Victor Koo, Founder, Chairman and CEO, YouKu, Inc., sat down with Fortune’s Jessi Hempel at Brainstorm Tech in Aspen. They talked about the challenges and opportunities to online video in China. An unedited transcript and video are below.
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VICTOR KOO: (In progress) ‑‑ two-thirds, or 70 percent actually comes from professionally syndicated content, TV series, movies, music, videos, news, entertainment, programs, and the like. And so the reason is, within China, if you depend on a video platform, just on user-generated video, there’s really not as much of it. Remember when YouTube was founded in the U.S., America’s Funniest Home Videos had been around for a long time. In China, the history of TV as well as user-generated video is very, very short. So, we’ve actually had to do a lot of things to motivate that.
On the technology side, when YouTube first started, before they were acquired by Google, they actually outsourced their backend technology. Whereas, with YouKu, all the video delivery, the search monitoring, all the backend technology, are all developed and managed in house from day one to now.
JESSI HEMPEL: So, how about the users, how do the users experience YouKu, and what I mean in particular is what is the YouKu experience compared to the experience that they may have on their televisions right now in China?
VICTOR KOO: Well, the most important thing I guess is it’s on demand. Also, it can be accessed through multiple devices, whether it’s PC or tablets or mobile phones. And also it’s interactive. So, a lot of people come to our website to discover videos. It has the most comprehensive database. But because there’s so much social behavior, when you have hundreds of millions of users coming to your platform, watching these videos, and they’re commenting, they’re giving thumbs up and thumbs down, so all that information itself that we use big data to really from an analysis standpoint drive how we recommend videos to our users.
By the way, YouKu means what’s best and what’s cool in Chinese. So, the whole product philosophy really revolves around how to help users, from a massive video database, finds what’s best and what’s cool.
JESSI HEMPEL: Right. So, you’ve had a fairly significant company event in the last 12 hours.
VICTOR KOO: Yes.
JESSI HEMPEL: Why don’t you tell the audience what it is?
VICTOR KOO: Well, on March 11th, we signed a merger agreement with the number two player in our market, Tudou. YouKu is number one, Tudou number two. And that was a very significant event. Actually, recently, just today, we announced that it was just approved by SEC. So, the merger is actually very much in progress.
JESSI HEMPEL: So, it’s good to go. That means we can talk about it, right?
VICTOR KOO: Yes.
JESSI HEMPEL: Okay. So, let’s do. What does Tudou bring to YouKu, and how are the sites different? I know some of it is geography, but they’re also really different properties.
VICTOR KOO: From a video platform standpoint, I think one of the fundamental tenets of the business is scale. I think the combined scale being the two dominant players, YouKu is listed on the New York Stock Exchange, and Tudou is listed on NASDAQ. Those are the only two listed video companies of scale. And so, whether it’s for the user, or for the marketer and advertiser partners, as well as our media partners, having a larger scale platform is actually beneficial to the whole value chain itself.
In terms of differentiation, like you mentioned, we actually started ‑‑ one started in Beijing, one started in Shanghai. So, the content differences as well as the demographic differences are actually quite different. It’s almost thinking about two incident television platforms and channels coming together under one parent and home company.
JESSI HEMPEL: So, like a Hulu and a YouTube kind of thing?
VICTOR KOO: Both actually platforms have a fair amount of professional syndication as well. Like I mentioned, it’s very hard to just have a pure form like a Hulu or a YouTube to be successful in China, because our view is, users come to a platform, they really don’t care whether it is professional or whether it’s a user-generated, or it’s premium you see, they want to come to a big database to be able to find the content they want. And we’ve been able to provide that in China.
JESSI HEMPEL: So, but branding-wise, are you keeping the Tudou name in Southern China?
VICTOR KOO: Yes. It’s going to be separate name with different positioning.
JESSI HEMPEL: Will a consumer necessarily even know it’s part of the same company?
VICTOR KOO: Well, I thin the most important thing is both websites have a lot of loyal users, and we want to make sure both the look and feel, and the branding and the positioning stays distinct just like two television platforms or stations, where they come to the platforms with their loyal user base, and they can stay on.
JESSI HEMPEL: So, the number one and the number two size video sites combine in China. You probably wouldn’t see that very often in the United States. Who does that mean is left to compete with you?
VICTOR KOO: Well, I think from a pure play standpoint, from a video, we’re really the two biggest companies. I think ‑‑
JESSI HEMPEL: How much of the market share does that mean you guys have?
VICTOR KOO: In terms of combined reach, the two platforms within the video audience cover over 80 percent of the Internet video population. I think from a revenue standpoint, since the smaller competitors are private, and so it’s probably hard to compare, but I would estimate probably 50 percent plus.
