Chinese online video companies Youku, Tudou merge

Two Chinese streaming video services see the power in consolidating forces for more tech, ad revenue

As the power of online media content becomes a greater threat to cable and satellite-provided entertainment, news hits that the two largest video platforms online in China are merging to become an online force.

Youku and Tudou, are merging in an all-stock deal, to take control of nearly half the online video market in China.

This Youku (NYSE:YOKU) and Tudou (NASDAQ:TUDO) stock-buying merger will result in Yoku buying up Tudou stock and the new company will retain the YOKU stock ticker. 

Monday morning the Youku stock was at $25 with pre-market trading pushing the stock up nearly 19%. Youku's last finical statement, ending Sept. 30, 2011, placed the company revenue at $262.5 million and $2.39 billion in cash and other investments on hand. Tudou closed Friday on the Nasdaq at $15.39 and was seeing a three-fold burst in the pre-market trading to more than $45.  Tudou reported in its financials ending Sept. 30  that its revenue was just under $150 million with $1.04 billion cash and short term investments.

Speculation about such a merge or buyout started last spring as the two companies became the clear leaders in the industry. 

This merger comes at the tail-end of on intense rivalry, which included battles around TV rights and creating indexes of each other’s content on their respective sites. 

The companies announced Monday that the new company will be known as Youku Tudou. Shareholders in Youku will own 71.5% and shareholders of Tudou will hold 28.5% of the new company. 

This new entity is estimates to hold almost 50% of the Chinese online video market, according to research released by TechInAsia, and the next largest online video provider, Xunlei, only controls 11.3%.

Despite the sheer population disparity between China and the US (where China has more than 1.3 billion people to the US's 310 million), China has only generated an estimated $267 million from the online video market, according to Analysys International, while the Interactive Advertising Bureau has put the US Internet video market of more than $7 billion dollars.

In 2010, the worldwide online advertising industry saw some big gains.  Online advertising revenues generated a record $26 billion in 2010, representing an increase of 15% over 2009, which saw $22.7 billion in total online ad revenue. The fourth quarter alone raked in $7.45 billion, a 16% increase over the third quarter and a full 19% increase over the same quarter in 2009.

Search continues to take the largest piece of the advertising revenue pie, accounting for 46% of the total online advertising market, which represents a slight drop from 47% in 2009. But while search’s market share declined, revenues increased to $12 billion, up 12% from $10.7 billion in 2009.

Display ads came in second with 38% of 2010 revenues, totaling $9.9 billion and representing an increase of 24% over the $8 billion generated in 2009. Display ads include banner ads, which drew in $6.2 billion; rich media, which saw $1.5 billion; digital video display ads, which drew $1.4 billion last year; and sponsorship deals, which generated $718 million.

This merger could be the needed push to bring the Chinese market into the the next phase of online video consumption and development -- thus bringing more of those ad dollars. 

By creating a major content provider that can negotiate substantial agreements with content creators and advertisers, the quality and expense of content could greatly increase in coming months. 

Even though the two companies will be combing forces and catalogs, each website will maintain its separate domains to make viewing access easy for each companies consumer base. 

Tudou claims an annual revenue near $402 million compared to Youku’s $1.93 billion. 

The combination has been approved by both companies' boards of directors and is subject to customary closing conditions including shareholder approvals by Youku's and Tudou's shareholders.