This story first appeared in the Sept. 6 issue of The Hollywood Reporter magazine.
It's a regular sight on the Beijing subway: commuters glued to their cell phones and tablets, watching The Walking Dead. Mirroring its enormous popularity in the States, the gory zombie series has garnered more than 160 million views to become the most watched U.S. show in China after debuting on the country's biggest online video outlet, Youku Tudou, earlier this year. It's a staggering feat for a foreign show, especially one featuring the undead, since Chinese TV viewers are used to a steady diet of kitschy reality shows and tepid costume dramas.
With daily video views doubling in the past six months, China's online video space has become another potential gold mine for Hollywood. After all, while China's film sector is often heralded as "the second largest in the world," its Internet market, with 591 million users, is the largest in the world -- and it's growing. In the past year alone, the number of people who surf the web from smartphones and tablets rose by 20 percent. What are they watching the most? American television and movies.
"Hollywood TV content has got great stories, characters, performances and mature packaging and marketing, all of which work in the Chinese market," says Zhu Xiangyang, head of content at Youku Tudou, which generates revenue through advertisements that run prior to its online content. "People here are watching more overseas programs in general these days."
Youku Tudou was formed by the merger last year of China's two biggest video websites and archrivals, Youku and Tudou, who agreed to set aside their differences to become the most competitive player in the industry. This came amid increasing competition from portals like Tencent -- which recently partnered with Warner Bros., Universal, Miramax Films and Lionsgate for a new online video venture called Hollywood VIP -- and Baidu, China's biggest search engine. Figures for the second quarter show that the merger helped: Youku Tudou's net revenues rose 30 percent from a year earlier to 753.5 million yuan ($122.8 million), while the group also registered a smaller consolidated net loss than the same period a year ago, at 105.1 million yuan ($17.1 million). The site had 14 million unique daily visitors in June.
Both Youku and Tudou started out copying the user-generated business model of the banned-in-China YouTube, but the focus in recent years has been on providing licensed content. This is good news for Hollywood because the online world offers a far different landscape than the troubled film sector (not to mention that the legitimacy of the licensing agreements is a way to combat piracy).
As the recent tax standoff between Hollywood studios and the main movie distributor China Film Group reminded everyone, the unpredictable Chinese movie market is not easy to navigate. The online space, however, is a different animal: There is no quota system, fewer bureaucratic hassles (i.e., less pesky censorship) and far fewer logistical headaches (no need for a middleman in the form of a state-run distributor like China Film Group).
Still, this is China, meaning there are likely to be long-term challenges, the first of which is, how does Hollywood get paid? Currently, content providers make money from Youku via licensing fees. How much? No one will say, but the conventional wisdom is that while profits may be low now, the future payout is more than worth the wait.
"Companies like Youku have spent a lot of money on purchasing American or English TV shows, but the goal is to accumulate the audience [now] -- the profit is still a long-term bet," says Yi Zongting, an analyst at Beijing-based media consultancy Entgroup.
Another long-term bet hinges on whether U.S. TV programming can remain popular in the face of domestic content that is bound to become more sophisticated.
For the moment, Youku Tudou's Zhu remains optimistic that the expanded online landscape in China will leave plenty of room for U.S. content. As a sign that change in China -- both in terms of business practices and values -- is happening at a breakneck pace, he even says the Chinese can learn a thing or two from watching one of his favorite American shows.
"I have been recommending Modern Family to my friends," says Zhu. "I believe a large percentage of Chinese parents may find the story inspiring."