Five things you need to know about Baidu's new online video service

1. Baidu’s new service has serious competition. CNTV, who soft launched this month with high profile support from the Chinese government, can now be seen as a contender for the premier league of online video business, competing not only with Baidu but also with Youku and Tudou. I believe that with the National Team and Baidu joining the premier league, the online video industry will post interesting developments.

However, with more advanced technologies, legal content and regulations, there may be less room for smaller players due to the high cost associated with entering the market. According to one source, operating a top online video site may soon cost around Rmb 30 to 40 million (US$ 4-5 million)  per month.

2. Legal or illegal? Baidu‘s new online video business will bet on legal content. After years of soft education, consumers in China are now catching up with their Western counterparts and demand access to legal, high-quality and variety video content. Baidu will follow the Hulu model that provides authorised and unabridged versions of movies and TV programmes (JV of News Corp. and NBC Universal) instead of the YouTube / UGC model that has been adapted by Youko and Tudou.

In fact, Hulu has proved to be a very unique and successful model in generating revenue from advertisers. Baidu will opt for legal content, cooperating with big players for upstream content.

3. High risk, high gain. Baidu and CNTV’s strategic move to provide legal and high-quality content answer to the needs of increasingly demanding consumers. I believe Youku and Tuodu will soon feel the pinch and be forced to redefine their strategy on the position of legal content. It is believed that one of the key players, ku6.com will invest Rmb 200 million, or US$29 million, in legal content development.

Despite the huge costs of entry, both traditional and digital media giants seem to find the lure of the online video business irresistible. i research reported a market size of Rmb 1.3 billion for online video in 2008 and Rmb 2 billion in 2009. Youku reported a revenue of Rmb 200 million (US$ 29 million) in 2009, doubling the Rmb 100 million (US$ 14 million) estimated in early 2009.

4. Who can smile at last? Given the “high risk, high gain” nature of the industry, Baidu does have a competitive advantage built on its technology, legal content model and traffic generated from being the biggest search engine in China. I believe it will shape the market and lead changes ahead.

Its biggest competitor will be CNTV that has undisputed advantages in content development. Moreover, its National Team background equips the channel with a strong and clear understanding of the new rules of the game.

Regardless of the competition, I’m sure the consumer will be smiling as there will be (more) legal, better quality and a wider variety of content up for grabs. As the traditional Chinese saying goes: As a snipe and a clam are entangled in a fight, a fisherman catches them both.

5. Baidu vs Google. Going digital has now become a national strategy of the Chinese government. Designing business strategies to fit into the political, economic and cultural demands of China have now become critical issues for companies seeking sustainable growth in the country. It seems obvious that Baidu has a deeper understanding of the bigger picture – of how to run a profitable and sustainable business in China.