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China’s Youku, Warners Strike Pay VOD Deal

No. 3: The Lord of the Rings: The Return of the King, 2003
New Line Cinema

'Harry Potter' to Cost 77 cents 100 days after theatrical release.

BEIJING – Youku.com, China’s leading video website, on Tuesday unveiled a plan to sell Warner Bros.' Harry Potter and Lord of the Rings film series and up to 450 other titles from the Hollywood studio through a video on demand platform.

China currently has more web surfers than there are U.S. citizens. New York Stock Exchange-listed Youku and competitors are courting Hollywood in an effort to provide content for which Chinese -- long used to getting movies cheap or for free -- might now be willing to pay.

“People are increasingly willing to pay for high quality content, and we take the growth of Youku Premium as a sign that the market is improving for paid services,” Liu Dele, Youku CFO, said in a statement announcing the three-year deal that will charge viewers in China 5 yuan ($0.77) for each new title and less for older Warner fare.

It is not clear if Warner’s deal with Youku is exclusive on the Internet. It follows a deal Warner struck earlier this month with You On Dmeand to serve content to China Central Television pay cable subscribers. The deal also follows Christopher Dodd’s visit to Shanghai and Beijing, where the MPAA chief talked to industry regulators about the country’s failure to uphold a World Trade Organization ruling demanding more open film distribution.

Youku in December enjoyed the most successful NYSE initial public offering in five years. In January, it test-launched a paid, advertisement-free VOD service with the global blockbuster Inception starring Leonardo DiCaprio.

Youku’s newly expanded offering will see all Warner titles, new and old, that are approved by regulators for either theatrical or home entertainment release in China land on the VOD platform 100 days after they hit China’s big screens or are pressed for sale as DVDs.

The service also offers China’s No. 1 all-time box office hit Let the Bullets Fly from actor-director, Jiang Wen, among other works by Chinese filmmakers.

Separate from the VOD offering, Youku Premium also offers a subscription service that test launched in October with a library more than 300 movies and 3,880 educational programs and by Tuesday had processed 224,083 paid transactions, a company official told The Hollywood Reporter.

Beijing-based Youku, which narrowed its net loss to $7.2 million in the first quarter, faces a short term spike in the cost of serving China’s 457 million Internet users with fresh content as the cost of bandwidth continues to rise, but CFO Liu previously projected that costs would stabilize in the long term as the sector consolidates.

CEO Victor Koo, meanwhile, hasn’t said when he expects Youku to turn a profit. Koo and Liu are betting on a hybrid business model to attract China’s expanding and increasingly confident and brand-conscious middle class, offering pay content from Warner’s local joint venture, CAV Warner Home Entertainment, and free advertising-supported content from other sources.

“Now we’re working to make sure that we’ve got the content that will set Youku Premium apart from the competition, and our new agreement with Warner Bros. is a major step in that direction," Liu said.

In September, in the run-up to its IPO, Youku quietly struck a two-year deal to distribute 44 new Disney TV series such as Desperate Housewives and Grey’s Anatomy and more than 200 titles from the studio’s library, a Youku official told THR on Tuesday. Youku’s deal with Disney, news of which leaked during the pre-listing quiet period but never was officially announced, is set to renew for another two years in 2012 presuming all is going well, she said.

Youku customers also may pay 20 yuan ($3.09) for a monthly subscription that includes access to some 10,000 hours focused on lectures and self-study materials.

Youku's monthly unique visitors reached 281 million in March 2011, according to Beijing-based analysis firm iResearch, which also noted in a recent report that Youku’s market share online dropped to 30% from 40% in the face of competition.

Another firm, Analysys International, said Youku’s advertising sales accounted for 22% of the online video market’s revenue in the first quarter. Competitor Tudou had 16%, followed by Sohu’s 13%, Analysys said.