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October 16, 2009

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Coca-cola sued in video-rights battle

THE battle over pirated videos in China has moved online, and the companies crying foul this time aren't from Hollywood.

It's Chinese Website versus Chinese Website in a fight that also entangles big online advertisers such as Coca-Cola.

Beijing-based Sohu, China's second-biggest Internet portal, teamed up with Shanghai online video site and other companies last month to form an anti-piracy alliance to fight what they call infringement of licensing rights they bought to screen copyright movies and TV shows.

Sohu said it has evidence that, a popular competitor and the seventh-largest Website in China, has shown more than 500 overseas and 1,000 domestic movies and television series that Sohu purchased the rights to screen., it claims, is uploading the content without a license to do so.

A total of 111 cases related to the complaint were filed in the Haidian District People's Court in Beijing as of September 22 and more cases are expected to follow, Sohu said. The lawsuits also seek 680,000 yuan (US$99,600) in compensation from Youku advertiser Coca-Cola China, alleging complicity in the breach of intellectual property rights.

Coca-Cola declined to comment on the issue. has denied the allegations and counter-sued for defamation.

It's a battle with big stakes. China is the largest Internet market in the world, with more than 338 million Internet users. About two-thirds of them watch online videos, according to the China Internet Network Information Center.

"It's the first time in China where owners of property rights have sued advertisers," said Wei Zhenhao, an intellectual property lawyer with Shanghai-based Yulan & Partners. "This kind of lawsuit may actually help advance the cause of tighter regulations on intellectual property rights, especially in the online video sector," he added.

The online video market in China was valued at 1.32 billion yuan in the second quarter by iResearch, with most of the money generated from advertising.

Growth market

Online videos, no matter their length, are usually studded with advertisements, either on the Web page or in 30-second spots ahead of the program. Online advertising is considered a growth market, whereas user fees for content account for only a small portion of revenue and are not expected to expand dramatically.

What is growing is the number of viewers.

"Licensed videos will become more popular with viewers," said Hu Yanping, director of China Internet's data center. "It's an inevitable trend that will intensify a shakeup in the industry as more content from the traditional movie industry becomes available on the Internet."

Among the movies screening this week on Sohu are "Sophie's Revenge," "City of Life and Death" and "Forever Enthralled," while on Youku viewers can see "The Gem of Life," "Up" and "The Boat that Rocked." Most are popular movies that have been screened in domestic cinemas in recent months.

"Youku has got many of the latest TV series and I can watch them as soon as they're screened on TV," said Sherry Yao, a young Shanghai professional. "I cannot tell what is pirated and what is not and I don't care."

Every month, an average of more than 100 million hours of videos are played on Youku, a company founded in 2006 by Victor Koo, who jumped ship after serving on Sohu's management team for six years. He was president of Sohu when he left.

Koo said he wanted to make his Website a platform for both professional and user-generated online video content.

Youku now has more than 500 media partners including CCTV, Shanghai Media Group and other domestic newspapers and magazines, and it has over 50,000 licensed videos.

It's a costly as well as competitive business. Youku received financing totaling US$80 million as of July 2008 from institutions including Brookside Capital LLC, Sutter Hill Ventures and Chengwei Ventures.

Sohu expects to spend more than 10 million yuan this year and 20 million yuan next year purchasing rights to films and TV series, but is still struggling to show a profit.

In addition, the company is paying more than 60 million yuan for its bandwidth to make hundreds and thousands of viewers at the same time possible with that figure expected to rise to nearly 100 million in 2010.

"We're very hopeful to make a profit if our bandwidth can be lowered," said Charles Zhang, founder and CEO of Sohu.

"Online advertising accounted for only about one-third of the total revenue of Sohu in the second quarter of 2009, and advertising in its video sector was just a small fraction of that," he said.

Promoting high-quality and legally obtained videos will benefit not only Internet companies, but also the film industry and the protection of intellectual property rights, said the anti-piracy alliance at its launch last month.

The average cost of each episode screened on Sohu has reached 10,000 yuan, a figure the company is using as a standard in seeking compensation from Youku.

"We signed a contract with the copyright owner and waited for one week after the series 'The Unconquerable Brave' was screened on TV before putting it on our Website," Zhang said. "But now it's screening everywhere in violation of our exclusive rights."

The dispute has serious ramifications for advertisers eager to get their brands before such large audiences.

Among the big multinational names advertised on video sites are the likes of PepsiCo Inc, Nike and Adidas.

"Consumer goods companies are very likely to be aware of the fact that these Websites carry some unlicensed content and that may harm their reputation if challenges go to court," said Wei.

"The offending Websites would be hard-pressed to survive without these advertisements," he said. "Thus, it can be legally inferred that those advertisers do abet those video carriers."


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