56.com, a leading Chinese on-line video site, suddenly suspended operations in mid-June 2008. The usual user-generated, YouTube-like video offerings were replaced with a brief message noting that a server upgrade was to blame. Over three weeks later, the message still existed. Company executives have refused to explain the continuing delay, despite typical server upgrades being completed within hours.
In December 2007, Chinese regulators jolted the industry by issuing rules that threatened to shut down at least some Internet video-streaming sites that are not state owned. Regulators later clarified that some private-sector operators already offering such services, might be issued licenses, provided they complied with government content restrictions. However, the fate of popular sites like 56.com and its larger rivals, Tudou.com and Youku.com remained unclear. Regulators did indeed shut down dozens of smaller sites, and left the top three sites alone, apart from a warning issued to Tudou.com for unspecified infractions.
Online video has been one of the fastest-growing applications of the Web in China, which has over 225 million Internet users. According to one government survey, 77% of Internet users in China watched online video in 2007. Advertising revenue has fallen to just 2% of all online-ad spending in China, but that has not stopped investors from pouring money into online-video companies. It si estimated that the top eight online-video companies have raised at least US$250 million as of May 2008. Investors include Adobe Systems Inc, Softbank China, venture capital giant Sequoia Capital and Steamboat Ventures, a fund backed by Walt Disney Co.
The suspension of service has the potential to damage 56.com’s future in the intensely competitive environment, as its traditional users switch to rival sites each day that 56.com is down. This could also bode trouble for the content partnerships that give 56.com an edge, including the rights to broadcast content such as games clips from the USA National Basketball Association.
Some private companies have been awarded online audiovisual licenses during 2008. However, the three biggest video sharing sites are still waiting. As long as those three continue to filter their content in line with government rules, they should be issued with licenses in due course.