I’m back in action folks, and fortunately not too much China tech/marketing news has slipped by in my absence–or so I’d like to believe.

But this could be big news, and definitely something to watch in the coming months. The Marbridge newsletter today has an intriguing little piece citing Xinhuanet–still looking for the original story–saying that the Ministry of Information Industries (MII) minister Wang Xudong has said that the MII and the State Administration of Radio, Film and Television (SARFT), with the approval of the State Council, will co-issue new rules governing the online audio and video industry in early 2008.

The new rules will limit provision of online audio and video programming to majority state-owned firms. Companies meeting this and other pre-conditions, must then obtain a license from SARFT for the provision of audio and video content, followed by an Internet access permit from the MII.

I rang my friend Victor Koo, former president of Sohu.com and founder and CEO of one of the leading Chinese video sharing sites Youku.com, who told me that this doesn’t actually represent a change in policy: “It’s really just a formalization of the implementation and application process,” he says. “We’ve already been submitting various information they’ve asked us for about our legal structure, and about how we operate. From an operational standpoint it doesn’t make a difference, but from a regulatory perspective it’s going to be similar to when the portals listed.”

There’s definitely precedent for operating in a regulatory gray area until things sort themselves out, and as long as no one crosses major lines–pornography, politically sensitive content–my instincts tell me that none of these regulatory bodies are going to sink a major video sharing or P2P player, as ominous as this bit about limiting online video to majority state-owned firms sounds.

Mark Natkin, who runs Marbridge, agrees. Here’s what he had to say when I spoke to him just now:

Technically most all of the private online video providers are working without the necessary licenses. And that comes in part due to a complication in terms of policy: SARFT is responsible for issuing those licenses, but then the State Council came out with regulations of its own–a moratorium on further issuance of licenses for private Internet video providers. And obviously the State Council [equivalent to the Cabinet] trumps SARFT. There were a couple of companies who received licenses before that [moratorium], like Sina and Tencent. So it’s not the case that every company is operating without a license. But many are–not naming names.

This puts SARFT in a difficult situation in which it would like to issue more licenses but its hands are tied. It’s a gray area. For SARFT, the resources it can devote to monitoring and policing are not infinite. So far the outlook has been that if you give these things enough time, like with many new businesses and industries, they’ll sort themselves out–especially in a business like this where bandwidth costs are so high. China Telecom [China's leading fixed-line carrier and ISP] has been talking in recent weeks about increasing bandwith charges dramatically, even doubling them, and Netcom will likely follow suit. They figure that a lot of these companies will just fall by the wayside by themselves. Already there are rumors that [video sharing company] Ouou.com might be headed that direction.

But I think there’s some real concern about adult video content on certain sites, and also certain political content.

It may be worth adding that, between tighter regulation and higher bandwidth costs, we expect to see significant consolidation in China’s online video industry in 2008. Kicking off the New Year, there have already been insider reports that PPStream and 6.cn are in discussion on a possible merger.

Mark wouldn’t comment on the record about which video sites have been singled out by SARFT for having crossed the line into the realm of the unacceptably naughty, but he intimated that major vid sharing sites have been named.

With literally tens of thousands of new videos uploaded to these vid sharing sites daily, it’s hard to imagine how any of them can keep taboo content from slipping by in-house censors. I don’t envy these guys that task.

Meanwhile, government regulators are only one major concern. As well-funded as the majors (Tudou, Youku, and 56.com) might be, they still face huge server and bandwidth costs that account for upwards of half their monthly burn, and the content delivery networks (CDNs) like ChinaCache CDN–services needed to keep the streaming as fast as Chinese users have come to expect–are relatively expensive, too. And where’s the revenue coming from? One friend of mine tells me that in 2007 to date, one major video site the three leading video sharing sites had combined advertising revenues of only about $6 million.