Will Youku Become China’s Netflix?

If you want to understand the Chinese media market, Youku.com (s yoku) CEO Victor Koo told me this week, you’ll have to look back. Way back. Think 1940, when the U.S. media market was completely fragmented, dominated by thousands of locally-owned stations, with no big Comcast-like players in sight.

Today, China has some 300 TV broadcasters running thousands of channels, many of which are also only available in certain cities or provinces. “We have no incumbents,” Koo said when I met him in San Francisco. “That’s the beauty of our market.”

Fragmentation of existing markets and an explosive growth of the Chinese online population, which is quickly approaching the magic mark of a half billion users, have helped Youku become the largest Chinese video property. Youku currently sees some 270 million monthly unique visitors, and the average user spends about an hour on the site.

Youku has been monetizing these visitors through a mix of traditional advertising, branded content it co-produces in cooperation with traditional media companies, subscriptions and pay-per-view. The site sometimes still gets compared to YouTube, (s GOOG) but Koo doesn’t think that’s a good analogy. He likes to point out that about 70 percent of the content on Youku is licensed and professionally produced, with the remaining 30 percent being user-generated.

Youku is now selling online access to Inception.

Advertising against free content still provides the lion’s share of the $58.7 million in revenue that Youku generated in 2010. The company was able to secure more than 420 advertisers last year, but paid offerings are starting to play a bigger role as well. Youku partnered with Warner Bros. (s TWX) and Disney (s DIS) in 2010, and is now offering movies like Inception and TV shows like Grey’s Anatomy for 2-5 RMB ($0.30-$0.75) each. The site is also selling a Netflix-like (s NFLX) subscription plan for 20 RMB per month, which offers access to catalog title movies, TV dramas and educational content.

Hollywood has been excited about offering its titles as video on demand in China, said Koo, especially given the fact that there simply wasn’t much of a legitimate market to begin with for many of these titles. “Traditionally, the DVD market has been pirated,” he said.

But Koo is also honest about the fact that getting users to pay for movies like Inception will take time, saying that these Western titles have been performing just “okay.” Piracy isn’t the only hurdle that prevents people from shelling out money for Brad Pitt, etc. Youku is also seeing much higher adoption in metropolitan areas where more people speak English.

Of course, getting distribution rights for foreign blockbusters, as well as the Chinese movies and TV dramas that are much more popular on Youku, costs money. The company, which went public at NYSE in December, isn’t profitable yet, and it actually missed some of its financial targets last quarter due to higher-than-expected costs. Koo addressed this by saying that his company isn’t targeting short-term investors. “We are a growth story,” he said, and growth costs money, be it for content, infrastructure or user experience improvements.

So how do you sell this story to U.S. investors? If Youku doesn’t want to be China’s YouTube, will it be China’s Netflix or China’s Hulu? Koo laughed when I asked him this question. He admitted that the business model probably is closer to Hulu than to Netflix. Then again, it doesn’t have to deal with many of the issues both U.S. companies are facing: no overzealous media conglomerate parents, no net neutrality roadblocks, no competition from giant cable companies. Instead, Youku is dealing with a market that really is much more like the U.S. before media concentration set it. In that market, Koo feels he can define his own destiny. “We are trying to be Youku,” he said with a smile.

Check out this interview I did with Koo last year:


Related content on GigaOM Pro: (subscription required)