What Does the YouTube Deal Mean for Google China?

Oct.10.06 | About: Alphabet Inc. (GOOG)

Jonathan Landreth of The Hollywood Reporter just called me with a really good question: What does the YouTube deal mean for Google (NASDAQ:GOOG) in China?

Frankly, I'd say nothing for at least six months. Apart from the fact that the deal needs to close, Kai-Fu Lee and the team over at Google China are wise enough in the ways of the Middle Kingdom to know that YouTube in the form that it operates in the U.S. would not fly with the Chinese authorities. A website that plays videos but is not a licensed broadcaster? That's a no-go: we know that from the way the IPTV trials are being handled. A foreign website? Playing foreign videos? Or worse, self-produced videos from local Chinese? Even worse, owned by a foreign company with huge resources?

No, YouTube in its current form would set off way too many alarm bells around the capital for Google to even consider launching it in China.

Indeed, after the announcement of the past two days (the content licensing deals in Hollywood and the Google buy) there may well be regulators who will argue that YouTube is no longer an amusing little fringe site, that it has now become a serious online media player, and for that reason should be more closely monitored, if not blocked.

So I suspect Google is going to be very low-key in China about the YouTube purchase. "Yes, we're very pleased. No, we have no plans in China at this time." Nothing to see here, dear regulators. Move along. Move along.


Hey, Kaifu, Does YouTube Even Translate?

At the same time, don't think for a minute that the wheels aren't turning at GooglePlex Beijing. YouTube is too a high-profile a purchase, and China too important a market, for Google to forego an opportunity to profitably put the two together. (This is the same logic that brought the tough and ambitious Mrs. Murdoch back home to try to set up MySpace China. But we digress.)

So what must Google do?

China is not the only place Google is likely to face challenges as it makes plans to take YouTube global. In Singapore and in other countries where Google does business, there will be authorities who take issue with the concept of a video sharing site, and Google will face a choice: don't launch YouTube at all, or launch a localized version that operates in accordance with local laws and sensibilities. I'm betting on the YouTube Local approach, especially in non-English-speaking territories.

Could they do this in China? Probably - by working with a local partner who is a licensed broadcaster and lending the name YouTube to the enterprise. Google provides the brand, the technology, and the hardware. The broadcaster provides the premises, oversees the operation, and makes sure nothing gets through that might offend a senior Party official.

The bigger question, of course, is how bad Google in the U.S. feels like they were burned by the whole "kowtowing to the Chinese authorities" issue. The folks in Mountain View may not be ready to go through all of that again in order to launch YouTube in China. Make no mistake - Google will have to give up a lot of control in order to get YouTube off the ground in the PRC, and that will certainly not sit well with the legions of well-meaning but non-vested Self-Appointed Guardians of the Interests of the Chinese People in newsrooms and living rooms across America.

So Google's real choice will be to either a) forget the whole thing and focus on YouTube in markets where it won't face regulatory issues, or b) move forward with localized versions but suffer the slings and arrows of global Internet activists.

Not a terriably appealing choice. But, in the words of The Jedi Master, there is another.

Walkie-Watchie
Mobile TV is coming to China - a standard has been selected, trials are underway, handset manufacturers are designing phones, and operators are trying to get their heads around how mobile television will make them wealthy. Meanwhile, the government is trying to figure out how to regulate mobile TV, who should regulate it, and what kind of content is permissible.

As with television elsewhere in China, though, the real challenge is going to be getting enough content into a service to make mobile TV appealing to consumers. Mobile content has its own particular requirements - small screens, short programming, and loads of choice. From that perspective, YouTube is brilliantly suited to mobile television: short duration videos, lots of low-definition stuff that people are used to seeing in small screens, and content that is mostly already formatted for wmv and RealPlayer. Launching YouTube in China as a video wireless value-added service provider [V-WVASP?], combined with some clever advertising techniques developed by YouTube and Chinese mobile TV pioneers like 21cms, could be the ticket.

There are a few advantages to this approach.

First, the nature of mobile video, going as it will from the content provider (YouTube) through a broadcaster (say, CCTV) then a carrier (China Mobile) runs the content through a range of filters. YouTube would not necessarily have to shoulder the burden of content controls, as submission and content guidelines would be enforced by the carrier and the broadcaster. This would take at least a chunk of heat off of Google from the activist crowd. After all, this is a very different business with a very different model than YouTube is now.

Second, over the long term the mobile TV market is going to be much larger than the website market. Initial uptake of mobile TV will be slow, but over time television functions will become increasingly common in handsets, especially once high-speed wireless networks are launched in China. Google has an opportunity with YouTube Mobile to become a player and a driver of mobile television, not to mention the advantages that come from getting in early and securing key content deals, building a branded service that could give it the kind of consumer affinity that has escaped other WVAS providers.

Finally, the YouTube Mobile direction is an opportunity to build trust with regulators and party ideologues that will be critical in the long term as Google figures out its strategy for online media. As of today, Google will no longer be seen by Chinese merely as a web search and advertising company that offers fun online toys like Google Earth. If it wasn't before, Google is now seriously in the media business as far as the Chinese are concerned, and its approach to marketing, government relations, and the way it approaches its business decisions must change accordingly.

I'm A Search Programmer, But What I Really Want to Do is Direct
Which brings us to an important point - YouTube will probably do more to change Google than any other acquisition or strategic move it has made to date. Integrating YouTube is going to force Google to rethink its business globally. How that will play out will be interesting, but what will be even more interesting is how the competition will react. MSN (NASDAQ:MSFT) has long wanted to be in the media business, and it has made halting steps in that direction. Yahoo China (NASDAQ:YHOO) wants to be in any business that might make money, and is probably already thinking about how to disrupt the Google-YouTube hookup in China. And I'm sure I'm not the only person who can see BaidUTube on the horizon.

This all adds up to search going Hollywood in China. And what that means is that we can look forward to a flurry of deals to tie up content, outlets, and distribution channels over the next 18 months.

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