China's online video giants shake hands on $1bn deal

Chinese online video giants Youku and Tudou have announced they are to merge in a billion dollar deal which should see the two finally put their well publicised courtroom battles behind them.

The all-stock deal, expected to close in the third quarter, will give birth to Youku Tudou Inc, reportedly to be headed up by Youku chairman and CEO Victor Koo with Tudou CEO Gary Wang on the board.

However, Tudou, which is the junior partner in the merger, will retain its brand identity and platform, according to the firms.

In a canned statement, Koo said the combined entity would be able to lead the next phase of online video development in China.

Youku Tudou Inc. will represent a differentiated leader in the online video market in China with the largest user base, most comprehensive content library, most advanced bandwidth infrastructure and strongest monetisation capability within the sector. Youku Tudou Inc. will have the reach and scale to bring our users high quality content at high speed.

This transaction would also lead to improvement in the industry structure and the underlying economics of the online video sector in China. We expect to see significant synergies across a number of areas including leveraging licensed content over a larger user base and realising efficiencies in bandwidth management and other common expenses.

With Youku and Tudou on market shares of approximately 22 and 14 per cent respectively, the entity will not be the all-conquering online video behemoth that YouTube is and for the time being at least will want to concentrate on a domestic market still split between a range of smaller players including Sohu and Qiyi.

Gartner analyst Sandy Shen told The Reg that the deal is all about scale and costs savings, in the short term at least.

“This will make it much harder for the competitors since online video is a scale business that requires heavy investment in user acquisition, copyrighted content and bandwidth,” she added.

“A few winners will take all, and the rest will be forced out of the market.”

Beijing-based Ovum analyst Jane Wang agreed, arguing that “other competitors will face pressure to challenge this big new company”.

“The new company’s business is currently focused on the Chinese market and will have little impact on YouTube’s business on the world stage,” she added.

Presumably the tie-up will also mean an end to the kind of acrimony which led to Youku filing an unfair competition law suit against Tudou last month.

In it, Youku reportedly alleged that remarks made by Tudou had caused its share price and ad revenues to fall, and ordered its rival to apologise and pay 4.8 million yuan (£480,000) in compensation.

However, with both firms reporting losses for last year, they have obviously realised they’d be better off together than facing each other across a court room. ®