JESSI HEMPEL: Okay. So, you went public now a while ago, December 8th, 2010.
VICTOR KOO: Very good.
JESSI HEMPEL: December 8th. Where does your revenue come from, how do you monetize?
VICTOR KOO: Sure. Primarily it comes from advertising first, but in the last year or so we really started pushing on the video on demand from working with a lot of studios, actually, here in the U.S. as well as in China, in terms of providing iTunes or Netflix type service, whether it’s transaction VOD or subscription VOD. And three to four years ago, we also started having an original programming unit, which actually creates content both ‑‑ primarily for new media, but increasingly as the quality has improved, we’ve actually been able to distribute it to our traditional media platforms as well.
JESSI HEMPEL: So, what’s your strategy with the content creation, and how might you compare it to what YouTube has done in the pats year in particular with content creation?
VICTOR KOO: I think it’s a combination of describing it like HBO Originals. We started as a syndication platform, where you syndicate professional content, as well as have a lot of users that upload different genres of content up to our website. And we can talk about that a little bit more.
But in terms of original content, that’s a very important part of our branding strategy. In fact, both YouKu and Tudou do original content for a number of years, and we position it based on our difference in terms of age demographic. And so the content itself is really more suitable for the brand itself.
JESSI HEMPEL: Got it. So, I want to come back to the monetization piece. Where do you see the most opportunity for growth?
VICTOR KOO: I think in terms of if you look at defining the market space as Internet television, and if you look at television, one is from an advertising standpoint, from selling TV commercials, or ads. The other one is really marketing and content solutions, like sponsorships, and product placements, where we really see a lot of opportunity. Where you see Internet television in China probably somewhere in the low single digits comparing the Chinese TV pie, 2 to at most 5 percent. So, it’s still growing at a very, very rapid speed.
Of course, from a consumer payment standpoint that’s also a business that we are seeing growing very rapidly. The two bottlenecks there are payment and piracy, and those are ones that we’re actively working on with our partners, and proving the payment solutions as well as combating piracy.
JESSI HEMPEL: How big of an issue is piracy for you?
VICTOR KOO: Well, it actually has moved from offline to online. It used to be a lot of the movies, for example, used to be pirated DVDs on the street. Now, if you come to Beijing and Shanghai, you see a lot less of those, but they’ve moved online to a lot of, I guess, equivalent to BitTorrent type of P2P services here in the U.S., there are similar services in China that we are really working to solve those kinds of problems.
JESSI HEMPEL: So, how do you fight that?
VICTOR KOO: Well, first of all, from a technology standpoint, we talk to Time Warner, and talk to News Corp, all of these partners about, you’ve got to know where they are, and you know how to deal with it in a Chinese context, whether it’s from a legal standpoint, whether it’s from a public relations standpoint, or even sometimes from a government relations lobbying standpoint. Those are all effective ways to do it. And we’re getting increasingly comfort as we work with the partners both domestically and internationally that they feel comfortable giving us the right to protect their IPR for them in China.
JESSI HEMPEL: Got it. So, I imagine there are some massive costs involved with your business.
VICTOR KOO: Sure.
JESSI HEMPEL: I mean, as Internet users expand in China, you must have extreme bandwidth costs. How do you control that, and what are your other major costs?
VICTOR KOO: Well, the two major costs in our business is content and bandwidth. And, in fact, I think the consolidation of the business has really improved the content cost picture. 2001 was actually a very dramatic year for our industry as the capital markets were booming, as well as the content callas were actually going up a fair amount. But what people have realized in the last years is that by buying the head content, the really, really high-end content for very high cost doesn’t really get to a sustainable traffic. So, a lot of these players have actually gone back on this strategy, and so content prices have stabilized, and have gotten a lot better and back to reality.
From a technology standpoint, the unit cost as well as because of scale advantage we’ve been able to work through that through load balancing and a lot of other different technology methods to decrease the unit cost. But since the telecom infrastructure in China is regulated, that’s an area where the decrease in unit cost is slower than the rest of the world.
JESSI HEMPEL: Yes, sure. So, I know that YouKu, most of your content is professionally produced. Tudou, it’s much more user-generated.
VICTOR KOO: It’s a hybrid.
JESSI HEMPEL: I would love you to address the pressure that you receive from censors. I know that in the West we’ve been reading a lot more about it. Have you noticed any change, and what’s that relationship really like?
