Much Ado About Video: Youku Buys Tudou

Two of the leading online video companies in China are coming together in a stock-for-stock transaction that will capture over a third of China’s burgeoning online video advertising market. Youku (“excellent and cool” in Mandarin), the number one company in terms of market share (21.8%) is buying out its bitter rival Tudou (“potato” — a play on “couch potato,” with 13.7% market share) in an all-stock deal worth over $1 billion.

Youku shareholders will own around 71.5% of the combined entity, Youku Tudou Inc.” while Tudou shareholders will get 28.5%. Initial reports say Youku CEO Victor Koo will helm Youku Tudou, while Tudou CEO Gary Wang will join the combined company’s board.Youku Tudou

The two companies went public a couple of years ago and clawed and hissed at each other to get user subscriptions and to license content — television series and movies. Late last year, Youku and Tudou accused each other of copyright infringement, where both parties alleged the other copied content from the other’s site and re-posted these illegally in their respective sites. Youku sued Tudou earlier this year for US$ 762,000 (4.8 million yuan) in damages, claiming losses due to Tudou’s misuse of copyrighted videos.

Youku remained strong with a market capitalization of US$ 1.93 billion, while Tudou “got by” with US$ 402 million in market capitalization. Tudou’s shares will be cancelled from the New York Stock Exchange while Youku’s shares will continue to be listed (NYSE: YOKU).

Both companies had difficulty wrangling the online video business in China however. Last year, Tudou reported a net loss of US$ 81.2 million (511.2 million yuan) while just this week, Youku declared a net loss of $27.2 million (172.1 million yuan). The market (513 million Internet users strong) has seemingly baffled online video providers, and advertisers have yet to jump in to make things profitable for major players.