At the end of 2007, the news that video websites have to be solely state-owned or controlled astounded the whole Internet video industry. It became the most talked about issue in the industry since two years previous when YouTube video became hot in China. The news represented the core message of the New Rules on Internet Video & Audio Services which would become effective since January 31, 2008.

Gu Yongqiang, founder and CEO of Youku.com, a video website, was concerned. He had just held a red carpet ceremony for the one year anniversary of the dotcom where he told the public that up to 100 million clips were being played on Youku.com everyday. That number was equal to the number of clips played on YouTube when it was acquired by Google. It seemed apparent that the New Rules would strike the remarkable achievements of Youku.com and bring them crashing down. Gu now finds himself consoling the company’s users who are worried that they might now be unable to upload their favorite video clips onto Youku.com.

Gu has said that the New Rules triggered a process of regulating the new industry. “Although currently there are hundreds of video websites in China, very few of them can be called large. When giants are forming and the market is being consolidated, government intervention and policies are needed to clear the way for the healthy development of the industry.”

At the end of November 2007, Youku.com completed the third round of financing and collected US$40 million. Its rivals, such as UUSee.com, 56.com, Tudou.com, 6.cn, and ku6.com, also attracted large investments. Among the many players, some websites are sharing videos clips that users upload, some provide P2P streaming technology, some are broadband websites providing sports clips and some with large web portals provide comprehensive video services under the name of “Podcast”. All of them want to establish their own platforms on which they can communicate directly with users and then hopefully to attract more advertisers. Now with the New Rules, they have to discover new ways to survive.

Many video websites chose to establish joint ventures with TV stations. An insider stated that CCTV.com is prepared for the purchase of some valuable video websites. “Even VC cannot be sold at a good price when the traditional TV stations dominate.” Some content providers such as PPLive and PPStream, who transfer programs from TV stations with P2P technology to the Internet for users to watch, would definitely be impacted by the New Rules. Fortunately they have their technology as protection. Some companies had been cooperating with TV stations before the New Rules were released. Now they have to act as the technology providers for TV stations.

Compared with P2P companies, video sharing companies like YouTube have been suffering from the great impact because most of the video clips on these sites are uploaded by users. The owners did not need to invest a lot to establish their websites. As a result, a lot of capital has been injected into the field and the number of those types of websites has soared. At the peak times, there were more than 300 such websites. Fierce competition forced those websites to attract traffic by whatever means they could find available. Some content the websites have used were at the edge of breaking the law of China. Anarchy resulted in a huge amount of junk video chips which, in turn, forced the government to intervene.

When video websites are in a sea of fire, audio and video businesses open their arms to the traditional telecom operators. The New Rules emphasize the qualifications an organization should have to get a license for providing audio and video services: corporate organizations, wholly state-owned or controlled, and without record of law violation in the three years before applying for a license. Thus telecom operators would be allowed to provide audio and video services.

As a new kind of media, the Internet has gradually changed from non-mainstream to a real, new and interactive media. But at the same time, the unabridged movies or clips such as Lust Caution, Lost in Beijing and Zhang Bin’s Affair (about a news anchor’s affair), are also rampant throughout the Internet and have created heavy Internet interest. The cooperation of many different government departments is needed to regulate the Internet video business.

The New Rules, released jointly by the State Administration of Radio, Film and Television (SARFT) and the former Ministry of Information Industry (MII) have bridged the gulf between the two ministries and have opened up many business opportunities. As an example, the Internet Starry Sky, owned by China Telecom and CNCMAX of CNC, evidences a business platform which is a safe playground for the companies under SARFT. Meanwhile the wire line telecom operators would be able to establish as powerful an industry chain as those of mobile operators.