From online to silver screen

Hollywood was crowded with senior executives from China's Internet giants in November

Jack Ma, China's richest man, and his team from Alibaba Group Holding Ltd had barely wrapped up meetings in Los Angeles with top international film studios before their competitors rushed in.

Officials from the video and entertainment arms of Baidu Inc and Tencent Holdings Ltd held their own talks on cooperation and content acquisition with Hollywood producers.

After conquering small screens on personal computers and mobile devices, the nation's Internet giants are now moving to the big screen. Analysts said the reason for their Hollywood visits is the thirst for high-quality content, be it films, soap operas or other programs.

"Over the past two years, the digital entertainment sector has been in the spotlight at Baidu, Alibaba and Tencent. Their investment is headed in two directions: one is online video platforms, the other is studios," said Pang Yiming, an analyst with domestic Internet consultancy Analysys International.

Some of China's online video sites are still in the red, but that does not mean that digital entertainment cannot be a lucrative business.

"An increasing number of Chinese have gotten into the habit of paying for what they watch online. Not to mention that companies can also make money from ads that are shown in conjunction with those films," said Pang.

If Internet companies start to produce and offer their own online content, they can make money from product placements.

Online video platforms represent only a small part of China's booming digital entertainment industry, which has a broad scope that ranges from video content to online games. According to consultancy iResearch Consulting Group, the market for online video platforms jumped 83.2 percent year-on-year to nearly 7 billion yuan ($1.13 billion) in the third quarter of the year.

Aggressive moves were made this year by Internet giants to cut into the entertainment market. Alibaba built up an entire digital entertainment business from scratch within a year through cooperation and investment in existing companies. It has spent at least $3 billion on its move into entertainment.

It acquired an 18.5 percent stake in China's leading online video company Youku Tudou Inc, and it also formed its own Alibaba Pictures Group Ltd through buying a controlling stake in content and media company China Vision Media Group.

Most recently, Alibaba and Tencent, which has its own online video platform named Tencent Video, invested a combined 2.8 billion yuan to raise their stakes in Huayi Brothers Media Corp, China's largest private film company listed on the Shenzhen Stock Exchange.

Baidu has been a bit quiet this year, but in 2012 it acquired a majority stake in iQiyi Inc, a domestic online video platform, which set up its own film production company in July and announced a plan to produce eight movies in the following year.

Jane Zhang, a senior analyst with technology consultancy Gartner Inc, said that at first glance, it would seem that none of the three Internet giants have a strong background in film production.

Baidu built its business on search activity, Alibaba is focused on e-commerce and Tencent leans heavily on instant messaging.

"But they have a lot of users and they know them well enough to produce entertainment content that can meet their demand," said Zhang, adding all of the big three companies have established distribution channels, such as online video sites.

Now it is important for them to move up the value chain by offering content.

She cited US-based Netflix Inc's political drama House of Cards as an example of how to make a very successful show through analyzing the data on viewers' preferences, such as what kind of actors and screenwriters they like.

Alibaba launched a crowdfunding project named Yulebao earlier this year, which allows fans to invest in the production of their idols' films. They can even make a profit if the movie is popular enough.

"The three Internet giants have natural advantages in expanding into the entertainment and film industry compared with other companies," said Chen Shaofeng, vice-dean of the Institute for Cultural Industries at Peking University.

"Generally speaking, they're well-established in platforms and distribution channels, and they're flush with money. They have wide, direct access to customers," he said.

However, Chen said that Internet firms are not quite ready for the big screen, even though some of the most popular movies released in China this year were made with investment from Internet companies.

In content production, traditional film and TV drama companies have advantages. For example, they have more experience in production and creation and they operate theaters. Investing in traditional studios can help Internet companies accelerate their learning process in terms of content production, Chen said.

Investing in studios brings content, which can help Internet companies differentiate themselves amid tough com-petition. Analysts agreed that the key to attracting viewers is to provide unique content.

Sun Zhonghuai, vice-president of Tencent Video, said in Beijing that the rush for original video content has pushed up prices.

"Video prices have been jumping dramatically. Videos are sold in minutes, and the price per minute has doubled to 20,000 yuan in the past year in China," he said.

The price war over content is not sustainable, so it is important for Tencent to get involved in the start of the process. "Rather than buying directly from producers, why not become an investor and create the whole product from the beginning?" he said.