China’s online space has long been one of rare industries where there is not big state-owned players present – Baidu, Inc. ((ADR) NASDAQ: BIDU),Alibaba.com Limited (HKSE: 1688), Tencent Holdings Limited(HKG: 0700 | (ADR) PINK: TCEHY), etc. are all private companies. People often speculate if and when this will change (just last night I had such a conversation with a friend who works in VC). Well, this has just become true for the online video sector.

China’s state-owned media giant China Central Television (CCTV) has just launched China Network Television (CNTV.cn), which is an aggressive foray into the online video space by any measure. Previously, CCTV has been content with offering ad-hoc streaming of important programs on its website and partnering with internet properties such as Sina. CNTV is a dramatic development as it is essentially trying to move all of CCTV’s content online (think Hulu, but 10 times more aggressive).

The site, which will officially launch on Monday, Dec. 28th, is already accessible. At launch, the site offers 5 distinct “channels”:

1. a 24-hour news channel,
2. a sports channel,
3. a general entertainment channel,
4. a user-generated-content (UGC) channel (think Youtube clone), and
5. a video-on-demand (VOD) channel.

In addition, CBOX (in Chinese), a software client, is available for download (though right now the link seems to be broken, so I haven’t been able to test it).

The 24 hour news channel and the sports channel (titled “5+”, as CCTV5 is the sports channel under CCTV) require a plug-in to view. 5+ currently only has some ads (it’s 7am Monday as of this writing, so the channel hasn’t officially launched yet), whereas the news channel is currently streaming CCTV News. I think these two channels will offer some forms of original programming going forward, and not just stream TV content. I’m not sure if the plug-in is based on some form of P2P technology (as used by competitors PPLive and PPStream), but at 7am the news channel isn’t streaming that well, so there are some technical issues to resolve. The entertainment channel, the UGC channel and the VOD channel utilize Adobe Flash.

The UGC channel, named CNTV Xiyou (grapefruit, I have no idea why it’s named as such…), looks and feels like any other online video site. As can be expected, there isn’t a lot of content right now, but I did see clips from other television stations uploaded – not sure how CNTV will handle piracy, but this will likely be a very sensitive issue due to CNTV’s state-owned background.

Personally I found the VOD channel, CNTV Bugu (cuckoo, again, no idea why it’s titled this), to be the most interesting. The service has two components – a live component and a database of programs. Right now, live streaming of 51 TV channels (CCTV properties and a range of the most popular provincial channels such as Beijing TV) is available. For the database, it seems to be CCTV’s ambition to make all of its programming fully searchable and watchable online, and Bugu is the first step in that direction. The database has a impressive collection already – I just watched the 30-minute news from September 14th. There are also some films, courtesy of CCTV6 (the movie channel), for example All Quiet on the Western Front, though again there could be some copyright issues involved (when CCTV purchased the license for the film, did it also include online broadcasting rights?).

CNTV’s launch has serious implications for the space. It’s an aggressive entry into all the sectors of online video. While UGC sites like Tudou (in Chinese) and Youku (in Chinese) might feel the pain less (CNTV in this regard is just another Youtube clone; there is not differentiation – yet), properties like PPLive (which has recently renamed itself PPTV) and PPStream which heavily rely on traditional TV resources will certainly be strongly challenged. One of CNTV’s stated goals is to make CCTV’s 20 channels fully viewable online, and since CCTV is the monopolistic player in many fields (sports for example – there are few competitors to CCTV5), this will make CNTV the go-to property for a lot of viewers. Of course, a lot depends on the actual execution, but it’s safe to say that the landscape is about to change.

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.

Children-focused Chinese social networking service (”SNS”) 51mole, which launched last year and received $5MM venture funding from Qiming Ventures this summer, has been under attack in recent months from Chinese media.CCTV, the national state television, first criticized the site in late August in one of its daily news segments; then in late September, Oriental Horizon, one of CCTV’s investigative programs, again called out the site for “making children addicted to the Internet.” And over the past few weeks, there has been quite regular articles popping up in the Chinese web media discussing the controversy.

“Internet addiction” is a sensitive topic in China these days. Literally hundreds of “recovery camps”, similar to those treating drug addiction in the US, have sprouted up all over China over the past few years. It’s a highly profitable private industry, and not surprisingly,horror stories are showing up of teenagers being harmed in those treatment camps. But the widespread popularity of such camps does go to show people’s perception of “Internet addiction.”

Therefore, 51mole’s bad PR, especially those accusations made by the state media, is a very serious issue for the firm. It could well be followed by regulatory crackdowns – and there is a recentcrackdown on Internet games ongoing. Regarding the allegations, I don’t know enough about 51mole to say whether they are true or false (the site is essentially a Club Penguin clone). Since it’s launch last year, the site has enjoyed quite explosive growth and now boasts 30MM users, and is part of a trend of SNS / gaming sites targeting children.

Regardless, I think the incident again highlights the regulatory risks of doing business (and investing in start-ups) in China – just think of all the Chinese Twitter clones getting shut down over the summer. In the long term, even if the government wants to retain such a heavy-handed approach towards the market, there must be due processes and proper justice procedures – otherwise China will never be a nurturing ground for entrepreneurial endeavors.