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Youku, Tudou tie the knot, hoping love isn't blind
By Ding Yining |
March 15, 2012, Thursday
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Print Edition
Print Edition
SHANGHAI-BASED Tudou finally decided on what to do with its money-losing online video business. It's merging with rival loss-maker Youku.com in the biggest deal to date in the world's largest Internet market.
China's top two video sites said on Monday that they will join hands to become a dominant player in the industry. They are betting that their combined strength will attract the advertising revenue they badly need to dig themselves out of the red. The US$1.04 billion share swap will give Youku, China's biggest online video site, a 71.5 percent of stake in the new company, to be named Youku Tudou Inc. Following the announcement, Tudou's shares in the US surged more than 150 percent and Youku's advanced as much as 30 percent.
"It is a win-win merger for both sides because they will be able to offer a wider range of content to viewers and cut patent costs, thus boosting profit making capabilities," said Analysys International researcher Huang Meng.
Tudou Chairman and Chief Executive Officer Gary Wang will sit on the board of the new company, with Youku's chief Victor Koo as chairman. The deal is expected to be completed in the third quarter this year.
Turn a profit
But can two loss-making companies find profit in marriage and in reshaping the landscape of the online video market? Most industry analysts are forecasting that video websites will be able to turn a profit by the end of this year, and that prediction is expected to stand despite the fact that the new combined company will gobble up more than one-third of the highly competitive market.
The sector has grown at an average rate of about 133 percent for each of the past three years, but increases in advertising income haven't kept up with the higher costs of acquiring quality content.
The teaming up of Youku and Tudou came as a surprise. The two rivals have been engaged in long-term legal battles over copyright issues.
Tudou said last December that it would seek 150 million yuan (US$23.6 million) in compensation from Youku for infringing on its exclusive rights to air certain entertainment series and animation films. Youku countersued, saying the accusation damaged its reputation.
Microbloggers commenting on the deal joked that love in the air after years of watching the quarreling couple.
Youku's Koo said he hopes the new company will establish a clear and dominant leadership position. On a conference call following the announcement of the merger, he said sharing content, traffic and technology will help the new company tap additional revenue sources and cover a broader base of users. The combined company will operate through two independent sales and editorial teams, although they will share content and viewers. Koo added that economy of scale is crucial to profitability.
Of course, viewers can be fickle, surfing among sites to find what they like best. I think there is a big overlap between Youku and Tudou's viewers.
"It is true that viewers will be able to enjoy a bigger variety of video content, but that won't prevent them from going to other rivals' sites, unlike what happens on social networking sites where users are very loyal and won't easily shift grounds," said Li Yan, an analyst with iChinastock.com, a website that tracks overseas-listed Chinese stocks.
Youku raised US$633 million through an initial public offering and additional placements at the end of 2010, and Tudou raised US$174 million in an IPO eight months later on the Nasdaq.
Fewer players
In the past year, Tudou reported a net loss of 511.2 million yuan, while Youku lost 172.1 million yuan.
The majority of Tudou and Youku's revenue relies on advertising income, and that's a competitive minefield.
The new entity isn't expected to scare off serious rivals like Baidu and Sohu, who both operate online video arms.
The merger is hardly likely to really change an industry business model based on the need to acquire ever more costly high-quality content to keep users entertained. The only real difference may be that there are fewer players plying the same strategy of chasing market share instead of margins.
Still, the Youku-Tudou merger will give both parties a fighting chance in a fast-changing sector. Some analysts describe it as a battle of attrition to see who's standing up last.
It will surprise no one if more mergers and acquisitions are forthcoming as players seek strength in consolidation.
China's top two video sites said on Monday that they will join hands to become a dominant player in the industry. They are betting that their combined strength will attract the advertising revenue they badly need to dig themselves out of the red. The US$1.04 billion share swap will give Youku, China's biggest online video site, a 71.5 percent of stake in the new company, to be named Youku Tudou Inc. Following the announcement, Tudou's shares in the US surged more than 150 percent and Youku's advanced as much as 30 percent.
"It is a win-win merger for both sides because they will be able to offer a wider range of content to viewers and cut patent costs, thus boosting profit making capabilities," said Analysys International researcher Huang Meng.
Tudou Chairman and Chief Executive Officer Gary Wang will sit on the board of the new company, with Youku's chief Victor Koo as chairman. The deal is expected to be completed in the third quarter this year.
Turn a profit
But can two loss-making companies find profit in marriage and in reshaping the landscape of the online video market? Most industry analysts are forecasting that video websites will be able to turn a profit by the end of this year, and that prediction is expected to stand despite the fact that the new combined company will gobble up more than one-third of the highly competitive market.
The sector has grown at an average rate of about 133 percent for each of the past three years, but increases in advertising income haven't kept up with the higher costs of acquiring quality content.
The teaming up of Youku and Tudou came as a surprise. The two rivals have been engaged in long-term legal battles over copyright issues.
Tudou said last December that it would seek 150 million yuan (US$23.6 million) in compensation from Youku for infringing on its exclusive rights to air certain entertainment series and animation films. Youku countersued, saying the accusation damaged its reputation.
Microbloggers commenting on the deal joked that love in the air after years of watching the quarreling couple.
Youku's Koo said he hopes the new company will establish a clear and dominant leadership position. On a conference call following the announcement of the merger, he said sharing content, traffic and technology will help the new company tap additional revenue sources and cover a broader base of users. The combined company will operate through two independent sales and editorial teams, although they will share content and viewers. Koo added that economy of scale is crucial to profitability.
Of course, viewers can be fickle, surfing among sites to find what they like best. I think there is a big overlap between Youku and Tudou's viewers.
"It is true that viewers will be able to enjoy a bigger variety of video content, but that won't prevent them from going to other rivals' sites, unlike what happens on social networking sites where users are very loyal and won't easily shift grounds," said Li Yan, an analyst with iChinastock.com, a website that tracks overseas-listed Chinese stocks.
Youku raised US$633 million through an initial public offering and additional placements at the end of 2010, and Tudou raised US$174 million in an IPO eight months later on the Nasdaq.
Fewer players
In the past year, Tudou reported a net loss of 511.2 million yuan, while Youku lost 172.1 million yuan.
The majority of Tudou and Youku's revenue relies on advertising income, and that's a competitive minefield.
The new entity isn't expected to scare off serious rivals like Baidu and Sohu, who both operate online video arms.
The merger is hardly likely to really change an industry business model based on the need to acquire ever more costly high-quality content to keep users entertained. The only real difference may be that there are fewer players plying the same strategy of chasing market share instead of margins.
Still, the Youku-Tudou merger will give both parties a fighting chance in a fast-changing sector. Some analysts describe it as a battle of attrition to see who's standing up last.
It will surprise no one if more mergers and acquisitions are forthcoming as players seek strength in consolidation.
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