The key to the success of Shanda's new strategy is the improvement in copyright protection in China, which is going to improve to the same level of the developed countries in the future. Shanda's active participation will greatly speed up this process.
I suggested several possible moves Shanda Interactive could make, and one of them, acquisition of Ku6.com, an internet video platform, was a bingo. The acquisition of Ku6.com by Hurray (HRAY), a controlled company of Shanda, was announced one week after my article. No, I did not have any insider information. My guess was based on the involvement of Ran Wang, the CEO of E-Capital, with both companies on their funding or acquisitions.
And then on December 22nd, Ku6.com and Sohu (NASDAQ:SOHU), a leading Chinese Internet portal, stroke a deal to put together a copyrighted content acquisition fund of $10 million dollars. At the same time, Ku6.com is pulling all non-copyrighted videos from its website and implementing policies stopping users from sharing copyright-infringing materials. The news is still fresh out of the oven and has not hit any English news media.
I feel an urge to praise this move because it is another solid step for better copyright protection in China. What's more, this step is going to change the landscape of China online video sector.
For those who don't know, there are three major online video sharing websites in China: Youku.com, Todou.com, and Ku6.com, ordered by their popularity. Other significant players but late comers include Sina, Sohu and China Central TV, all of them being existing dominating internet or TV media platform and interested more in copyrighted videos. For the three online video sharing websites, the majority of their revenue-generating visits are actually for non-copyrighted materials, a lot of them being TV and movies from the US, Japan and Korea.
The non-copyrighted materials have offered cheap entertainment for a vast Chinese audience. In my view, this form of piracy created huge social value despite all the legal issues. However, such a business model is destined to be short-lived because it is not a complete ecosystem for its ignoring the interest of content generators, the source of all the entertainment.
Smart people know that copyrights are the future. The need of copyright protection is much beyond ethics or morality but its essentiality in building a healthy ecosystem. Ran Wang was one; Tianqiao Chen, the CEO of Shanda Interactive, was another; Shanyou Li, the CEO of Ku6.com, followed.
Now that Ku6.com gained access to $60 million cash on the balance sheet of Hurray, it is making one of its most important moves. By cutting all the non-copyrighted videos, Ku6.com is expecting to lose at least half of the user visits. If in a chess play, it is the sacrifice of the queen, but the checkmate of its competitors at the same time. Todou.com is removing non-copyrighted videos. Youku.com claimed that it was not following suit. Wrong. Very wrong.
One thing business should do well in order to survive is to tell the difference between a fleeting trend and a permanent development. Here we see a permanent development for China to respect copyrights. Whoever does not follow the trend will be mired in lawsuits and will not create positive investor value. One report I read claims that Youku was in 51 lawsuits and lost all of them. Even though I can not testify to its truth, I can believe that the trend is certain.
Capitalism is at work. I see that nearly all influential China media firms have joined forces to protect copyrights, not for the morality per se, but their own goods. In doing so, content generators' interests will be protected and consequently more capital will be directed to produce better quality intellectual products.
This is not an article to tell you which stock is a buy or a short. But as an investor, you also need to be able to tell the difference between a fleeting trend and a permanent development.
So let me tell you loud and clear: Copyrights are getting better protected in China. It will not take long for China to catch up with the developed countries in that regard.
Disclosure: Long SNDA, HRAY. No Position in SOHU