Executive summary: Ku6 (NASDAQ: KUTV), one of China’s major online video sites, said it will transform into a UGC (user-generated content) website similar to Youtube. Like other Chinese online video sites, Ku6 is still losing money at present, with a net operational loss of $21.6 million in the second quarter. But Xiaotong Shen, CFO of Ku6 media, said the company has set a timetable to reach profitability. Shen also said the company will shift to a new advertising platform that will boost profitability.
On August 30, Shen had an online interview with iChinaStock investors about the company’s stratergies and business prospects. Ku6 is a subsidiary of Shanda Interactive (NASDAQ: SNDA).
Below are excerpts of the conversation. (For the complete Chinese-language of the interview, click here.)
1) Ku6 will become more like Youtube
Q: How do you position Ku6 as a brand?
Mr. Shen: We aim to build Ku6 into a technology-powered, UGC-oriented website with fresh content.
Q: That’s a clearly defined goal. What are the major obstacles for you in achieving this goal?
Mr. Shen: We have to optimize users’ experience and keep the cost as low as possible. Progress in every respect has to be shown in the financial results.
Q: You mentioned “Ku6 is undergoing a major transformation” during the Q2 conference call. Can you give us some details about the transformation?
Mr. Shen: First, we are trying to make Ku6 a community website featuring short videos, similar to Youtube. Second, we are shifting the main source of advertisement revenue to AA commercials (Applied Advertising is a new online advertising platform adopted by Shanda Interactive Entertainment Limited, the parent company of Ku6).
2) Will share ad revenue with users who upload video
Q: What is ku6’s strategy to encourage users to generate content on the website? Statistics show that Youku had an average of 70,000 videos uploads every day in the second quarter. What is the number for Ku6?
Mr. Shen: We are testing some new online communities and will add a number of personalized functions. We will be sharing ad profits with our users in a bid to encourage them to upload videos. At the moment, we are not ready to reveal the number of video uploads as things are still at the early stage. We welcome various forms of cooperation, especially exclusives.
Q: It seems for now that Ku6 is largely UGC oriented and that performance-based advertising is going to play a bigger part of its future. What is your arrangement for sharing profit with users who upload videos along with commercials?
Mr. Shen: That depends on content and traffic flow. Anyway, we encourage you to upload, so as to enjoy a share of profits from advertising.
3) Transforming into a performance-based advertising platform
Q: You noted that “Ku6 will focus on the AA (Applied Advertising) strategy” during the call. Could you elaborate on that? How much did revenue did brand advertising contribute to your total revenue? And how will the proportion change in the second half of the year?
Mr. Shen: Applied advertising is something like performance-based advertising, by which advertisers and agents from the advertising union bid for a place on the website of Ku6 by means of an automatic system and pay us according to how many times their commercials are clicked. Brand advertising contributed 80% of the total revenue from advertising and applied advertising 20%. The latter number is expected to rise steadily in the second half of the year. But we are not able to give you an accurate prediction as AA is something new.
Q: Did Ku6 have more advertisers in the second quarter than in the first one of this year?
Mr. Shen: There is no point in comparing the numbers of advertisers in the two quarters since AA was not introduced until the second quarter.
Q: Why does Ku6 prefer performance-based ads, as most video websites are still using brand advertising. Is it something about cost concerns?
Mr. Shen: When the amount of advertising grows beyond a certain level, you can actually have more applied than brand advertising as the former is less costly and thus higher in profit margin.
Q: You’ve got to meet several prerequisites to have performance-based advertising: 1) massive traffic flow; 2) a large number of users; 3) a technology to match the two. But apparently Ku6 does not have strong advantages in these respects. What’s your comment on this shift from brand advertising to AA?
Mr. Shen: We are working hard on AA. And I think it will work out pretty well as the traffic flow increases. We will, in the meantime, keep developing necessary technology and capacity to take advantage of the new platform.
4) Ku6 to stop purchasing long-form videos
Q: Can you describe for us the future of Ku6’s Yunzhong Theatre? There is no longer access to it on the site’s navigation bar (including news, entertainment, comedy, talents etc.). Will you give it up in the future?
Mr. Shen: Long videos will not be a major focus of our website in the future. Some have raised the question about how we are using our copyright fund. The answer is that we will spend it mainly on encouraging users to upload videos and on purchasing our company-made videos.
Q: The cost of contents for Ku6 stood at $5.6 million in the second quarter and only $400,000 of them were spent on buying new videos. Was the rest of the $5.2 million spent on previous purchases?
Mr. Shen: We counted the cost of all existing copyright contracts into the total of that quarter.
Q: Commercials on Ku6 and several other websites are becoming longer and longer, which annoys users very much. Was that due to the rising cost of copyrights and bandwidth? How can the problem be solved?
Mr. Shen: Actually, we have seen lower costs of copyright and bandwidth. Anyway, we will focus on increasing users’ satisfaction rather than unreasonably lengthening commercials.
5) We have a timetable for reaching profitability
Q: Ku6 experienced a net operational loss of $21.6 million in the second quarter this year, an increase by 98.2% compared with $10.9 million in the same period of last year. What caused the larger loss?
Mr. Shen: The loss in the second quarter, non-cash costs (copyrights, bad debts, devaluation of intangible assets, cost of reconstruction, etc.) excluded, was around $10 million, pretty much the same as that of the first quarter. The net outflow of cash in Q2 amounted to around $7 million, 30% less than that in Q1. Things are therefore heading in the right direction. But it is not yet the time to predict when we will make a profit.
Q: Does Ku6 have a timetable to reach profitability?
Mr.Shen: There is one within the company. But we decide to keep it from the public media for the time being in the interest of fair disclosure.
6) Ku6 will shut down its online radio business
Q: What strategy does Ku6 employ in producing its own videos? And what other programs are available among its mobile services?
Mr. Shen: We will keep producing our own programs. Cooperation with producers affiliated to SNDA is also likely. That will be a case of what is referred to as synergy.
Q: The financial report reveals that Ku6’s long-standing business breaks down into two: a portal website for online video and online radio. Why does Ku6 continue with the online radio?
Mr. Shen: It claims only a marginal proportion of business and will soon be closed down.
Q: Does Ku6 feel a greater pressure from Youku and Tudou’s IPO? Any plans to make the company more attractive in the capital market?
Mr. Shen: It represents investors’ recognition of the online video industry that some of our peers have been listed. We will step up the introduction and promotion of our company at the right time. Over the last 12 months, we have attended 4 or 5 investor conferences, and have done some road-shows for non-financing purposes.
7) 5% of commercials come from SNDA
Q: What has SNDA provided to Ku6 besides money?
Mr. Shen: The cooperation between SNDA and Ku6, both of whom are independently listed companies, is legitimate and well-grounded. We mobilize what resources we have, like contents and users, for mutual gain. 5% of the commercials that are run on Ku6 come from SNDA.
Q: What is your observation on the development of online video communities, seeing that Qiyi launched one such virtual community named Qitan earlier this year? Any similar plans for Ku6? From your perspective, is there a better way to secure user loyalty besides building online video communities?
Mr. Shen: We are working on a new online community to provide personalized and streamlined functions for users.
Q: What do you think of Sina’s purchase of Tudou’s shares? Do you think of it as mere financial investment?
Mr. Shen: Any investment that is made into a video website represents a vote of confidence in the industry. We are not in the position to comment on it.