BEIJING: The Chinese online video audience is expected to reach 300m people in 2011, luring major advertisers to this emerging channel.

Research firm CMM Intelligence has published its second annual report assessing the prospects of this rapidly-growing sector.

It argued hundreds of sites compete for the attention of netizens, many of which are affluent, young and well-educated.

More specifically, CMM said watching material via this route was among the top five habits of China's internet population, regularly attracting 265m people, or 63.2% of the potential user base.

Looking ahead, it predicted viewing levels would surpass 300m at the close of 2011, aided by increasing penetration and digital literacy.

"Online video fills a deep need for varied and engaging content that broadcast television – including cable – has failed to address," CMM suggested.

"The internet revolution has changed the more prosperous Chinese consumers from a passive to an active viewer who wants entertainment on his or her terms."

At present, independent operators Youku, and Tudou occupy the leading roles, but big state-owned media companies such as CCTV and the Shanghai Media Group are establishing formal ventures.

These host professionally-produced shows, and CCTV's CNTV currently heads the pack.

Shanghai Media Group's BesTV is an early frontrunner concerning IPTV, and VeryCD and Xunlei have assumed the same status regarding downloads.

Apple's iTunes may also be a "possible dark horse" in the latter segment, according to CMM.

However, although $600m has been invested in the industry over the last five years, most platforms are not likely to become profitable during the foreseeable future.

Broadband expenses typically soaks up between 40% and 60% of revenues, and the rising popularity of high-definition formats means this could remain a sizeable challenge going forward.

The cost burden of licensing and the "lack of creative and entrepreneurial ad sales managers" also pose significant problems.

While marketers are taking a greater interest in this medium, CMM forecast the category would record a maximum adspend of $300m (€224m; £194m) in 2011, equivalent to 6% of digital ad expenditure and 1% of total media budgets.

In a filing with the Securities & Exchange Commission in November 2010, Tudou revealed the clips uploaded each day have surged from 23,000 in 2008 to 42,000 in the first nine months of 2010.

The company listed its largest clients as Unilever, Coca-Cola, PepsiCo, Volkswagen and Procter & Gamble, collectively delivering 13.5% of revenues from January to September 2010.

Domestic corporations Master Kong and China Mobile – with which Tudou runs a partnership offering consumers access using wireless devices – contributed a further 4.7%.

"The large number of online video users provides advertisers in China with multiple opportunities for customer behavioural analysis and customer targeting," Tudou said, adding that reach and cost benefits also played a role.

Youku produces in-house content alongside acquiring material from elsewhere, and receives 260m visitors a month.

Founder Victor Koo does not anticipate making a profit until 2013, but sees strong possibilities.

"In the US, search engines are king. That is because everyone already knows what they are looking for. Brands have been around for a long time … In China that is not the case," he said in December 2010.

"This is the first generation of people buying cars and fridges. Video is much more important. You cannot transmit the branding through text banners and pictures."

For a full briefing on the marketing opportunities presented by online video in China, Warc subscribers can read an analysis of the sector by Beijing-based marketing consultant David Wolf.

Data sourced from CMM Intelligence; additional content by Warc staff