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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There’s an interesting report in the domestic media saying popular online men’s fashion retailer Masa Maso is planning to slash its advertising budget by half this year, a move that will probably be repeated throughout the industry as many e-commerce firms, most of them losing money, go into cash conservation mode in their struggle to survive. Of course that also bodes poorly for companies that depend heavily on such ad spending for their revenue, from search leader Baidu (Nasdaq: BIDU), which gets nearly all its revenue from advertisers, to web portals like Sina (Nasdaq: SINA) and Sohu (Nasdaq: SOHU) and video and social networking sites likes Youku (NYSE: Youku) and Renren (NYSE: RENN). Let’s look at the report itself, as it does contain some details that show how the situation could play out. It cites a Masa Maso executive saying the company began slashing its ad spending in the second half of last year as part of a strategy to focus more on customer retention, in what looks like a roundabout way of saying it finally realized it had to cut costs and become profitable or risk going bankrupt. (
It was almost inevitable that China’s second biggest web portal, Sohu.com (Nasdaq: SOHU) was destined to disappoint investors with its fourth-quarter results, after it notched a blowout third quarter on the strength of potential in its online search and video services. So it shouldn’t come as too big a surprise that investors used the company’s results, which saw its profit fall 40 percent, largely due to a one-time write-off, to sell Sohu shares, which tumbled 15 percent after the report came out. (
Five months after buying a 9 percent stake in Tudou (Nasdaq: TUDO) shortly after its New York IPO, Sina (Nasdaq: SINA) has just announced its first tie-up with the online video site, China’s second largest, in what looks like the first of more to come, perhaps ending with the biggest tie-up of all, an outright acquisition. Under their first tie-up announced late on Friday, the 2 companies have launched a platform allowing sharing of Tudou videos on Sina’s popular Weibo microblogging platform. (
The search-blocking wars that gripped the e-commerce sector in the second half of last year have spread to the online video space, where Tudou (Nasdaq: TUDO) and Sohu (Nasdaq: SOHU) video, the second and third largest operators, have blocked their content from a video search engine operated by top player Youku (NYSE: YOKU). (
