Beware, China Is Damming the Live-Video Stream: Gadfly

(Bloomberg Gadfly) -- Investors in live-streaming services are reassessing their bets this week after Chinese regulators decided that enough is enough.

Weibo, AcFun and iFeng had the questionable honor of being named directly by the State Administration of Press, Publication, Radio, Film and Television as non-compliant with rules on video broadcasting. Those internet video providers were ordered to shut down, the agency said in a statement Thursday.

Unsurprisingly, Weibo Corp. dropped in New York on volume almost four times the 20-day average. The stock, down 11 percent at one point, closed 6.1 percent lower. The drop could have been bigger, given how fundamental streaming has been to Weibo's revival.

Chairman Charles Chao was so confident of a rebound that he borrowed $456 million from Credit Suisse AG in 2015 to plow into his company's stock. "With internet products, once you lose momentum, it’s very hard to come back,” he told David Ramli of Bloomberg News in a story this month that outlines how Weibo came back from the dead.

Chao will be hoping that statement doesn't ring true a second time. So too will investors in AcFun, including SoftBank Group Corp., and iFeng, backed by Phoenix New Media Ltd.

The specific offense cited by the regulators is broadcasting without an Internet Audiovideo License. They do point out, however, that the content included broadcasting negative opinions on social commentary programs.

I'm surprised that these websites, and many others, got away with this illegal broadcasting for so long. But as is often the case in China, new businesses are allowed to flourish before having their wings clipped when they get too big or unwieldy.

This doesn't mean video streaming is dead in China. For example, Karen Chan, an analyst at Jefferies Group LLC, points out that the social-networking provider Momo Inc. does have the requisite license, and focuses on entertainment.

Judging by declining short interest in Weibo stock, hedge-fund managers didn't seem to think that the lack of a license -- or more free-wheeling content -- would be a problem. But there were signs of a crackdown going back as far as July 2016, when the Cyberspace Administration of China ordered special checks at internet companies that operate news sites, such as Sina Corp., Baidu Inc. and Phoenix.

With the 19th National Congress of the Communist Party approaching later this year, now is the time for China's leadership to consolidate power, and we're seeing signs of action with closer scrutiny of major dealmakers in areas from finance to real estate.

What it's not time for is big bets on unfettered online broadcasting in China.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

To contact the author of this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.