Leeway Seen in China Internet Rules

China is so keen to keep foreign investment flowing that it probably will let private Web sites work around strict new rules limiting video-sharing to state-controlled companies, analysts say.

China-based Web sites already need a government license that only companies majority-owned by Chinese nationals can get, and managers of private sites based in China say they already excise "inappropriate" content.

But the new regulations _ issued Dec. 29 and scheduled to take effect Jan. 31 _ also require that the state have a controlling interest in any video entertainment Web site.

"It's a very clear message these Chinese film governing authorities have decided to send _ that they're taking this stuff seriously and they're going to regulate it," said Jeremy Goldkorn, editor-in-chief of Danwei.org, a Web site that covers Chinese media issues.

But Goldkorn said Beijing won't shutter private video sharing Web sites because that might spook foreign investors to desert the world's second-largest Internet community.

Youku.com, one of China's major video sharing sites, said it had raised $40 million in American and Chinese venture capital as of November. Overall, China's Internet video sharing market is still small, but it's growing.

Video sharing Web sites brought in just 40 million Chinese yuan, about $5.5 million, in revenue in 2006 _ a figure the Internet Society of China expects to grow to more than fivefold by 2009.

Youku.com founder Victor Koo remains hopeful that he can work within the new rules.

"It is not currently clear how big the impact is to the online video space, as this will depend on the interpretation and the implementation of such policy guidelines," he said in an e-mail, adding that Youku's legal advisers are in touch with the government.

One way to get past the new rules would be for private sites inside China to partner with TV stations or newspapers, which in China all are state-owned, said Dick Wei, a Hong Kong-based technology analyst for investment bank J.P. Morgan.

Wei said the state entity could own the content _ satisfying the new rules _ while splitting the profits with the private entity.

Private Web sites in China already hire their own censors to delete sensitive content _ like footage of protests or pornography, Goldkorn said. Youku's Koo said his company has "24x7 content approval procedures to ensure that no porn or politically inappropriate content appear on our Web site."

Kaiser Kuo, group director of digital strategy at advertising agency Ogilvy China, said the regulations are a response to the popularity of Internet videos _ which have cut into the audience for traditional media like government-run broadcaster CCTV, an important outlet for the ruling Chinese Communist Party.

"They've suddenly lost control of one of the main state organs of propaganda and obviously the party is not going to like that. So it's only natural they would want to reassert some control in this new and increasingly popular form of media," he said.

Kuo too said the new rules may worry possible foreign buyers.

"A lot of them were probably hoping that a Google or YouTube would come in and swoop them up. It's going to suddenly make it very difficult for that to happen," he said.

J.P. Morgan's Wei said the new rules clarifies policy.

"In the long term, it is a good thing for the industry because it clarifies what and who and how the industry can do video sharing."

"I think some smaller players probably are going to be affected. But I think for the leaders in this space ... I'm relatively comfortable they are going to work closely with the government and have a meaningful business," he said.

Video sharing Web sites based abroad, like YouTube, are not directly affected by the rules, experts say, although the Chinese government may occasionally block access to those sites from within China. It censors or blocks politically sensitive content _ like information about the Chinese military's brutal crackdown on pro-democracy protesters in Beijing's Tiananmen Square in 1989.

YouTube runs a Chinese-language Web site, but none of its video-hosting computers are located in China so it falls outside the jurisdiction of the new rules.

China is the world's second largest Internet market, with a total audience of about 164 million, including people who surf the Web from public computers, according to the research firm comScore Inc. Only the United States, with about 182 million Internet users, boasts a larger online audience.

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AP Business Writer Joe McDonald contributed to this report from Beijing.

China is so keen to keep foreign investment flowing that it probably will let private Web sites work around strict new rules limiting video-sharing to state-controlled companies, analysts say.

China-based Web sites already need a government license that only companies majority-owned by Chinese nationals can get, and managers of private sites based in China say they already excise "inappropriate" content.

But the new regulations _ issued Dec. 29 and scheduled to take effect Jan. 31 _ also require that the state have a controlling interest in any video entertainment Web site.

"It's a very clear message these Chinese film governing authorities have decided to send _ that they're taking this stuff seriously and they're going to regulate it," said Jeremy Goldkorn, editor-in-chief of Danwei.org, a Web site that covers Chinese media issues.

But Goldkorn said Beijing won't shutter private video sharing Web sites because that might spook foreign investors to desert the world's second-largest Internet community.

Youku.com, one of China's major video sharing sites, said it had raised $40 million in American and Chinese venture capital as of November. Overall, China's Internet video sharing market is still small, but it's growing.

Video sharing Web sites brought in just 40 million Chinese yuan, about $5.5 million, in revenue in 2006 _ a figure the Internet Society of China expects to grow to more than fivefold by 2009.

Youku.com founder Victor Koo remains hopeful that he can work within the new rules.

"It is not currently clear how big the impact is to the online video space, as this will depend on the interpretation and the implementation of such policy guidelines," he said in an e-mail, adding that Youku's legal advisers are in touch with the government.

One way to get past the new rules would be for private sites inside China to partner with TV stations or newspapers, which in China all are state-owned, said Dick Wei, a Hong Kong-based technology analyst for investment bank J.P. Morgan.

Wei said the state entity could own the content _ satisfying the new rules _ while splitting the profits with the private entity.

Private Web sites in China already hire their own censors to delete sensitive content _ like footage of protests or pornography, Goldkorn said. Youku's Koo said his company has "24x7 content approval procedures to ensure that no porn or politically inappropriate content appear on our Web site."

Kaiser Kuo, group director of digital strategy at advertising agency Ogilvy China, said the regulations are a response to the popularity of Internet videos _ which have cut into the audience for traditional media like government-run broadcaster CCTV, an important outlet for the ruling Chinese Communist Party.

"They've suddenly lost control of one of the main state organs of propaganda and obviously the party is not going to like that. So it's only natural they would want to reassert some control in this new and increasingly popular form of media," he said.

Kuo too said the new rules may worry possible foreign buyers.

"A lot of them were probably hoping that a Google or YouTube would come in and swoop them up. It's going to suddenly make it very difficult for that to happen," he said.

J.P. Morgan's Wei said the new rules clarifies policy.

"In the long term, it is a good thing for the industry because it clarifies what and who and how the industry can do video sharing."

"I think some smaller players probably are going to be affected. But I think for the leaders in this space ... I'm relatively comfortable they are going to work closely with the government and have a meaningful business," he said.

Video sharing Web sites based abroad, like YouTube, are not directly affected by the rules, experts say, although the Chinese government may occasionally block access to those sites from within China. It censors or blocks politically sensitive content _ like information about the Chinese military's brutal crackdown on pro-democracy protesters in Beijing's Tiananmen Square in 1989.

YouTube runs a Chinese-language Web site, but none of its video-hosting computers are located in China so it falls outside the jurisdiction of the new rules.

China is the world's second largest Internet market, with a total audience of about 164 million, including people who surf the Web from public computers, according to the research firm comScore Inc. Only the United States, with about 182 million Internet users, boasts a larger online audience.

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AP Business Writer Joe McDonald contributed to this report from Beijing.