We’ve covered the launch of Qiyi.com, a new video site backed byBaidu, Inc. ((ADR) NASDAQ: BIDU). The site imitates a lot of Hulu’s functionality and design, and in terms of business model Qiyi is certainly also looking at advertising. Qiyi’s CEO, Gong Yu, was recently interviewed by QQ Tech (link in Chinese), and while it’s a lengthy piece (with lots of marketing talk), Gong did share some interesting perspectives and stats. I’ll try to blend his quotes with some questions I have for the site.

On content acquisition:

“…Our content comes from several sources… Copyright intermediaries are a major source of content in our procurement… We aim to be the biggest legal video content database in China by the end of this year… Our licensing rights for domestic TV series are usually 1-3 years, with some cases being 5 years.”
– Gong Yu, CEO, Qiyi.com

My thoughts: I think one key difference between Qiyi and Hulu is that Hulu is founded by content companies – NBC, Fox and ABC. Theoretically and quite probably in practice this gives Hulu lower acquisition costs to content. Qiyi on the other hand, is an “outsider”, and Gong has basicallyadmitted they need to go through middle-men to get the content. This will definitely raise its costs.

On revenue generation:

“We see three main models for video sites. The first is user-generated content. The second is short clips purchased from TV networks, usually news and documentaries, to form a news-reporting service. The third is long-form entertainment. Almost all of Qiyi’s resources are used on long-form entertainment. This means the amount of content we have will be less than websites such as Youku which does all three models.

However, of these three models, we see offering long-form entertainment to users for free and generating revenue through advertising as the most healthy model, so we are devoting all our resources to it.”
– Gong Yu, CEO, Qiyi.com

My thoughts: Clearly Qiyi is adopting Hulu’s existing model. However, I have reservations on whether Hulu is as successful as Gong believes, since the news last week on Hulu looking at a premium membership model probably suggests that advertising alone is not enough for profitability. Furthermore, online advertising in China has always been a lesser developed business model, which is the very reason Chinese social networks were so creative in using virtual currencies to generate income – pure advertising based plays just haven’t survived that well in China historically.

On site features:

QQ Tech: How did Qiyi come up with innovative features such as auto resume of the clip last watched and “dim lights”?

Gong Yu: This is due to our positioning and the needs of the market… as a new video site [late-comer to the game] our first step is not how to grow the overall market but how to build a brand in a already established market. The speed and quality of the video is important, but user experience is also very important.

Friendly user experience is in the details, such as the auto resume function you mentioned, it’s to address specific user habits…

… Other features such as the “dim lights” which helps you to focus on the video, and video recommendations based on your mood (“happy”, “sad”), are all to make the site user friendly to users of all ages.

My thoughts: Obviously a lot of these features are straight from Hulu.

On feedback from users through beta-testing:

“Users gave positive feedback on the user-friendliness and uniqueness of the site and its design… Users highlighted the high quality of videos… They also noted that more content needs to be added, but most hit shows from recent years are already available.”
– Gong Yu, Qiyi CEO

My thoughts: Video quality may be a differentiator, but that probably won’t last. And these shows are available on most Chinese video sites. Conversely, the availability of copyright infringing content on competitors’ sites (even a casual search on Sina Video returned episodes of US TV series such as CSI) means that competitors will still have an “unfair” advantage, for as long as they can get by the litigations. If anything, Qiyi will be footing the bill for educating Chinese consumers on copyright – not sure if that’s a viable business model.

In sum, I’m somewhat bearish on Qiyi, 1) the ad-based model it’s trying to copy isn’t exactly a blockbuster for Hulu; 2) content not exclusive (as far as I can tell); 3) Chinese online environment still very liberal for piracy / bittorrent, so lots of alternatives for content.

Two weeks ago Baidu, Inc. ((ADR) NASDAQ: BIDU) rolled out iTieba (in Chinese), an addition to the Tieba topic forums (think Google Groups, but much much more popular – Tieba literally means “post bar”). iTieba is a personal status page for Tieba users, a throw back to the original idea behind Twitter.

The site immediately caught the attention of the Chinese media, with many stating that Baidu has joined in the competition of microblogging platforms. Comparisons were immediately made to the Twitter clone launched by Sina Corporation ((USA) NASDAQ: SINA), as both prominently featured celebrity accounts. Sina is the master of using celebrities to push its services, as can be seen by its massively popular Sina blogs where it seems most Chinese stars from all walks of life reside (including Kaifu Lee, former head of Google Inc.’s (NASDAQ: GOOG) Chinese group). For Baidu’s iTieba, at launch it already had a number of popular celebrities such as Jet Li, and one pop artist has already amassed 1MM followers.

Interestingly, Shu Xun, the division manager of Baidu Tieba, went on the record on his Sina microblogging account to say that iTieba is not a microblogging service:

“Sina Microblog is very fun and I check it regularly. Thank you for all your interest in iTieba. iTieba is just the personal center of Tieba, and is a function of Tieba, so people who don’t use Tieba may not be used to it. According to my knowledge, Baidu has no plans for a microblogging service.”
– Shu Xun, Division Manager, Tieba

So it remains to be seen whether iTieba is a serious microblogging play from Baidu, or just a very Twitter-like new function for Tieba. Sina Microblog (which remains to be creatively named) has gained good traction in the past few months, both thanks to its celebrity strategy and the competition vacuum created when most of the leading Twitter clones in China were shut down for political reasons (the former leader, Fanfou, is still down, while Digu has returned). Microblogging is still a very new thing in China, and the potentially huge market is up for grabs, so it won’t be surprising if Baidu does want a piece of the action.

Baidu, Inc. ((ADR) NASDAQ: BIDU) announced its 3rd quarter results today, and 3rd quarter earnings were up 42%, but according to Reuters the company’s Q4 forecasts were below expectations and sent the stock price tumbling 13% in after-hours trading. Baidu forecasts Q4 revenues to be around US$174-180MM, below analysts’ consensus of US$205MM.

One of the main reasons cited for the low forecast was the full implementation of the new Phoenix Nest search advertising system which had been in existence for the last 8 years and will fully replace the company’s previous bid ranking system by December 1st 2009.  According to Baidu, the new Phoenix Nest system, which has been in operation since April of this year, currently serves 70% of Baidu’s 216,000 advertisers.

“During the quarter, Phoenix Nest, our new online marketing system, continued to gain customer traction and showed promising trends in key monetization metrics.

…With 70% of customers already using Phoenix Nest, we believe this is the right time to complete the switch to the new system.The move to a single upgraded bidding platform will more efficiently utilize company resources and relieve customers from the burden of maintaining two systems. We are confident that Phoenix Nest will deliver tremendous benefits to our users, customers and Baidu.”
– Robin Li, Chairman and CEO, Baidu

Last year Baidu was heavily slammed by CCTV (website in Chinese and in English), the Chinese state television, for allowing rampant fraudulent ads on its bid ranking platform. The fact that ad results are not clearly distinguished from organic search results was perhaps the most central issue, as certain keywords resulted in full pages of paid search results which users often mistook for organic search results. Baidu seems to have been on a PR campaign since then to repair its damaged reputation, and efforts included heavy sponsorship for the CCTV Chinese New Year Gala (which led to some netizens speculating that CCTV had used the same “coercive marketing” tactics that it had accused Baidu of using). The new Phoenix Nest system directly addresses the issue of mixing paid search and organic search results.