Crackdowns On Video, E-Commerce Accelerate

New crackdown on online video

The year 2014 could well go down as the “Year of the Crackdown”, as evidenced by 2 more such crackdowns in the headlines as we head in autumn. The first and larger of the pair comes in the online video space, where media are reporting the broadcasting regulator is finalizing rules that would severely limit the amount of foreign content on online video sites. Meantime, a more mild crackdown is also coming in the e-commerce space, where separate reports are saying another regulator is rolling out rules that will punish companies that overstate their transaction volumes.

Neither of these crackdowns is completely new, as we’ve been hearing rumblings in the video space since the spring when leading web portal Sina (Nasdaq: SINA) abruptly had its video license revoked for hosting pornography on one of its sites. Likewise, the e-commerce crackdown dates back to the beginning of the year, when China rolled out a controversial consumer protection law that allowed buyers to return most merchandise within a week if they were unhappy with the purchase.

All of this comes against a broader Beijing crackdown on corrupt government officials and top company executives at state-run firms under the 2-year-old leadership of President Xi Jinping. The crackdown wave has also seen a recent explosion in anti-monopoly probes against major foreign firms like Microsoft (Nasdaq: MSFT) over unfair pricing claims.

This latest video crackdown certainly seems consistent with all the other crackdowns that have been taking place, though it certainly doesn’t bode well for an industry that once looked set for explosive growth. Leading online video site Youku Tudou (Nasdaq: YOKU) is the best bellwether for companies in the sector, with its stock down by nearly half since a peak in late March.

According to the latest reports, online video sites will be limited to no more than 30 percent of foreign content on their services. (Chinese article) One report points out that foreign programming now accounts for more than half of the content on Youku Tudou and another leading video site operated by web portal Sohu (Nasdaq: SOHU). A separate report also says that the video site operators will need to get approval for all their foreign programming from the main broadcasting regulator, the General Administration of Press and Publication, Radio, Film and Television. (English article)

Things certainly don’t look too good for these online web sites, and it’s quite possible that we could even see one or two mid-sized names forced to either merge or close as a result of this widening crackdown. The companies may try to find ways to circumvent some of the  new rules, such as buying lots of obscure domestic programs, which would allow them to import more content without violating the 30 percent ratio. But the regulators seem to be equally determined to keep throwing out more obstacles, which is almost certain to put a major damper on future growth.

Next let’s move to the e-commerce space, where the suddenly high-profile State Administration for Industry and Commerce (SAIC) has announced it will levy fines of up to 500,000 yuan ($81,300) on companies that overstate their transaction volumes. (Chinese article) This particular rule seems squarely aimed at smaller e-commerce firms and is probably a good step to help stamp out their widely inflated claims over how much business they actually do.

Larger companies like Alibaba and (Nasdaq: JD) probably aren’t the target of this rule as they are run more professionally. And even if the bigger names do inflate their claims, which wouldn’t surprise me, the size of the fines would be inconsequential to them. But once again, the move does reflect the very real fact that Chinese regulators are suddenly becoming quite aggressive under the strict new leadership in Beijing.

Bottom line: New limits on foreign content will severely stifle the growth of online video firms, driving some consolidation, while a separate e-commerce crackdown is clearly aimed at smaller firms.

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