Youku and Tudou are China’s leading online video firms, the country’s YouTube equivalents. Both provide premium licensed content, user-generated content and original in-house productions.
Youku is the leader, with 21.8% market share. Its internet TV platform lets users search, view and share high-quality videos easily across multiple devices. Youku stands for ‘what’s best and what’s cool’ in Chinese.
Tudou, China’s first UGC video sharing website, was founded in 2005. The annual Tudou Video Festival has become the online video industry’s signature event. Tudou follows Youku in market share with 13.7%.
The two companies have been fiercely competing for market share. Last year, they traded charges of copyright infringement, accusing each other of copying content and posting it on their respective websites.
Eventually, Youku sued Tudou for $762,000.
With the rivalry reaching fever pitch, it was a surprise to many when they joined hands. Blogger Sarah Lacy expressed her astonishment on the Pando Daily blog :
This much is for sure: Merging was never plan A for either company. Both Tudou and Youku are very different companies, built from very different management teams with very different cultures. While they’ve played mostly nice with one another, I’ve heard the founders of both make plenty of catty comments about the other one.
Despite the tensions, the two firms realised that desperate times call for desperate measures.
Youku acquired Tudou in a stock-for-stock transaction worth more than $1 billion. Youku shareholders will own about 71.5% of Youku Tudou Inc, while Tudou will own the rest. Tudou’s shares will be cancelled on the New York Stock Exchange.
China’s online streaming video category is very competitive. In the US or Europe, most consumers only use YouTube, Vimeo, Metacafe or some niche network. China, on the other hand, has 10 large networks vying for users’ attentions.
Michael Clendenin, managing director of Shanghai-based RedTech Advisors, said:
We know online video is way too competitive. There are 10 players, where there should be only one to two
Experts predicted industry consolidation for several reasons.
Competitors Baidu, Sina and Youku were all rumoured to purchase Tudou. Baidu was the most likely acquirer due to its high cash reserves, followed by Sina, which already owned 10% of Tudou. Youku was believed to be the least likely acquirer due to lack of capital. The prize: Market dominance for the firm acquiring Tudou. Youku got past the finishing line first.
Because Tudou is (the) only independent, so-called video company in the space, whoever snaps up Tudou is going to give the rest of the industry a very hard time. So I think the premium is justified on this front.
Blogger Jiang Zhang commented on the acquisition :
• China’s online video industry is undergoing consolidation amid rising bandwidth and content costs, and companies are trying to establish economies of scale through M&A
• Youku-Tudou will become the leading online and mobile video platform in China with no clear number 2 in sight
• Smaller players, such as Ku6 Media (KUTV), could become attractive acquisition targets as other large players, such as Sohu (SOHU) and Baidu decide to consolidate them to compete against Youku-Tudou
With the rivals coming under pressure from more established and better funded portals like Baidu and Tencent, and with profits proving elusive, consolidation was always on the cards.
Consolidation is the next step for the industry in general because, while many firms are showing robust top-line growth, none of them are profitable. Blame it on rising bandwidth and content costs.
The large number of players are bidding up content prices. Rising bandwidth costs are due to the increasing use of resource-intensive websites and applications such as games and social networking apps/websites.
With online advertising still nascent in China, video companies find it difficult to recover the money spent on content and bandwidth.
As Sarah Lacy continued on her blog:
When I heard about the Youku-Tudou merger last night I immediately thought it could represent one of two things. Either it was another sign that China’s cultural preference against mergers and acquisitions was starting to shift, or it was the Chinese equivalent of Excite@Home. In other words, two much-hyped, money-losing Web giants shoving themselves together in hopes that size will somehow solve their pressing balance sheet challenges.
The reality may be somewhere in the middle.
Last year, Tudou reported a net loss of $81.2 million, while Youku lost $27.2 million. Something had to give.
Consolidation will help cut and share costs. As Clendenin said:
The cost of purchasing copyrights in the market will be more effectively controlled with fewer – online video companies.
Along with cutting costs, Youku Tudou Inc will establish a clear dominant leadership position in China.
As mentioned by Youku chairman and CEO Victor Koo :
The transaction will produce an industry leader and also lead to improvement in the industry structure and the underlying economics of the online video sector in China.
Each company will bring its strengths to the table, including technology, catalogues, mobile partnerships, original programming and management talent.
Youku will be able to enter the fast-growing mobile video market that Tudou has been tremendously successful in. Tudou will benefit from a larger scale and reach.
