Youku Inc. and Tudou Holdings Ltd., China’s two largest online video companies will merge in a $1 billion all stock deal.
The new company, to be called Youku Tudou Inc., will hold a one-third market share in the crowded Chinese video market. It will be headed by Youku chairman and CEO Victor Koo.
The two rivals have been in court since January battling over unfair competitive practices and copyright infringement. Youku filed the lawsuit and was seeking $762,000 in damages.
Merging the two companies not only ends the lawsuit, but also strengthens their ability to compete against rivals Tencent Holdings Ltd., Baidu Inc. and others. There are currently ten players in the Chinese online video market, where Youku holds 21.8% of the market share while Tudou has 13.7%.
Rivals welcome the merger. A spokesman for Baidu told Reuters: "The cost of purchasing copyrights in the market will be more effectively controlled with fewer online video companies. It will also reduce the competition for bandwidth and market talent."
The merger is expected to save Youku Tudou $50 million to $60 million in the next 12-18 months. Youku and Tudou will operate as separate platforms, attracting different customers.
The merger still needs to be approved by shareholders, and is expected to be finalized sometime in the third quarter.
Analysts say the Chinese online video market is too fragmented and competitive, but believe this is a step in the right direction.
Chinese video websites have 400 million viewers, and analysts predict this will be the future of advertising and television.
When the online video sites went live, they imitated sites like YouTube, which is banned in China. Today, however, the sites act like television stations, producing their own programming and importing foreign shows. Viewers can download television shows and movies to their computers and smart phones.
Chinese video sites enjoy less censorship than state run television and radio stations and newspapers. As a consequence, many viewers have been driven away from traditional television stations.
According to Analysys International, revenue for Chinese video websites totaled $275 million in the fourth quarter of 2011.
Key Facts - China Online Video Market (source: Research in China)
- The Chinese segment of the online video industry is forecast to continue a compound annual growth rate of 30% by 2016.
- In 2010, online video market revenue in China totaled $359.5 million, which marks a 170% increase from the previous year.
- Video sharing companies Youku and Tudou are the largest Chinese online video companies not only in terms of revenue and the number of users, but also in content resources.
- Besides Youku and Tudou, other Chinese online video companies have gone public successfully such as Ku6 and Letv, as well as other companies involved in online video industry like Xunlei and Phoenix New Media.