Rivals merge to form online video giant
Two mainland internet firms are setting aside their bitter rivalry to merge, in a record-breaking deal to create the country's biggest online video-services provider - though they still must prove they are profitable.
Youku and Tudou, both Nasdaq-listed internet video companies, said yesterday they had signed an agreement for Tudou to combine with Youku in a 100 per cent stock-for-stock transaction. The new company will be called Youku Tudou Inc.
The merger is valued at US$1.04 billion, according to Thomson Reuters, making it the biggest mainland internet deal by stock swap on record.
Youku is the mainland's largest online video-services provider and the second-largest worldwide, behind YouTube, according to Comscore. YouTube is barred on the mainland.
The deal marks a milestone for the two former rivals, which have locked horns in court over alleged copyright infringement and unfair competitive practices.
Other leading players in the mainland's online market include v.qq.com, ku6.com, tv.sohu.com and PPLive. Youku held a 21.8 per cent market share as of December 2011, while Tudou, ranked No 3, had 13.7 per cent, according to Beijing-based research firm Analysys International.
'We intend to lead the next phase of online video development in China,' Youku's founder, chairman and chief executive, Victor Koo, said in a statement.
Xie Wen, an internet analyst and former Yahoo China president, said: 'The deal will solidify Youku's leading position in China. However, I think deeper integration is needed.'
Despite the two companies' solid market position, two people working in the industry, who declined to be named, did not expect regulators to oppose the deal, saying the mainland tended to take a relaxed view of such transactions.
However, the two companies face the challenge of proving to investors that online video is a profitable business as they contend with the high cost of bandwidth infrastructure and licensing content.
Tudou reported a net loss of 511.2 million yuan (HK$625.74 million) last year, and Youku reported a net loss of 172.1 million yuan.
While their income largely comes from advertising, both are trying to make internet users pay a premium for high-quality content such as new movies.
'After the merger, the new company's competitor won't be other video websites. It will be web portals providing comprehensive services - like Sina, Sohu and Tencent,' Xie said. These portals were heavyweights and video websites were in a difficult position, he said.
'Besides, the deal does not touch the macro-environment under which the video sites are operating,' he said, referring to the strict government monitoring.
Beijing takes a cautious approach to online content, and its so-called Great Firewall has prevented internet users from accessing some of the most popular websites in the world, including YouTube, and social networking websites Facebook and Twitter.