More than 700 million people in China will be watching online video content in four years, new McKinsey research shows. The successful stock market debut of Youku, one of China’s leading online video sites, reflects what many feel is the industry’s dazzling future. Youku, whose shares rose 2.6 times on the first day of trading in the United States, in 2010, already has more than 200 million monthly users. Its closest rival, Tudou, has 180 million.
Despite that potential, many observers remain cautious about the industry’s outlook. They note that although the market is growing at a furious pace, few companies are making money. Our research suggests that profits will indeed materialize, but only players with the deepest pockets will survive to enjoy them. Successful online video sites will need capital on three fronts: to expand their bandwidth; to attract experienced online advertising salespeople, who are in short supply; and, most important, to buy the content that will win the biggest audiences and the most advertising. The best-funded sites are therefore likely to pull steadily ahead, in what could be a winner-takes-all phase of the market.