According to Victor, Youku Tudou Inc plans to lead China’s next level of video design and development, with the country’s biggest internet user base, most elaborate content library, the most advanced bandwidth platform and the most powerful monetisation capacity.
Analysts said the merger would be good for the highly competitive industry, with several players fighting over more than 500 million Internet users.
Beijing-based Independent online expert Bill Bishop said:
The contract is “a sign of how tough the online industry has become” and both firms must have realized how difficult the future will be if both companies went its own ways.
China’s internet and social media industry is booming, so it made sense to tighten their hold on the market. As Clendenin recently told China Wealth:
Larger trend in China’s internet space is the adjustment to slower growth. If you look at the Internet in general, you see the maturation of the Chinese Internet.
The ban on the world’s biggest social networks – Facebook, Twitter and YouTube – in China throws open opportunities for local social networks.
Social Media has taken China by storm, with over 235 million users in 2011 on the back of affordable net access, mistrust of government-controlled media and an internet generation resulting from China’s one-child policy.
The infographic below taken from Mashable shows that the average Chinese internet user spends a lot more time online than users from around the world, clocking 2.7 hours a day. This proves that the Chinese are more likely to consume video content (which takes up more time and bandwidth).
By and large, consumers haven’t expressed concern at the merger, though some wondered how the user experience would change.
As mentioned by Derek Dong, digital expert of MSLGroup China:
For consumers, they do not particularly care about the merger. Most users feel that the two sites are one in the same already, just with different names, logos and copyright libraries. Consumers primarily care about the user experience changes for the merger, such as if the website will charge fees to play movies.
Most of the discussions have been light-hearted. Take for example, this comic strip that went viral.
The cartoon depicts the CEO of Youku wanting potatoes for dinner. He asks his PA to buy some (Tudou means ‘potato’ in Chinese). Fifteen minutes later, his PA tells him she has bought ‘potatoes’. When asked how many kg, she is shocked.
Take the comments on the website Beijing Shots :
So you two really did get married. Alright, I once again believe in love.
The next to merge will be McDonald’s and Kentucky Fried Chicken, Pepsi and Coca-Cola.
I believe in love now! When will Colonel Sanders and Ronald McDonald become a family?
Some critics claimed that the merger was coordinated by the government to increase control over video sites.
Around 20% were concerned over the video browsing experience, increased advertising and shorter buffer time.
Monopolies around the world have a reputation of taking advantage of customers. This was a fear voiced by the blog entry ‘Does Combination of Youku and Tudou breach China Anti-monopoly law?’ :
In the perspective of economics of scale, surely the combination is beneficial to the shareholders of Youku and Tudou, however, isn’t actually good for consumers. For example, when there is competitive relationship between Youku and Tudou, they would restrict the time and length of advertisements that are inserted in videos to maintain the users. However, through combination, the previous competition disappears, therefore to the consumers, there may be longer loading time, much more advertisements or even subtitles advertising.
The merger could be detrimental to the interests of TV channels and advertisers too. Initially, TV stations and producers could sell content to both websites, but now their revenues could take a hit.
As mentioned on Beijing Shots:
Television stations now have headaches. Originally they could sell to two websites and get money twice but now they’ve f***ing merged.
While brands won’t have to advertise on both portals any more, they will need to pay a lot more to advertise on Youku Tudou Inc because of a rate hike.
Eric Qiu, Analyst at Guosen Securities, told CNBC :
It’s not a bad move for these two but I think the synergy effect could be very limited because advertisers may not want to spend two times the money on both platforms.
The first challenge for Youku Tudou is to minimise costs and losses. While experts don’t expect the merger to make online video in China instantly profitable, it will create a single, powerful operator that has a fighting chance to do so.
The first steps that the entity could take to minimise losses could be:
• Finding a new income channel outside of traditional advertising
• Reducing copyright purchase expenses
• Reducing operation costs
Youku Tudou is expected to command 35%-40% of the market share, leaving the other nine players to battle it out for the rest. As described by a poster on Beijing Shots:
A lot of the copyrights for films have been bought up by these two, and now that they’ve merged… it’s the beginning of a new monopoly… If we look at it positively, this helps the development of original/genuine work. Negatively it means new and smaller video websites won’t have any room to grow, that the prospects are dim for some entrepreneurs and workers in this industry, and the bad ones will close down and have to find new jobs.
Smaller players have a glimmer of hope through consolidation. Players, such as Ku6 Media (KUTV) could become attractive acquisition targets for large players such as Sohu (SOHU) and Baidu once they decide to consolidate and compete against Youku Tudou Inc.
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