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This Company Is a Chinese Youtube in the Making: Here's Why

Thursday - 7/4/2013, 2:32pm  ET

Online video streaming in the second biggest economy of the world is the next big thing.

First of all, Chinese advertisers are willing to pay a lot more for video ads than just normal ads, because Internet users can't ignore vid ads. Second, Chinese Internet users are demanding more and more video streaming. But considering that both the smartphone penetration rate and Internet access in China are still low compared to Western countries, we can be sure that this is just the beginning. That's why many companies, from Chinese IT giants to start-ups, are willing to do whatever it takes to become a leader in the fierce Chinese video streaming market.

But how big is this market? According to iResearch, revenue from online video in China is expected to grow to 33.2 billion yuan ($5.4 billion) in 2016, up from 6.3 billion yuan in 2011: an amazing growth rate shows that this is a huge market in the making. Most of that will come from advertising.

That's why companies like Baidu , which started as a search engine; and Renren , which started as a social network; are trying to catch up as soon as possible. Baidu's recent acquisitions confirm that the giant is not going to let this opportunity go.  And Youku Tudou , which has been streaming video since 2006 and is considered the second largest video site in the world with an Alexa ranking just after YouTube, isn't going to make its competitors' life easy. The market certainly looks fierce, but somebody has to win. Who's that going to be?

Baidu and its acquisitions

Baidu is using the more than $5 billion in cash and cash equivalents it has to reinforce its online video business, iQiyi. That's why the company recently spent $370 million to buy PPS. By merging PPS's user base with iQiyi's, Baidu is expected to become the largest online video platform, by number of mobile users and video viewing time.

But Baidu isn't strong just because of its aggressive acquisitions (in a similar move, it recently paid $306 million for majority stake in top travel search engine Qunar). Baidu's competitive advantage is that by owning the biggest search engine in China, it can easily shift some of its search engine traffic to its new products, like iQiyi. 

PPS also happens to be a good complement to iQiyi's traffic. Most iQiyi users watched videos via Web browser, while PPS is strong at delivering video content via mobile terminals or software. Mobile video streaming is probably the fastest growing segment and it also enjoys higher user retention rates. That's why the PPS acquisition makes a lot of sense. 

That being said, nobody knows if Baidu will be able to succeed in its new ventures. From e-commerce to real estate, iQiyi is just another product inside Baidu's fast-growing portfolio of products. The company is unfamiliar with most of these new businesses, but it has the advantage of counting with the most used search engine in China to drive traffic to its services.

Youku Tudou: 19% share of Chinese online video market and counting

Baidu's recent acquisition of PPS can be seen as a reaction to the merger between Youku and Tudou last year, which created one of the biggest online video content platforms in China. As of December 2012, Youku Tudou had more than 4,500 movie titles, 2,700 television serial drama titles, relationships with 1,800 professional media content owners and over 900 variety shows. It's also doing well with its monetized version, Youku Premium, which has processed more than 4.5 million paid orders since December 2010. 

So how big is Youku Tudou? In terms of mobile, it may be below Baidu in size: it had 100 million monthly mobile users and 80 million mobile apps installed at 2012. Since there was a 50% quarterly growth in mobile daily activity, the number of apps installed in mobiles should be much bigger by now. There should be at least 200 million monthly users by now. Now, Youku Tudou seems to be spending more money in content than Baidu. In 2012, Youku Tudou's content costs were roughly $118 million and Baidu's content costs were roughly $35 million. But revenue may be higher (than iQiyi) as well, considering that Youku Tudou has a premium version active.

The strength of Youku Tudou relies on its monthly unique visitors from home and office PC users: about 260 million for the Youku platform in December 2012. That being said, the company knows well the importance of mobile. In the first quarter earnings call, it was announced that mobile traffic increased 50% quarter-over-quarter to over 170 million daily video views. 

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