China’s YouTube lookalikes file US IPOs

But investors should be cautious, writes Asia Sentinel’s Hamish MacKenzie

Analysts predict two upcoming initial public offerings by leading online video providers in China will receive a warm reception, but investors should beware: there are layers of deep uncertainty in the space, including stiff competition from the country’s search giant.

Within days of each other in November, the online video giant filed on Nasdaq and filed on the New York Stock Exchange to raise US$120 million and US$150 million respectively to sustain and grow their expensive businesses.

Often referred to as “YouTube clones”, the websites host a mix of user-generated video and professional licensed content. Youku recently started producing its own content to host on the site. In terms of revenue and users, Tudou and Youku are the leaders in a crowded field, but in the fast-shifting sands of China’s internet market their success is not guaranteed.

Steep operating costs, uncertainty over regulation, a wary state broadcaster and a challenge by the deep-pockets search company Baidu all threaten Tudou and Youku’s bottom lines, despite impressive revenue and traffic numbers registered by each.

Some analysts say the timing of the filings illustrates the fact that Tudou and Yukou are losing money. “They’re struggling – they’re looking for ways to get funding,” said Ben Cavender, an analyst with the Shanghai-based China Market Research Group. “It’s hard for us to understand where the real value is sometimes with these firms, and how ultimately they’re going to become profitable.”

Neither Tudou nor Youku are profitable, although Tudou, by clamping down on costs, narrowed its losses in the first nine months of 2010 compared to the $15.1 million loss it reported for the same period last year.