Chinese authorities ordered 25 video-sharing Web sites to halt operations and issued warnings to dozens of others on Thursday, tightening their grip on online content in a move which could scare away future investment in the sector.
Among the Web sites to be warned was Tudou.com, which is backed by a unit of venture capital heavyweight IDG and received an official warning under new rules to curb pornographic, violent and political content.
Venture capital firms such as Sequoia, IDG and Steamboat Ventures have poured into the Internet sector in China--by some estimates now the world's biggest Web market--in search of the next YouTube, which was acquired by Google.
But Beijing said late last year that only state-owned or state-controlled companies can apply for licenses to broadcast or stream video online.
A lack of clarity over those definitions and uncertainty over how strictly they would be enforced has left the industry confused.
Tudou, one of China's most popular video sites whose service was temporarily suspended last week, said it had received an official warning before the statement came out on Thursday.
"We're working hard to upgrade our systems to catch everything that needs to be caught," Vice President Dan Brody said by phone from Taiwan.
Tudou's investors include Granite Global Ventures, IDG China and JAFCO, and its users publish more than 40,000 new videos each day, according to its Web site.
"This is just a reminder that everyone has to stay on their toes and keep their content clean," added Brody, a former Google executive.
Several of China's popular video Web sites, which include 56.com and Youku.com, have won backing by foreign venture capital heavyweights.
But some industry players warned that foreign investors may become wary of throwing money into the country's fast-growing Internet sector.
"This would certainly make the investment community nervous, until the current situation clears up for companies on the blacklist," said Victor Koo, chief executive of video site Youku.com and former president of portal Sohu.com.
Among three lists released on China's government Web site Gov.cn on Thursday, Tudou figured on the top of a list of companies which had received an official warning.
A second list ordered some lesser-known Web sites to cease operation and a third listed companies operating without a content license.
In China, an administrative punishment typically starts with a verbal warning, followed by a written warning, and eventually suspension of operations.
China's government, keen to avoid stoking social discontent, keeps a tight watch over the media and often blocks or censors popular Web sites and forums where dissent may brew.
This latest sweep of the Internet by Beijing echoes its previous campaign to force Web sites to apply for Internet content licenses, and may be a prelude to putting in place a system for standardizing video content, industry watchers said.
Some add they also expect a "whitelist" of officially sanctioned Web sites to come out, which foreign investors may see as safer investment targets.
"We are certainly very concerned about this matter and are keeping a close eye on developments," said one executive at a prominent foreign venture capital firm who asked not to be identified.
China, which had 210 million Web users at the end of last year, has since overtaken the United States as the world's biggest Internet market by number of users, according to Beijing-based research firm BDA.
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