China's Top Online Video Sites Headed for IPOs

Youku, Tudou Will Likely List in Q1 2011

BEIJING – Youku, China’s leading online video company, aims to raise $150 million on the New York Stock Exchange, signaling a belief -- at least at the Beijing-based company and among its underwriters at Goldman Sachs -- that Chinese consumers will continue to want to watch Internet content for some time to come.

Youku, founded in 2006, by Victor Koo, a U.S.- and Australia-educated Hong Kong Chinese veteran of Nasdaq-listed web portal Sohu, filed the paperwork for its U.S. initial public offering at a time when competition for the attention of China’s 420 million web surfers intensifies with No. 2 online video web site Tudou.

Both companies are going to market after multiple rounds of private capital fundraising – Youku having raised $160 million and Tudou having raised $135 million, filings with the Securities and Exchange Commission show.

But both sites are losing money and have survived fierce competition and the closure of many early competitors by cooperating with Beijing authorities. Those regulators have the job of keeping the Chinese-language Internet inside the so-called "Great Firewall" free of any material, such as sex, violence and politics, offensive to the one-party state’s conception of a “Harmonious Society.”

Increasingly this means paying an ever-larger staff of self-censors and posting more and more commercially produced and sponsored content, as opposed to the user-generated content that initially made Youku and Tudou as popular in China as YouTube or Hulu are in the West. (Neither YouTube nor Hulu can be viewed in China without employing a virtual private network to get around the censors’ firewall).

In an attempt to broaden its audience, Youku in July signed pacts with South Korea’s CJ Entertainment and Hong Kong’s Media Asia to feature films from their archives online.  Then, in August, the company debuted an original Chinese online movie called The Boxer’s Secret, a short about a fighter losing possibly more than his sight after an accident. The film, the first in a series, was fully funded by Chevrolet and the state-run movie studio the China Film Group.

Both content offerings heralded Youku’s efforts to capitalize on the size of its audience and grow its advertising base among wealthy young consumers to offset the high cost it pays for bandwidth, estimated by some analysts at more $2 million per month.

From July to September, Youku commanded 23%, of China’s online-video market of 621 million yuan ($93 million), research from Beijing-based Analysys International shows. Tudou, which filed for a Nasdaq listing on Nov. 9, followed with 19% of the market that more than doubled in size in the quarter. Credit Suisse and Deutsche Bank will underwrite Tudou’s planned IPO.

Both IPOs are expected in the first quarter of 2011.

In the first half of 2010, Youku reported triple-digit annual revenue growth and recorded more than 200 million unique visitors to its site each month.

Up until recently, most of the imported video clips viewed on the Chinese Internet – including copyrighted content from the major Hollywood studios, such television shows like Prison Break from 20th Century Fox and Lost from ABC/Disney -- were pirated as web sites tried to skirt Beijing's control of media imports and avoid paying license fees.

Around the time of a Dec. 2009 ruling in favor of a U.S. complaint against China at the World Trade Organization, web portal Sohu and video sharing firm Ku6 established a $10 million fund to license Hollywood movies and television to show online. Then, in September, China warned video sharing websites Youku, Ku6, search engine Baidu and a dozen others to remove content in violation of copyright.

Now, in the run up to March, when Beijing’s leadership has agreed to try to uphold the WTO ruling and loosen the state’s grip on the import and distribution of copyrighted entertainment products, Chinese companies now in favor with Beijing are being encouraged to shore themselves up for the coming competition.

In a market whose audience is increasingly divided between web surfers and traditional TV watchers – where what works for one often doesn’t even exist for the other – analysts say that despite the difficulty of monetizing content fast enough to cover overhead and make a profit, the potential is great on China’s Internet.

“There’s lots of amazing, new and different content on the Chinese Internet and we’re seeing more and more ads in front of it,” said Anke Redl, director of Beijing-based media business consultancy China Media Monitor Intelligence.

“What’s uncertain is how the regulatory battles are going to play out. There’s still a lot of gray areas and it’s not clear if some state-run player won’t someday muscle in on the turf of the Youkus and Tudous of the world.”