Yang Lei, a 25-year-old student at Zhejiang University of Finance and Economics, loves comedy movies and stuffed animals.
As such, she was desperate to see Ted, a Hollywood comedy based on the adventures of a boy and his teddy bear, which was released by Universal Pictures in June.
Yang was unable to find the movie at any of her local cinemas, so she decided to use the paid premium-content platform of Youku, one of China's best-known online video websites.
"I was reduced to tears when the teddy bear was torn to pieces at the end," said Yang. "The film isn't being shown in theaters in China. I'd been looking forward to seeing it and had searched for it on the Web, but I couldn't find a high-resolution version to download. Instead, I decided to pay for it when it appeared on the video platform."
Yang spent 5 yuan (80 US cents) on the movie, a fraction of the 70 yuan she would expect to pay to see a typical Hollywood import at a movie theater.
"Watching films online is cheap and gives me the freedom to arrange my schedule," she said. "I'll pay for an online film if I'm really interested and there's no high resolution version to download from the Internet."
After years of delivering free content, China's leading online video websites such as Youku Tudou, Sohu TV and iQiyi are experimenting with subscription and pay-per-view services. All of these websites have expanded their copyright cooperation with the dominant Hollywood film companies that supply most of the movies listed for subscription.
Tencent Video launched its Hollywood Theater platform on Nov 12, offering subscribers access to a bundle of nearly 400 films at the discounted price of 20 yuan per month. In addition to new releases such as Argo, a US-made thriller starring Ben Affleck, and Dark Shadows, a comedy-horror directed by Tim Burton, subscribers will gain a 50 percent discount for pay-per-view services and freedom from onscreen advertising.
'Subscription is key'
Also in November, Youku Tudou announced a five-year agreement with Sony Pictures Television. The agreement will allow the Chinese provider to introduce more than 300 new and classic titles to its paid Youku Premium platform, with new releases and classic titles from Sony added every year. Since the company officially launched the platform in June 2011 after reaching a digital distribution agreement with CAV Warner Home Entertainment, it has signed similar deals with Paramount, Walt Disney, DreamWorks, NBC Universal, 20th Century Fox and Lionsgate.
All the imported films will be put into the Youku premium content library, charging subscribers 15 yuan per month or 5 yuan per view for random visitors.
"Subscription is the future direction for the development of online video services. It will diversify our profit patterns," said Ma Ke, general manager of the copyright procurement center of Sohu TV.
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.
Large deficits
"When we discussed charging users to watch movies online with movie production companies a year ago, none of them supported this business model. They were afraid of losing money at the box office if they allowed Web users to watch and pay for online videos. But now, many film companies are cooperating with us to provide subscription-based services. This is a big change for the industry," Zhu said.
The total revenues of Chinese online video services reached 2.66 billion yuan in the third quarter of 2012, a rise of 37.2 percent year-on-year, according to statistics released by iResearch, a research company that focuses on China's Internet industry.
Youku, Sohu and Tudou remain the top three in the online video market, according to the latest rankings published by iResearch in October. Youku leads with 31.4 million unique visitors per day who watch at home and at the office, while Sohu TV has 22.77 million daily unique visitors and Tudou 20.21 million.
However, behind the figures lurks the uncomfortable fact that most online video service companies are still running large deficits. Youku, for example, incurred a net loss of $27.3 million in 2011.
The desire for profit has prompted some online video websites to launch subscription-based services to offset the high costs of film production and licensing.
"If we keep providing copyrighted movies online for free, the advertising revenue will barely cover our licensing costs. But by offering paid content, users will make a much greater financial contribution to our business," said Yang Xianghua, vice-president of iQiyi. Yang's company gained more than 100,000 subscribers after launching its subscription-based services in May 2011, presenting around 550 foreign and domestic films and nearly 400 military-themed documentaries.
Subscribers watch slightly more than four movies per month on average, at a cost of 19.8 yuan.
During the past two years, iQiyi's subscription revenues have grown rapidly, and the company has already covered its licensing costs for this year. The copyright owners usually receive a minimum payment and will get 50 to 70 percent of the extra income if the revenue from their movies overtakes the minimum payment.
"We hope that subscription and pay-per-view services will eventually account for a significant part of our business, and we also look forward to the revenues from subscription-based services exceeding our advertising income," Yang said, adding that the target will be met in about three years.