Rocky road ahead for merger of opposites

PUBLISHED : Wednesday, 14 March, 2012, 12:00am
UPDATED : Wednesday, 14 March, 2012, 12:00am


The planned merger between China's two major online video websites, Tudou and Youku, is the first step on the road to survival in the highly competitive and cash-burning industry, say analysts.

However, their contrasting enterprise cultures and the disposition of their founders, suggests that it will not be a smooth journey.

'Youku and Tudou are hugging together in winter for warmth,' said Xie Wen, an internet analyst and former Yahoo China president.

'But the merger is just the first step. They have similar user groups, but Tudou is more grass roots and has more self-generated content. They will have to deepen co-operation or the merger will be meaningless.'

The companies have announced that they reached agreement on a merger, which is now awaiting the approval of their respective shareholders.

Zhang Fan, with domestic research firm Analysys International, said the proposed new entity would continue to operate their websites independently. 'To combine them into one will be a loss for both sides,' he said.

As the market leader on the mainland, the New York Stock Exchange-listed Youku - which stands for 'what's best and what's cool' in Chinese - provides comprehensive content, especially licensed television programmes and movies.

Youku founder Victor Koo was a businessman, said Zhang. 'The internet is an industry that requires frequent fund-raising, as it relies heavily on capital. Koo is very good at this aspect and his career has run smoothly from the beginning.'

Born in 1966 in Hong Kong, Koo has a bachelor's degree from the University of California, Berkeley; and an MBA from Stanford. He was Sohu's president and chief operating officer.

Tudou founder Gary Wang was born in 1973 in Fujian and obtained a masters degree from the Johns Hopkins University in Baltimore, Maryland, and an MBA from INSEAD in France. Before setting up Tudou, he was China president of multinational media group Bertelsmann.

Wang wed a Shanghai television presenter in 2007 - his second marriage - and filed for divorce within a year. Tudou's listing had to be postponed in 2010 as Wang resolved a divorce dispute in which his ex-wife demanded shares in the firm.

The deal between Youku and Tudou signals that the video-sharing industry will be reshuffled, experts say.

A BOCOM International research report said it expected further mergers. 'We have some concerns about the online video business model, as most of the video site operators are still experiencing significant losses.'

Wang Ran, chief executive of China e-Capital, the Beijing-based investment bank advising Tudou, said a consolidation was under way and, ultimately, no more than four major players would be left.

Youku incurred a net loss of 49.6 million yuan (HK$60.8 million) in the fourth quarter of 2011, widening by 32 per cent from a year ago.

Tudou shares surged as much as 178 per cent to a record high of US$42.81 in US trading when news of the merger was announced, while Youku, owner of China's biggest online video site, jumped to an eight-month high of US$32.75 on Monday.