The YouTube of Shanghai

SHANGHAI — In Shanghai’s Huangpu District, up a dark set of stairs stained black by years of cigarette ash and muddy shoes, is the Eastday Internet Cafe. Like most Internet cafes in China, it’s dead quiet, save the incessant clicking. About 50 mostly young Chinese stare at old CRT computer screens, intermittently puffing on cigarettes or slurping instant noodles.

There’s no reading of news articles or checking of email — everyone is either playing games or watching online video. Of those video watchers, most have their browsers set to Tudou.com: China’s YouTube.

Across the city, in a hip renovated warehouse on the banks of the once (and still slightly) toxic Suzhou Creek sits the headquarters of that online video giant. Still run by its founder and CEO Gary Wang, the office, like the website, represents a new strain of creativity in Chinese business. In between breaks in the game room and brainstorming in front of computer screens, employees graffiti the walls with smiley faces and proud pronouncements of the company’s future.

And in the corner of the bullpen-style office space, sitting at a humble desk like any other employee, is Wang. He’s affable and charming, and tends to run the company more as a leader among equals than as a boss with an iron fist.

Despite his 12 million viewers a day — the site attracts more visitors and uses more bandwidth than YouTube — Tudou’s office has the feel of a Silicon Valley start-up. For good reason: Since the website’s launch in January 2005 (two months before YouTube), it’s never made a dime in profit.

But the ever-casual CEO is determined to change that. “Tudou is not just some fun hobby; it’s a real serious business that has a great deal of influence among a young Chinese audience,” Wang said. “Now we have to turn that influence into cash.”

Wang’s revenue plan: Online video advertising. 

Wang’s financial backers trust him. Through four rounds of funding over the past three years, investors have given Tudou $87 million for further development. If Wang can pull it off, he’ll not only change his company’s fortunes, but will possibly revolutionize online advertising.

“No, we are not making a profit yet,” he said. “But once we find a marketing pioneer that strikes gold with online video advertising, we will.”

To that end, Tudou has ramped up its sales and advertising department, going from three employees in 2005 to more than 70 today. It has also begun developing ads using rich media. The cutting-edge technology allows viewers to interact with different aspects of an advertisement, leading to higher click-through rates and more advertising revenue.

Wang predicts that more advertisers will switch to rich media in the future. The hope is that people like Jessie Pan, a 23-year-old office worker staring at her screen at Eastday who prefers to go by her English name, will actually pay attention to the ads.

“I don’t usual(ly) look at the ads,” she said. “If they were cool and interactive I think I would. Tudou usually has big companies advertising, who make more creative ads anyway.”

Among the major companies advertising on Tudou are Nike, Pepsi, Ford, Intel and Apple. The company claims that there is a near-100 percent retention rate among the advertisers.

But like anywhere else, business is war in China and Wang is worried. As the profits roll in, so too will Tudou’s well-funded competitors, such as the country’s top online media companies Sina, Baidu and Tencent Holdings. “If we go in there and create the market for internet video, then the big guys will come in with more resources than we have and reap the benefits we’ve created,” Wang said.

Tudou is using business techniques — including content partnership agreements, self-financed productions and the launch of a premium video site called Heidou (launched at the same time as its American equivalent Hulu) — to hold off the competition. But its secret weapon is visitor loyalty.

Tudou is hip, young and Shanghai cool. “When I’m with my friends and someone mentions a new movie that was good, we all look it up on Tudou,” explained Pan. “We don’t really go on YouTube because it seems foreign and Tudou has a younger feel than other Chinese sites around. Plus, everyone thinks the name is cool and easy to remember.” Tudou means potato in Mandarin — as in couch potato.

With the kind of business culture Wang has developed, it’s not surprising that his site attracts young Chinese. “We are who we are,” he said. “People come into our office and look at all the graffiti. It’s not something I designed, it just happened naturally. Our people just started painting on the wall.”

Of course, in the internet business there’s always a risk of a newer, cooler and more technologically advanced competitor popping up. Asked if he worries about a game-changing hotshot bursting onto the net, Wang leans back in his chair and widely smiles.

“If we see a site with great potential that is challenging us, we have nothing to lose by changing course," he said. "It’s not like we are making tons of money today.”

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