VICTOR KOO: Well, for YouKu, we developed our content monitoring technology, literally, right after the front end product was done. And before the regulations came out back in 2007, and the regulation came out end of 2007/2008, all of our technology was already in place when the regulation came out. So, all the monitoring, whether it is inappropriate content of different types, we call it kind of the three Ts, Taiwan, Tibet, Tiananmen Square. And certainly the racy content that you see on a YouTube you really don’t see on YouKu. We feel that for ‑‑ a lot of people say it’s just for government reasons. The other thing is also much more advertiser friendly, as well as we have also a lot of young children actually on our site as well, and so we want to make sure that it’s parent-friendly.
JESSI HEMPEL: I’m sure all those three things work together, right? They have common interests. How does that exactly work? I mean how do you monitor the content, how do they monitor the content. And what are those conversations like?
VICTOR KOO: Well, the difference between traditional media and new media, and quite remarkable, it really shows the increasing sophistication of the Chinese government to understand how to approach new media. Is that traditional media, like a television show, is always screened by SARFT, the State Administration of Radio, Film, and Television, before it’s shown on television. So, nothing is live, per se. But, new media, they’ve actually empowered us to really do the monitoring ourselves. So, we have actually developed a technology that we’ve optimized over the years and we also have a team that actually are very sophisticated in content monitoring, as well. So, it’s technology plus people, really. The end solution is a hybrid.
JESSI HEMPEL: And I assume they, from time to time, check in with you. I mean do things slip through, get missed?
VICTOR KOO: Well, we have consistent communication and then basically at the same time there are issues that are also actions that are taken. We take down, just like copyright holders’ take down measures.
JESSI HEMPEL: So, Victor, I’d love to switch gears a little bit here for a few minutes and talk about your own personal history. How did you get into this Internet business in China in the first place?
VICTOR KOO: I was here in the Bay area between ’85 and ’94, going to school.
JESSI HEMPEL: Where did you grow up, Victor?
VICTOR KOO: Actually I was born in Hong Kong. My father and mother come from Northern and Southern China, respectively. So, I spoke both Cantonese and Mandarin when I was young. And I left actually pretty young, around 15 years old to Australia for a few years, a boarding school and so forth. And then moved over here to the states for about 10 years. I worked for a couple of years and then Stanford Business School. And I was the only person out of eth class of ’94 who decided to move to Beijing right after business school.
At that point everyone thought I was crazy. And so basically starting from 1994 this is my third early-stage, media-related, technology related company. The class of ’94, actually, at Stanford, and people were entering the Internet basically right around that time, whether it’s Netscape, or whether it’s Yahoo! and company, or eBay and companies like that, from the class of ’94-95. But, in China things really only started around ’98-ish. So, before that I was involved in a private equity firm that invested in print publications and entertainment attractions, working with companies like Ziff Davis, Times Mirror, and companies like that to do Chinese versions of books and magazines in China. And then I was the president and CEO of Sohu.com, which is a NASDAQ-listed portal. So, I was involved, I guess, in Internet print, shall we say, for about six years.
And then I started this, which I’ll define as Internet television, since the end of 2005, and we launched the website in 2006.
JESSI HEMPEL: So, 2005, that’s like yesteryear in Internet years. How have you seen things change over that period of time for you as an entrepreneur working in China?
VICTOR KOO: Well, from a user standpoint, certainly I would include the U.S. in that, in the sense that back in 2005 really when you wanted to watch video basically the television screen is the primary screen and maybe going to the theaters. As short as half a dozen years later, whether it’s PC, or tablets, or mobile phones, are all video screens. And from a consumer behavior standpoint, literally the 24-7 experience of having access to video becomes a lot more real. And that has completely created a new industry, as well as changed the media landscape in China, as well as the rest of the world.
JESSI HEMPEL: So, let’s talk about the social media landscape in China for just a second. What with the government change coming and more attention paid to what’s popping up on sort of the Twitter equivalents in China, the Weibos, what do you see as the biggest risks for social media sites right now and what do they ‑‑ how do things stand to change for them with the changing in the government?
VICTOR KOO: Like I mentioned, about 30 percent of our viewership comes from user-generated video. And because of lack of history we’ve kind of guided that in certain ways. To give you an example, we have a program called YouKu Talent, which there’s 1.3 billion people in China and rapidly changing. So, interesting people, interesting events would be very interesting content. And so the YouKu talent program has a lot of talented people upload videos related to all the individual talents from playing the Rubic’s Cube, or sing like Madonna, or whatever.
Then we’ve got also called a YouKu-Paike program, which is a little bit like citizen video or citizen documentary, where people are filming all the rapid changes that are happening within China, a lot of them related to current events. And going to your question, in terms of current events sometimes they can be rather sensitive. And that’s an area where you’ve got to be very, very careful in terms of how you monitor and how you communicate internally, as well as externally.
