INTERNET: Youku Tudou Bets Big On Content Production
Bottom line: Youku Tudou’s big bet on original content development could pay dividends in the long term, but will push the company further into the loss column in the short term as it spends heavily on the business.
When the history books are written, the story of China’s online video industry could well be called “A Tale of 2 Business Models”. The most common model is seeing a growing number of players invest big money on development of original content, which is what former leader Youku Tudou (NYSE: YOKU) is doing with a major new announcement in that direction. The other model is seeing players like LeTV (Shenzhen: 300104) focus equally or more on distribution by rolling out new products like smartphones and Internet TVs to deliver their content.
For now at least, the momentum seems to be with the companies that are focusing on delivery channels rather than purely on content. LeTV and smartphone sensation Xiaomi have become two of the hottest companies in the space right now, both by selling TVs and smartphones at low prices, and then recouping their money by selling subscription video services to those customers.
Despite that trend, Youku Tudou’s latest announcement shows it is placing its bets on original content development, with its announcement of a major reorganization in that direction. According to the announcement, Youku Tudou has launched 2 new business units, one of which, Heiyi Studios, will produce TV dramas and content just for the web. (company announcement)
As part of the company’s broader overhaul detailed in the announcement, it is breaking up its content unit into 9 separate centers based on what they produce. The move will instantly create a huge new machine devoted to making a wide range of programs, ranging from TV dramas, news and variety shows, to games, education, music and educational programs.
Youku and its peers like Sohu (Nasdaq: SOHU) and Baidu’s (Nasdaq: BIDU) iQiyi previously bought most of their content from overseas sources like the Hollywood studios, and also purchased from domestic Chinese production houses. But the regulator has recently started limiting the purchase of overseas content, cutting off an important source of programming. Many of the video companies are producing a growing volume of their own content to fill the gap, and also to offer exclusive programs to their subscribers.
LeTV has also invested in programming, but is equally focused on selling TVs and now smartphones at subsidized prices to make sure its content gets wider distribution. By comparison, Youku Tudou is reliant mostly on Internet users, though it also sells its programming to third-party makers of Internet TVs and smartphones.
Investors weren’t too excited by Youku Tudou’s new move, with the company’s shares rising slightly on the day of the announcement, only to give back most of the gains the next day. By comparison, LeTV’s shares have been soaring lately, more than doubling since the beginning of the year.
The surge has made LeTV China’s most valuable online video company with a market value of about $10 billion. By comparison, Youku Tudou was formerly China’s largest online video company, but has seen its shares move in the opposite direction over the last year, losing more than half their value. As a result, Youku Tudou now has a market value of just $3.2 billion.
The moral of all this seems to be that a balance of content and strong distribution is key for the success of online video companies in the current market. LeTV is the strongest player in that regard, and as a result has become the only company to find profits in the space.
For that reason, LeTV’s shares look like a good bet over the longer term, though they may be set for a short-term pullback after their sharp gains. Youku Tudou could continue to struggle in the meantime, since this big push into programming is likely to further widen the company’s losses in the near to medium term.
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