Internet companies are changing the landscape of the television industry by combining entertainment with commerce, reports Jiang Xueqing

Song Chen / China Daily

Within 28 minutes, 5,555 over-the-top TVs were sold out by LeTV, an online video portal in Beijing, on Nov 11. The TVs, which deliver video and audio over the Internet, cost 6,999 yuan ($1,140) each for 60-inch models and 1,999 yuan for 39-inch versions.

The buyers made a great contribution to the spending spree on the so-called Chinese Singles' Day, invented by e-commerce entrepreneurs to boost sales.

Also on that day, 1,111 OTT set-top boxes from LeTV were sold as soon as after they became available. Each box cost 490 yuan, providing one-year access to the portal's online video service plus a gift card offering an additional three months of access.

The hot sales came just 20 days after the company took orders for 21,000 50-inch OTT TVs on Oct 22, though it had only 10,000 in stock.

"Market demand went far beyond our expectations. Consumers started to realize that over-the-top content delivery is the future direction of television," said Zhang Zhiwei, vice-president of LeTV.

Since the beginning of this year, OTT TV and set-top boxes have grown in popularity. Web users are no longer satisfied with watching copyrighted movies and TV series online on the small screens of their personal computers, laptops or tablets.

They feel more comfortable watching a wide range of content on a large screen with better visual quality.

"I got tired of connecting my laptop to my TV. It's not convenient," said Han Peng, a software development manager at an information technology company in Beijing.

He bought an OTT set-top box from Xiaomi Corp, a mobile Internet company that develops smartphones, apps and consumer electronics. The box is mainly used for playing children's cartoons and movies for his family.

"Before I bought a MiBox, I had to watch whatever was shown on TV at a fixed time. But now, I can choose what I want based on my own schedule," he said.

Many users of OTT TV and set-top boxes share his delight. Not long ago, they abandoned TV broadcasts by downloading movies from the Internet or watching their favorite content online.

According to iResearch, a market research firm focusing on the Internet industry, the active audience for online videos in China hit 450 million for PCs and 120 million for mobile phones and tablets in August.

Viewers watched online videos for an average of 43 minutes on a PC every day that month and 18 minutes on mobile devices.

The Internet is posing a real challenge to the TV industry, but it also brings opportunities for change. Experts said that TVs will become the next device to offer Internet access in addition to PCs, mobile phones and tablets, because they are one of the most important home appliances, connecting all family members.

"A large TV screen at home is the best partner to a small mobile screen," said Peng Gang, senior vice-president of LeTV.

"Today, we regard TV as a device for Internet access. This revolution is inevitable, thanks to the continuous efforts of Internet companies to enrich their content resources and improve user interaction," he said.

The change is taking place with the increase of Internet speed in China, said Liu Chuang, general manager of the flat display panel consulting division of All View Consulting.

The average Internet connection speed in China stood at 3.3 megabits per second in the second quarter, according to ChinaCache International Holdings Ltd.

The State Council, the country's cabinet, plans to further increase household Internet connection speed to 20 Mbps in the city and 4 Mbps in rural areas by 2015.

Competition for the Internet market on big screens has become increasingly fierce this year, as many well-known Internet companies have expanded into the TV industry.

The e-commerce giant Alibaba Group Holding Ltd gave 1 million set-top boxes — each costing 399 yuan — to its customers for free on Nov 11 as a reward for their patronage.

IQiyi, a video provider owned by China's largest search engine Baidu Inc, debuted its 48-inch OTT TV jointly with TCL Multimedia Technology Holdings Ltd, a leading consumer electronics manufacturer, on Sept 3.

Hot competition

Just two days later, Xiaomi unveiled its 47-inch 3-D smart TV at an amazing price of 2,999 yuan — about 1,550 yuan cheaper than the smart TV made by TCL. An updated version of Xiaomi's set-top box with a faster central processing unit was also launched in September.

"Any online video provider could become a virtual cable operator by streaming videos to television sets over the Internet, as long as it partners with an OTT TV license holder in China.

"The operator identity is very alluring to video providers, for TV audiences will have access to their platforms and content. Although none of the Internet companies has made a profit by providing OTT services, they expect to make money within five years," said Luan Xutao, director of the operator relationship department of Nielsen-CCData Media Research Co Ltd.

"In China, cable television operators are divided by regions, but online video providers may turn into national virtual cable operators.

"At present, the companies that launched OTT set-top boxes are still attracting users. Once their user population reaches a certain level, they will find tons of business opportunities," he said.

Industry observers predicted that Internet companies will march into the TV market on a large scale during the next five years. The number of servers ordered by Baidu for 2014 equals the total number of servers the company has purchased since it was founded.

Alibaba and Tencent Inc, one of China's largest Internet service portals, are also increasing their server purchases, according to an industry analyst who declined to be identified.

Compared with traditional consumer electronics manufacturers that only make TV hardware, Internet companies have the advantage of providing rich content and related services, said Liu.

"Many people asked me: ‘What is OTT TV? Does it simply mean streaming online videos to TV?' That's not the case.

"The real significance of OTT TV lies in getting users to participate in the design, production and upgrading process of hardware and content. It requires stronger interactions between the users and the operating system," said Peng.

Apart from offering 5,000 movies and 90,000 episodes of TV series to subscribers, LeTV has also upgraded its television operating system every weekend since July, based on customer feedback.

Following user suggestions, the company provides a remote video surveillance service for the home that allows parents who are at work or on a business trip to stay connected with their children. It also launched a software application to turn a smartphone into a remote control for its smart TV.

In the future, users will be able to post comments on TV screens while watching movies and receive instant responses from their friends.

They will also make decisions on which TV dramas should have special channels of their own so viewers can watch any episode they like at any time.

"For traditional consumer electronics manufacturers, their job is done once they deliver a TV set to the customer. But for Internet companies like us, our job has just started," said Peng.

With the further development of OTT TV, new business models will be created based on a large screen, according to Liu.

For example, while watching the main characters having dinner at a fancy restaurant, the audience may pause to read a brief introduction to the restaurant that will cover its location, specialties and head chef.

If they like a dress worn by an actress, they can easily discover its label and try it on virtually on TV, having a full-body scan before making a purchase.

Statistics reveal advertisers prefer TV to other types of media. About 76 percent of advertising expenditure is allocated to TV networks in China every year.

So the advertising value of an online video portal is bound to improve if it appears on the TV terminals of millions of users nationwide, and the portal can help marketers advertise across all screens, said Luan.

However, an effective profit model has not yet emerged, even though many OTT TV and set-top boxes are burgeoning across China. Industry analysts said that whether OTT video service providers can recover their huge investments in copyrighted content and hardware is still in question.

Contact the writer at jiangxueqing@chinadaily.com.cn