Rumored Tie-Up to Challenge Youku-Tudou 腾讯、搜狐和百度或结盟挑战优酷-土豆联姻

By newsdoug on April 24, 2012

Sohu leading rumored new video tie-up? I’ve saved the most interesting tidbit from the China Internet space for my last posting today, which comes in the form of a report that 3 Internet leaders are preparing to pool their online video businesses in a bid to challenge the industry titan created by the recent merger of Youku (NYSE: YOKU) and Tudou (Nasdaq: TUDO), the sector’s top 2 players. The report cites an unnamed industry source saying that Tencent (HKEx: 700), Sohu (Nasdaq: SOHU) and Baidu’s (Nasdaq: BIDU) Qiyi will announce the deal this week, possibly as early as Wednesday, creating a second major platform that would act as a single buyer of copyrighted content such as popular movies and TV shows. (Chinese article) The fact that the source is saying a deal is so close, and also the proximity to the big Youku-Tudou merger announcement last month (previous post), lead me to believe it’s quite possible this story is true. What’s more, this new tie-up also appears to be a direct response to the Youku-Tudou announcement, meaning the deal was probably arranged very quickly, which is not a good sign for this kind of major tie-up. On paper at least, such a new tie-up would certainly look intriguing. Sohu is currently China’s third largest online video company with 13.3 percent of the market, while Qiyi is sixth with 6.4 percent, while Tencent is a relatively small player, meaning the new platform would have around 20 percent market share. That would be about half of Youku-Tudou, which will have around 40 percent market share when that deal closes. From a purely superficial perspective, the prospect of a Sohu-Qiyi-Tencent tie-up certainly looks attractive and would be the latest much-needed consolidation of this fragmented and money losing industry. These new larger players would have more bargaining power to get rights to the latest movies and TV shows at better prices, helping them in their drive to become profitable. As if to trumpet that fact, Youku has just announced its latest major licensing deal, this time obtaining exclusive China distribution rights for 2 hit TV series, “Survivor” and “America’s Next Top Model”, from US broadcaster and program maker CBS Studios (NYSE: CBS), marking the latest in a string of similar major licensing deals. (company announcement) On the one hand I’m quite encouraged by this kind of M&A activity, as China’s Internet companies have traditionally resisted such tie-ups due to reluctance by their founders to yield control, even though such consolidation is sorely needed to create major players that can keep expanding and perhaps even someday become global names. But at the same time, the presence of so many strong-willed personalities could make such mergers difficult and even ultimately fail in some cases. Early signs indicated that the Youku-Tudou marriage could suffer from the strong personality of Tudou founder Gary Wang. The founders of Tencent, Baidu and Sohu also have equally strong personalities, especially Sohu’s Charles Zhang, who would presumably lead the leader of any new tie-up. All that said, I would still look for Youku and Tudou to complete their merger and for this new tie-up to also move ahead, though there could be many difficult growing pains for both new partnerships in the year ahead.

Bottom line: Reports of a Sohu-Tencent-Baidu video tie-up could well be true, creating a major new player to counter the industry leader formed by the merger of Youku and Tudou.

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