Consolidation In Chinese Online Video: Two Biggest Players, Youku And Tudou, Are Merging

The online video market in China is a fragmented scene dominated by national portals where sites like YouTube don’t even get a look in; but today sees that market move one step closer to consolidation, with the news that the two largest video portals, Youku and Tudou, will be merging in an all-stock deal, to take control of nearly half the online video market in the country.

The merger caps off a period of intense rivalry between the two, which included spars over TV rights and the ability to index each other’s content on respective sites. Now, it seems all that is water under the bridge: the companies say in a release that the new company will be known as Youku Tudou, and shareholders in Youku will own 71.5 percent, while Tudou shareholders will have 28.5 percent.

The combined entity, according to figures from iResearch (via TechInAsia), will control 49 percent of the Chinese online video market, with the next-biggest being Xunlei at only 11.3 percent.

The market for online video in China is still in its early days — Analysys International says that the market only brought in $267 million last year — so this deal could be seen as laying the groundwork of sorts for the next step ahead.

Indeed, Youku and Tudou are playing this as “the next phase in online video development in China,” in the words of Youku’s CEO and founder Victor Koo. Most significantly, that will include unprecedented audience scale against which to sell advertising as well as have leverage in premium content negotiations. But it will also mean a huge content library, the most extensive distribution/bandwidth infrastructure and the biggest portfolio of technology to improve the experience and better monetize it.

But although the two are combining, it looks like Tudou intends to retain its own distinct brand in the group. That is important because although its market capitalization is smaller — $402 million compared to Youku’s $1.93 billion (FactSet Research Systems via WSJ), its audience still made up 18.8 percent of all video streams in the country pre-merger. That points to some customer affinity and loyalty that would be crazy to abandon in a market with so many choices.

The companies say that both boards have now approved the transaction, although it is still subject to SEC clearance in the U.S. because both are publicly listed. The two are holding a call later today to talk more details, with a live webcast at 8 a.m. Eastern time to be broadcast here.