker and juicer (Advertising Panorama, 2009). The video maker, Aiyo V, is a talent discovered on Youku platform, which later became a program producer for Youku. Another way to profit from user creativity is through user-generated advertising (UGA). Ku6 launched a UGA competition for various brands which spans different sectors, including Coca-Cola, Kang Shi Fu Ice Tea in FMCG, BYD Auto, online game developer and operator Perfect World, mobile brand Sony Ericsson. The competition required users to submit self-produced videos based on the theme or elements provided by the advertisers. Viewer votes and comments, and sometimes professional judgment decided the winners, who then received 10% to 50% of the ad revenue and were awarded by advertisers in cash or in kind (Li, 2008). The site serves as a platform where it connects advertisers with its users, who are not only viewers but have also become producers and promoters. The effort of commercializing UGC is accompanied by the formal sector’s experimentation with social videos. This demonstrates the incorporation of the informal into the formal sectors. In February 2012 Tudou launched an enhanced platform for Sina Weibo users to upload and share videos, becoming the first site to provide such functionality for users of the popular microblogging service (Tudou, 2012a). The joint forces of the top online video site and the leading online social hub in China provide opportunities in facilitating user creativity in content production, and providing an enhanced experience of content consumption and sharing. The commercialization of UGC came at a time of the rising licensing costs in an uncertain market. The importance of user community cannot be emphasized enough in a social network market, where the nature of consumer choice and producer

decision making is based on others’ choices due to uncertainties about product quality arising from novelty or complexity, or the cost of acquiring this information oneself (Potts et al., 2008). Many examples of successful home-grown channels offered in the YouTube Playbook have built on the understanding of Youtube as a social network and a community rather than as an inert publishing platform (Burgess, 2012). The mechanisms facilitating user creativity and sharing offers further content production and distribution possibilities. Such adaptation under pressure also demonstrates the blurring line between the informal and the informal as the two sectors co-evolve.

Conclusion China’s media sector has undergone significant change in the past decade, to a great extent as a consequence of competition. A Chinese variant of creative destruction has forced change in industry boundaries and entry barriers, a breakdown of formerly protected market positions, and reform of regulatory frameworks. Much of this change has been wrought by technological developments that have made file sharing easier while at the same time stimulating the rise of UGC. It is interesting that this kind of creative destruction has occurred in online media and has replicated similar international moves to ‘clean up’ the problem of unauthorised file sharing and copyright violation. In the more traditional media of television and cinema, which are more tightly regulated by the state, there has been less disruption of business models although as we have pointed out in the case of channels such as Hunan TV there is increasing synergy between traditional and new media forms. This article began by discussing the formal and informal economies in audio-visual sector in China and the evolution of the offline informal video market into the online world. The online video market created its own momentum on the back of the ethos of free downloading and the availability of peer-to-peer sharing platforms. The watershed moment came when the state released the licensing in 2008, which changed the game for industry incumbents, forcing some into the annals of Chinese media history, while allowing others to ‘professionalize’; that is to observe copyright

regulations, which in turn raised the cost of content acquisition, as well as impacting on the kinds of content acquisitions. Because of the higher cost of western content, cheaper East Asian content found its way into many of these sites. The tension between formal and informal markets however, did not disappear. Offline vendors of pirated product remerged. The clamp down on the informal sector resulted in a loss of content diversity and community culture. As players experimented with alternative business models, the informal economy sought new means of expression. Different content strategies and business models emerged. While some incumbents opted for cooperation in copyright content acquisition, in-house content (co-) production, or multi-platform distribution, others experimented with the commercialization of UGC and social video service. The online video service providers that are engaged in the commercialisation of UGC and social video services are more than formal publishing platforms. They are facilitators of informal grassroots activities. This facilitation provides an opportunity to encourage non-infringing use of copyright content by users. For viewers, the new business models create new cultural identities and entrepreneurial opportunities. Meanwhile TV and film consumption is reinvented as a communal activity with the tag of UGC and communities. Users can bring their creativity into the formal sector; this perhaps is the new face of participatory culture in China. Meanwhile, underlying the state enforcement of western-dominated ideology of copyright is the deep- rooted traditional conception of copyright as public or common good. This still remains very relevant in the informal sector, which is increasingly merging with the formal sector.

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