Regulator Tough On Internet TV, Eases On E-Commerce

by: Doug Young

Two major regulatory moves could have opposite effects for different areas of the Internet, providing relief for e-commerce firms while posing yet another new challenge for online video operators. In the former category, media are reporting the regulator that oversees e-commerce is talking with major players about modifying a controversial policy that gives consumers the right to unconditionally return most merchandise within a week of buying it. In the latter category, other media reports say the broadcasting regulator is continuing an ongoing campaign to rein in online video sites by limiting their ability to operate dedicated program channels similar to traditional TV.

The common theme behind these 2 pieces of news is that many of China's online industries are so new that constant regulation is required to maintain order. But unlike the west, China's online spaces are highly fragmented and often filled with fraudsters, a factor that necessitates strong consumer protection laws. At the same time, emerging sectors like online video often have to battle with opposition from older rivals like traditional TV stations, which have strong government ties.

The prevalence of fraudsters and sub-par merchandise in the e-commerce space was the main factor that promoted the Ministry of Commerce to implement its new consumer protection law for e-commerce buyers earlier this year. That law gave buyers the right to unconditionally return any merchandise purchased online for a full refund within 7 days. The policy immediately drew complaints from e-commerce firms who said it would raise their costs and also pave the way for fraud by consumers.

Now media are reporting that due to incomplete execution of the policy, the Commerce Ministry has called a meeting bringing together 10 of the nation's top e-commerce firms and consumer groups to try and find a way to make the rule work. (Chinese article)

We saw something similar happen a couple of years ago, when the government rolled out a policy requiring microbloggers to register with their real names in a bid to tackle online rumor mongering. That policy was also never strongly enforced, largely for practical reasons. To this day it is still largely ignored by the nation's major microblogging services like Weibo (NASDAQ:WB), who took other steps to tackle the problem.

The unconditional return policy was never really aimed at the big e-commerce operators like Alibaba and (NASDAQ:JD), and instead was meant to protect consumers from shoddy and fraudulent service by the thousands of smaller sites in China. Accordingly, I expect we'll see some changes to the unconditional return policy that could effectively exempt the biggest e-commerce firms or limit consumers' rights to unconditionally return their merchandise.

Meantime in the online TV space, the General Administration of Press and Publication, Radio, Film and Television (GAPPRFT) is reportedly considering a new policy that would prohibit online video sites from offering dedicated channels similar to traditional TV. (English article) The move wouldn't affect the sites' ability to offer video content, but instead would make users choose what programs they wanted to watch on an individual basis.

This policy, if implemented, would be the latest in a growing list of moves that are clearly in response to protests from traditional TV stations, all of which are state-owned and tightly controlled. (previous post) Those stations are seeing their advertising revenue rapidly stolen by these newer, online video sites, which can offer a much wider range of programs in far more flexible formats.

This ongoing tug-of-war will have many twists and turns, but big names like Youku Tudou (NYSE:YOKU) and the many companies rolling out new Internet TV products are almost certain to feel some short-term pressure during the process. In the end, I suspect that many local TV stations will ultimately be forced out of business and the online companies will take over the video broadcasting space, though that could take up to a decade to happen.

Bottom line: Separate new regulatory moves should provide relief to major e-commerce operators, but will put growing pressure on online video and Internet TV operators.

Disclosure: None