Broadcast TV remains the primary source of entertainment in China, even though the country is home to the world's biggest audience for online video. Linear channels still represent the majority of viewing for all age groups in the Middle Kingdom, and take the lion's share of TV advertising.

Indeed, deepening competition between China-based video sites could inhibit their growth prospects. As online video providers seek to offset rising content investments with more ads, alongside a possible drive for subscription revenue, consumers may find them less appealing.

"This will soon raise questions on the effectiveness of the advertising, and we're not sure how far this can be pushed without triggering negative reactions from the viewers," ponders Shann Biglione, head of strategy for media agency network ZenithOptimedia China.

"So far, we're okay, but this is something that could impact the whole industry," Biglione adds.

Traditional TV remains a core source of entertinment, making up around two-thirds of viewing among all online video viewers in China, and around 60% of viewing for 15-30-year-olds, the most online-focused group, according to Sinomonitor, a local research agency.

That said, Chinese consumers still watch more online video than people in other Asian markets.

There were 439 million people watching online video in China by mid-2014, according to official statistics, enjoying a wider selection of programming than traditional TV, delivered over extensive broadband networks with shorter commercial breaks.

It is only a matter of time before on-demand becomes the default option for younger viewers, with only sports and event programming watched live.

THE IMPORTANCE OF REACH

Nonetheless, online television (OTV) only reaches half as many people as traditional broadcast channels, Biglione points out. This curtails the platform's appeal to big TV advertisers – a key source of revenue in a country where subscription models for TV have struggled to gain traction.

At the same time, few people have abandoned traditional options altogether. "Although there are variances depending on the surveys, only about 5% of OTV viewers do not watch TV," Biglione notes. "Most watch both. Just to put things into perspective, there are still more people who watch only TV than people who watch OTV in China."

Large consumer brands, in a fight to reach the most people, are voting with their wallets. Broadcast TV sits at the heart of media plans for the biggest spenders, with online video playing a supporting role.

Underlying dynamics are changing, however.

Some TV spend is moving online, prompting leading broadcasters to ramp up investments in their own on-demand platforms to protect their share of revenue, ratcheting up competition further. Such moves will impact content negotiations, prompting sites to make more of their own content.

Additionally, video sites are also attracting a greater share of internet display spend, helping solidify their appeal as an effective way to drive brand awareness online.

"It's likely that more and more display advertising will be relegated to conversion – visits, leads, sales – while OTV takes a big share of the pie of the online awareness budget," Biglione contends.

"In general, this will also bring more and more questions on the validity of splitting budgets between traditional and digital," he adds. "I think in the next two to three years, we will be talking more about the format – video, display – than the channel – TV, OTV."

AN INFLATIONARY MARKET

Meanwhile, as ratings competition pushes up content costs in both the traditional and online worlds, advertisers must brace themselves for higher ad rates. This, in turn, will impact their own media strategies.

"One has to remember that the power of TV isn’t just about the influence of audiovisual advertising, but also its reach," Biglione explains. "Content that is able to deliver that reach will always be able to attract big dollars, sometimes beyond reason."

When ad deals reach a certain scale, success for advertisers hinges less on what advertisers buy, and more on how they can exploit available opportunities. Smart brand integration can justify some big TV partnerships, Biglione notes, but rising sponsorship costs are making it harder for agencies to recommend higher levels of spend.

"The downside of sponsorships is that they are high in influence but limited in reach," he says. "It tends to be the same audiences tuning in week after week. You have to question the way the impact is measured to justify such investments."

Nonetheless, as long as sales keep rising, and brands don't ask too many questions about the efficiency of such deals, the cash will keep flowing.

"There will be a strong pressure on platforms to produce and/or acquire content," Biglione says. "That cost has to be passed onto advertisers at some point, or maybe even consumers with premium subscription models."

"The bottom line of advertising is that it will be dictated by offer and demand," he adds. "If prices go too high, we'll enter phases of slowdown for sure, but I don't think we're there yet."