But, that’s an area that’s also growing very, very fast, and has already become the source of content for the television stations, as well. In fact, when this phenomenon started it was back in 2007, where there was a major snowstorm in a city called Shenyang in the Northeast of China. And what happened was that for literally 10 days no television crew could go in that city. And so CCTV, which is the largest national broadcaster in China, saw these videos on our platform, contacted us when we were actually a really small website, and then used the videos and we helped them connect to our users to bring that content onto CCTV prime time. So, that’s an indication of using the Internet as a source of content for all of media. And that’s another area that we focus a lot on.
The other area is what we call YouKu original, where it’s scripted shows by a lot of talented people that gets uploaded, which is around social themes, as well. And so we get a lot of traction doing that. And that in a way is very similar to some of the things that YouTube is trying to do.
JESSI HEMPEL: Yes, very similar.
So, do you think that there’s any hope for Chinese social media companies to be able to expand outside of China?
VICTOR KOO: I think as companies go within China, China is a very large country, as well as is rapidly changing. So, I think for the first five to six years of history there’s just too much to do. But, what you’re seeing is the first, the second generation of Internet companies that have been around for 10-plus years, some of them are trying different ways to get involved in other developing countries is what we’re seeing. Whether you see Tencent or AliBaba and companies like that are doing that.
And since we’ve been also around the same time we are starting to think about it, but it’ still pretty early days for us, in terms of thinking about international strategy. So, you’re going to start seeing Chinese Internet companies, because the models that we actually bring to bear, or adaptations are actually quite different from the rest of the world. When we think about, I guess, a global strategy, or model also needs to evolve based on the different country requirements as we expand.
JESSI HEMPEL: Got it. So, I wanted to leave just a little bit of time here for audience questions. I can barely see you all from this stage. But, if anybody has a question will you raise your hand and identify yourself now?
Right here in the front. One second for a microphone to get to you.
QUESTION: Has SARFT imposed any quota restrictions similar to what they do on broadcast television on you? I know broadcast has been 11 percent quota for foreign, but I don’t know if they’re doing anything similar for you.
VICTOR KOO: Well, new media in general, because their view is that it’s targeted towards the urban, young, educated population. The latitude within new media, whether it’s original content or international content, has been a lot broader. So, anything that actually gets rights to DVD actually can be on new media. So, that’s a much broader spectrum than what you’ll be able to show in a movie theater, as well as the television stations.
JESSI HEMPEL: Anyone else?
Right over here, sorry, Bill.
QUESTION: Thanks, Jessi.
Bill Powell (ph), I’m the China Bureau Chief for Fortune. You guys famously on the original content front aired an original film called Old Boys a couple of years ago, which was a single sponsored by Chevrolet and got god knows how many hits, tens of millions it’s up to at this point.
VICTOR KOO: Over 50 million.
QUESTION: Over 50 million, and it’s a film of sufficient quality that it even brought my usually very unemotional Shanghainese wife to tears. Did you catch lightning in a bottle with that film? Have you been able to replicate it, in terms of its success and are you sticking with sole sponsor models for the original content, or do you farm out the sponsorship to all comers?
VICTOR KOO: Well, YouKu original programming has evolved over time. I think the primary focus is because most traditional media really is geared towards our older population. We’re trying to develop basically themes that are targeted towards the urban youth. And so, I guess your wife must be in our target demographic. And so it tells a lot of stories about what happened in our youths that really touches people’s hearts and minds. And that’s why it’s created the national phenomenon that it did. And we’ve been ale to be very successful working with the same director, and the studio, and extended that program.
Every year we run a program. And now, by the way, we also are working with multiple sponsors just not one sponsor any morel, where we have a program where we work with young independent directors to do a portfolio of movies, and usually two or three of them actually become very big hits. And we develop series based on those.
For example, another very important one is Ms. Puff, which is an animated series that has been very successful in China that we’re onto our fourth season on. So, we have a hit from, I guess, an exploration program, and then from that you get directors and studios that work very well with each other, and then we keep extending the investment. I guess in that approach standpoint, when I talked to Robert over at YouTube, they’re also thinking of similar approaches.
JESSI HEMPEL: Got it. So, we’re running low on time, and I just want to take my last 30 seconds to just tell you, Victor, that Stephanie Mehta, Adam Lashinsky, and myself were all very good at Rubik’s Cube. So, if you are looking for your next YouKu talent generation, it’s right here. I think many of us are good at it.
VICTOR KOO: We’re looking for international talent, please come, please upload.
JESSI HEMPEL: Thank you very much.
VICTOR KOO: Thank you very much.