An unfolding drama for online video sites

Currently, more than 95 percent of the revenues of all Chinese online video websites come from advertising, according to Ma.

"This has potential risks, as we (online companies) are putting all our eggs in one basket," she said.

To vary their business models and profit patterns, these companies have started promoting subscription and pay-per-view services in the hope of cultivating a culture of paying for online videos among Chinese audiences.

Referring to this type of service as "a new business model at a starting point", Ma admitted that the number of paying customers is still far lower than that of users of free online video services.

In 2011, active paying users accounted for just 1.5 percent of the total number of users of online video services, according to a report published by the China Internet Network Information Center in March. In total, China had 538 million Web users by the end of June. In 2011, only 7.6 percent of users nationwide had paid for online videos, and 73.5 percent of them had only paid once or twice.

Strategic battlefield

In spite of such a small proportion of active paying users, industry insiders agreed that online video websites can't afford to overlook the importance of subscription-based services.

"It's a strategic battlefield that we've got to occupy. Otherwise, we'll have no say in this business in the future," said Sohu TV's Ma. "During the process of expanding the market, we have built up smooth cooperation with several large international film production and distribution companies. It has enlarged our content library, attracted more users and improved our brand image."

Zhu Huilong, vice-president of Youku Tudou Inc, predicted that the market for subscription-based online video services has great growth potential. The market could grow to be as large as that in the US, he said, adding that companies in the US have spent eight to 10 years cultivating the market. That process will take longer in China, he added.

His confidence was based on China's improvements in copyright protection during the past few years and government policies to encourage reform and innovation in the culture industry.

"Online video platforms will inevitably change from being free to subscription-based services because of the continued increase in licensing fees for copyrighted and professionally produced content," he said.

Youku Tudou's annual report revealed that its content costs increased significantly to 243.4 million yuan in 2011, from 82.7 million yuan in 2010, because of the rapid expansion of its content library. The average licensing fees for television dramas and movies increased by more than 100 percent year-on-year in 2011, according to the company's records.

Since Youku launched its first chargeable programs in 2010, before its acquisition of competitor Tudou, the company's pay-per-view users and subscriber numbers have grown to more than 3 million. Most are white-collar workers aged around 25, living in big cities in coastal areas and making an average of 5,000 to 6,000 yuan per month.