Beijing - China's two biggest video websites are fighting a court battle over accusations they are misusing each other's programming as rivalry heats up in an industry that is luring viewers away from bland state TV.
The conflict between Youku.com and Tudou is part of a struggle for dominance in an online market with nearly 400 million viewers and dozens of privately owned outlets that might represent the future of China's video watching and a lucrative advertising stream.
"Everybody is shooting for that golden demographic - the young people who are just out of school, have a lot of disposable income and that watch online video instead of television," said David Wolf, a marketing consultant in Beijing.
China's video websites started out imitating Youtube, relying on users to upload cat videos and other free material. But to lock in affluent viewers, the most ambitious started to imitate TV stations, paying to import foreign programmes or create their own.
Still more viewers might be driven to video websites by a new government campaign to clean up China's airwaves and promote "socialist core values".
Rules that took effect on Sunday strike at a hugely popular market segment for China's ambitious local broadcasters by slashing the number of reality, talent and dating shows they can show on satellite channels. State media say the number of prime time entertainment shows plunged from 126 in December to just 38 this week.
That hurts local stations just as rising revenues allow online rivals to produce even more content, highlighted by the court fight between Youku and Tudou.
In a Dec 16 lawsuit, Youku accused Tudou of stealing 60 of its programmes. Tudou says it has filed suit in Shanghai and Beijing accusing Youku of showing a Taiwanese series, after Tudou obtained rights to it.
The company claims Youku showed Japanese cartoons without the owner's permission.
The companies, both of which have shares traded on US exchanges, accuse each other of trying to use legal claims to gain a competitive edge.
"Youku think they can live on free traffic without paying for the content," said Tudou CEO Gary Wang in a statement, "and they are trying to hide the fact that they are actually not as competitive as they pretend to be."
Both companies reject the accusations in the lawsuits.
"Tudou is playing games," said a Youku spokesperson, Jean Shao.
Beijing has allowed such private companies to flourish with fewer of the controls imposed on China's entirely state-owned newspapers, TV and radio, possibly to avoid stifling what its leaders see as a promising high-tech industry.
Their surging popularity threatens to erode viewership for state TV, which Beijing sees as a tool to mould public opinion. That raises the threat communist leaders might tighten controls to protect their media presence.
Tighter regulation might "threaten private online video sites' very existence, and put investors at risk," said CMM Intelligence, a media consulting firm in Beijing, in a March report.
Chinese video websites make money from advertising and also have pay-per-view and other premium services. But while viewership and revenue are soaring, companies are losing money as costs for programmes, marketing and internet bandwidth rise.
394 million online
The number of Chinese who watch online video jumped from 284 million in 2010 to in 2011, according to CMM Intelligence. It said the total might pass 445 million by the end of 2012.Managers of China Central Television and local state-owned broadcasters have tried to become more commercial. But the government bars foreign programs from prime time and any material deemed racy or vulgar, leading to a schedule heavy with family-friendly but dull historical sagas and variety shows.
Video websites, with looser controls, show dramas and comedies from the United States, Taiwan and Europe and their own programmes. Viewers can download shows to watch on mobile phones during their morning subway ride.
Neither the government nor private researchers have reported on how many online viewers might have abandoned state TV outright.
"We all know it's taking place but nobody wants to go out and publicise the data," said Wolf, chair of Wolf Group Asia.
"The online video guys are terrified that if there are statistics that show the 'golden demographic' dropping TV to watch online video, then the government is going to come after them."