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Tea Leaf Nation
It’s More Fun When It’s Legal
IP defenders have an unlikely new ally: Chinese Internet companies.
Since becoming available in mid-February, episodes from season two of U.S. political television drama House of Cards have been streamed nearly 30 million times in China, potentially exceeding U.S. viewership. (Netflix, the only U.S. platform on which the show can legally be viewed, does not disclose usage data.) And it has all been legal: While China is commonly seen as a haven for copyright pirates, with the bulk of Western content consumed via bootlegged DVDs or illegal downloads, the environment around web-based content is changing rapidly. That means even House of Cards‘ portrait of skulduggery and sex on Capitol Hill is nonetheless being delivered through a squeaky-clean mechanism — one that appears to violate neither Chinese nor U.S. copyright laws.
Most mainland Chinese have watched protagonist Frank Underwood’s machinations, not to mention other hit U.S. shows like sitcom The Big Bang Theory and action-horror series The Walking Dead, through Sohu.com. The Chinese web giant, which offers a viewing experience similar to Netflix’s but without a subscription fee, purchased the rights to these series. Licensed viewing on Sohu.com and other web platforms like Tencent and Youku Tudou, China’s largest video site, are helping to change the notion that China is a country of pirated content. Given these developments, the day when U.S. content producers can rely on significant revenue streams from distribution to China might not be far off.
Internet streaming may be an unlikely antidote to the culture of piracy that has drawn the ire of content producers in China and abroad. It was not long ago that a U.S. show as popular as House of Cards would likely be viewed in China almost exclusively via either illegal download or bootlegged DVD. Knockoff DVDs can still be purchased for $1 or $2 per disc throughout the country, often from vendors in permanent storefronts operating with tacit government approval. As recently as 2013, when I was living in China, my favorite DVD vendor in the provincial capital of Kunming was situated on a popular pedestrian street next to a bubble-tea shop and sold everything from recent Oscar winners to lecture series by popular Yale University history professors. Uniformed police often staked out the street, but the proprietor, a nice man who evinced a genuine love for cinema, paid them no mind — they were more worried about drunk tourists than copyright infringement.
Shops selling discs that were daoban, or pirated, have long been the most straightforward way to obtain or watch foreign films in many parts of China. Their popularity had an enormous payout, as Chinese state media reported $6 billion in pirated DVD sales in 2010. But licensed web streaming is now starting to poach black-market consumers, and some bootleg-DVD hawkers are already complaining of a dip in demand.
The change in approach has not sprung from a crisis of conscience among China’s would-be bootleggers. Instead, as the domestic Chinese film and television industry continues to boom, more domestic Chinese companies have an interest in protecting their borrowed content from piracy. Derek Bambauer, a University of Arizona law professor who specializes in Internet law and intellectual property, explained to Foreign Policy that for the most part, only foreigners used to be interested in protecting foreign intellectual property in China. But now, "there are domestic interests as well," such as Chinese film production companies, the powerful China Film Group, and online video platforms like Sohu. That means that Chinese courts "have an interest in enforcing intellectual property law," he said. (Sohu did not reply to repeated requests for comment.)
Over the past several years, Chinese web giants — including Sohu’s main competitors, Tencent, Youku Tudou, and Baidu — have raised hundreds of millions of dollars to develop their online video-streaming platforms and enter into licensing agreements with Western entertainment companies like Disney and Sony. To protect their investments, China’s web companies find themselves unlikely allies of U.S. producers, and the former have shown themselves willing to go to the mat to protect their investments. In November 2013, a group of Chinese entertainment companies that included Youku Tudou, Sohu, and Tencent joined the Motion Picture Association of America to file a $50 million lawsuit against Baidu for alleged video piracy, and Youku Tudou now employs a team of dedicated Internet scourers who patrol the Chinese Internet for pirated content. Fearing expensive fines and other legal repercussions from courts that have turned serious, Chinese web hosts are clearing pirated content from their domains. In one case, China Daily reported that Baidu scrubbed 5.8 million links to pirated material in the wake of a government campaign against piracy. Smaller companies that focus more of their services on unlicensed videos have been shut down entirely.
None of this means U.S. content producers are seeing massive bumps in revenue as a result. Charles Zhang, the founder and CEO of Sohu.com, recently estimated that the annual payout this year from Chinese websites would be from about $100 million to $150 million for U.S. television shows, though he told the Associated Press that this amount could reach $500 million by 2016. A U.S.-backed company might theoretically find more commercial success if it started its own content platform in China, but that’s unlikely. Major U.S. video Internet platforms Netflix and YouTube are both blocked there — though Chinese authorities don’t admit it. Alternatively, a U.S. company could acquire an existing platform already blessed by Chinese authorities, but they have been cool on accepting foreign dollars for domestic web platforms. (China watcher Bill Bishop explained that foreign firms are generally "blocked from Internet M&A [mergers and acquisitions] of any significant size" in China.)
Censorship also remains an obstacle. Streamed material may be edgier than what appears on Chinese television, House of Cards being a potent example. But streamed content is easier to scrutinize and thus censor than bootlegged DVDs passed between friends and hawked on city streets. Chinese censors routinely trimmed down films shown on the Chinese big screen to make their messages more amenable to the Chinese Communist Party line, and it is easy to see how censors could exert a similar grip over streamed content. CNN has already reported that the third episode of U.S. crime drama The Blacklist has been removed from Chinese video-streaming services, probably because the plotline includes a Chinese spy killing an American CIA agent. Perhaps more pernicious is that some market watchers have feared that state outlets, like China Central Television, will use their considerable influence to exclude private-market entrants, given that China’s telecoms — and thus Internet bandwidth — are under government auspices. Despite all these countervailing factors, revenue from online videos in China, which mostly flow to private companies, has increased 42 percent, from $1.4 billion in 2012 to about $2.1 billion in 2013.
As an increasingly wired Chinese populace turns online for content, the sun may be setting on the still-ubiquitous bootleg-DVD shop, which will give way to private Chinese web companies united behind a desire to protect intellectual property. Meanwhile, Western content producers are waiting to see just how big the payout will become. But because powerful Chinese state actors retain the authority to derail the enterprise at any time, it’s impossible to predict how these dynamics will evolve. Perhaps House of Cards’ Underwood said it best: "Money is the McMansion in Sarasota that starts falling apart after 10 years. Power is the old stone building that stands for centuries."
Xia Yihua and Elisa Yang contributed reporting.