Business
Tudou, Youku to face tough times ahead
By Lian Mo (China Daily)
Updated: 2010-12-14 11:05
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BEIJING - They may be everyday names in China and may have millions of followers, but Tudou and Youku, two major online video companies, will likely be profitless in the next two years, according to financial experts.
And who laughs last, they point out, may largely depend on the next group of cash-burning competitors to come and challenge the pair.
Youku.com Inc, China's largest online video company, raised $203 million in its initial public offering on Dec 8, beating expectations of $150 million. Its rival, Tudou Holdings Inc also filed for an IPO in the United States last month. But their prospects of making a profit, experts say, are gloomy.
There are myriad reasons for the experts' pessimism. The majority of online video companies in China depend solely on venture capital funding to float their operations.
Broadband server fees in China are extremely high, as are copyright fees due to the country's strict Web regulations on pirated material. The content delivery network service offered by a domestic provider in China was about 50,000 yuan ($7,460) per gigabyte per month last year. The price offered by Akamai, a US information technology content delivery company, is about $0.015 per gigabyte flow.
Chinese netizens also are not in the habit of paying for online content. According to China Internet Network Information Center, China has 420 million Internet users and about 63.1 percent of them watch online videos.
Then there is the problem of poor revenue flow, which for Tudou and Youku comes mainly from advertising. Experts say the advertising revenue is not enough to cover their costs.
More than 94 percent of both Youku and Tudou's revenues came from advertising in the first three quarters - Youku had about 284.4 million yuan in ad revenue while Tudou made 211.6 million yuan - according to Beijing research firm Analysys International.
China's online video market took in about 621 million yuan in the third quarter. Youku took in 22.5 percent and Tudou 18.5 percent.
But "it will be still hard for China online video companies to make sustainable profit in the next two years", said Tang Yizhi, an analyst at Analysys.
Through six rounds of venture capital funding, Youku netted $160 million; Tudou had $135 million through five rounds of funding. Both have been burning through their cash since they launched. This year, however, their losses reportedly abated. In the first nine months of this year, Youku lost $25.5 million, twice as much as Tudou's $12.6 million.
There is also the issue of competition.
Xiao Zhixiang, senior analyst of International Data Corporation, a US market research company, said that because of fierce competition, "video sites have to offer lower advertising prices than portals to attract clients".
If you compare independent video sites such as Youku and Tudou with portals and search engine providers, he said, it is easier for the latter group to rein in advertising clients because they can sell advertising in packages.
The video business run by major Internet companies has grown quickly in recent years. The Internet TV site qiyi.com under Baidu, launched in April, announced last month that it had attracted 86 million visitors in October.
"In fact, there is no other option for Youku and Tudou except filing an IPO. If they could not get listed, it would be hard for them to get more venture investment to continue and some video websites hosted by portals and search engines, such as tv.sohu.com and qiyi.com, may surpass them in short time," Xiao said.
"If Tudou can be successfully listed too, the competitive situation will continue for a while," Tang said.