Venture capital heavyweights have placed high-profile bets on China's YouTube-inspired video-sharing Web sites, but now appear to be moving on to online companies with more traditional business models.
China's video-sharing sites, which blossomed last year after Google bought the top online video-sharing site YouTube for $1.65 billion, are struggling to build convincing business models, since the more popular they become, the more bandwidth costs tend to balloon as traffic gets heavier.
Some private equity houses also say too much venture capital money is chasing too few deals in China, especially in the technology sector, driving up project prices and prompting investors to broaden their horizons in search of higher returns.
Compared to YouTube, Chinese video-sharing sites such as Tudou.com, Yoqoo and Rox.com.cn command only slivers of the country's vast online market. They also face yawning gaps between their large inventories and low ad revenues.
"If video-sharing sites rely on their own resources and capabilities, I don't see much prospect for profit," said Liu Bin, chief analyst at the Beijing research firm BDA China.
Funds are starting to favor online companies with more traditional business models such as online payment, e-commerce and digital music, as well as traditional businesses such as retail, health care and medical devices, market watchers said.
Last year, 11 online video firms received a combined $52.7 million in venture capital funding, up almost 40 percent over 2005, according to the data firm iResearch.
Revenue from online video in China totaled about 500 million yuan, or $64.7 million, in 2006 and is expected to rise to 3.4 billion yuan by 2010, it added.
But while there have been some successful video-sharing projects in China - such as the bandana-wearing Back Dorm Boys, who became famous via video sites - about 90 percent of the 400 to 500 online video firms in China are expected to wither away as they struggle to turn traffic into cash, analysts said.
Established Web companies like Tom Online, SINA, Sohu.com and Netease.com, which market watchers believe are considering expansion into video sharing, have a bigger chance of success in the online video business, as they already command a high level of traffic and have deeper pockets, analysts said.
"Online user-generated content in China is facing a crossroads," said Li Zhu, chief executive of UUSee, an online video venture with funding from Sequoia Capital.
All of the points raised above make sense. Like Youtube, none of China's video sharing sites have a clue how they are going to make money off their users, but unlike Youtube, China's video sharing sites have to deal with a nasty regulatory environment and an advertising market that is extremely conservative.
However, there is something about China's video sharing sites that makes them much more interesting than their American counterparts: broadcast TV in China is really boring. There is no HBO, no Fox, no CNN. China's MTV is lame, and so is Star TV.
Young Chinese people can have a lot more fun on Tudou.com than they can by watching any broadcast TV channel. As long as China's video sharing sites have the cash to keep going, they will eventually find ways to make money off their audience — brand advertisers in China will need some time to get on board, but when they do, they will follow the young people who no longer watch the idiot box.
But while several video sites hope to cooperate with wireless service firms, analysts said current wireless data transmission speeds in China were too sluggish to make video-sharing via cellphone appealing to consumers. The country has yet to roll out high-speed third-generation wireless after years of delays.