Youku, Tudou battle for video billions
By Sherman So
HONG KONG - A three-year battle to be China's leading video-sharing site is
coming down to the wire, with front-runners Tudou and Youku looking for
recognition as the mainland equivalent of YouTube, the hugely successful
US-based site.
The reward for the fleetest could take the form of an initial public offering
(IPO) in Nasdaq, the United States share market often favored by Chinese
technology companies for raising cash. The founders and venture capital backers
of the first past the Nasdaq post can anticipate cashing in their investments
and consider the prospect of a soaring share value. The losing company faces a
less illustrious future, with a possible sale to a rival or another Internet
company.
The race started in 2005 when video-sharing became the hot trend
in Silicon Valley. After Google bought the unprofitable YouTube at a remarkable
US$1.65 billion in late 2006, more than 100 YouTube wannabes sprang up in
China. Now the race is essentially down to two contestants, Shanghai-based
Tudou and Beijing-based Youku, competing neck-to-neck in the last round.
Tudou - Chinese for "potatoes" - was among the first web sites to provide
video-sharing services in China when it was founded by Gary Wang and Dutchman
Marc Van der Chijs in April 2005. The two knew each other through Van der
Chijs' wife, who worked with Wang in the China operation of Germany's
Bertelsmann Media Group. Like YouTube, at first it was focused on
user-generated content - or as the non-tech world calls it, homemade videos.
They soon secured the backing of venture capital investors looking for the next
big thing in China. Tudou's first batch of investment was seed money of
US$500,000 in 2005. In May 2006, it raised $8.5 million from Granite Global
Ventures, JAFCO and IDG VC. By early 2008, Tudou had raised a total of $85
million over four rounds of funding.
Competitors were already on their tail, especially after Google's acquisition
of YouTube in November 2006, which demonstrated that video-sharing sites were
not only popular but also valuable. At their peak, more than 100 were operating
in China, with most looking exactly like their American model.
Pure homemade video was no longer the main attraction. All kinds of pirated
materials and erotic content were uploaded to grab attention and market share.
Viewers could watch movies that were still showing in the cinemas. Watching TV
shows and movies on the sites became a favorite pastime of the young.
By the end of 2008, 238 million people - 80% of China's Internet users - were
visiting video-sharing sites, according to researcher IDC.
The industry started to consolidate in 2007, driven by the high cost of
developing national networks that would support and deliver video content; only
players with the strongest backing could survive. These included ku6.com, 6.cn,
56.com, and Youku, which with the help of venture capital money started to
assault Tudou's position as the number one video-sharing operator. Of these,
Youku was the most serious contestant.
Youku was founded by Victor Koo, a former president of Sohu, China's
second-largest online portal, in December 2006. To challenge Tudou, it has
raised $70 million equity investment and another $10 million in loans, and has
brought to customers a different approach to content.
Youku focuses on professional content, partnering with local television
stations and production houses to obtain programs and movies. Koo's previous
experience with Sohu, which stocked its online portal with content from local
newspapers and magazines, convinced him that he could have just as much success
with professionally produced video.
"China's film and television industry is very fragmented. It is not difficult
to convince local television stations and production houses to partner with
us," said Koo. Another factor behind his approach is the relatively low
availability of home video.
"Homemade video in America has a history of 10 to 20 years," said Koo. "But it
only became popular in China in the past two or three years. Good
user-generated video content is much less plentiful in China than in America."
While the American television industry is dominated by a few powerful groups
such as Walt Disney, CBS, NBC Universal and Time Warner, China has 298 TV
companies providing more than 2,000 channels. And whereas the American film
industry is concentrated in the hands of a few Hollywood studios, China has
over 1,000 film and television production houses.
By the end of 2008, Youku had signed up over 70% of local television companies
and most of the film and TV production houses. It later expanded to media
companies overseas. Youku offers its partners a small downpayment for the right
to show their programs and shares the advertising revenue with them.
Youku also invested heavily in network infrastructure. When it formally
launched in December 2006, Youku's national network was mostly in place, and in
the following 18 months it continued to expand rapidly in capacity and
coverage.
With a decent network and lots of professional content, Youku's popularity
soared. By the end of 2008, the young site was attracting 23 million visitors a
day, who on average spend an hour a day on the site. As many as 150 million
people were by then visiting the site every month.
Most agreed it had surpassed Tudou as the country's number one video-sharing
site. A report by the China Internet Society in March 2008 said Youku had a
37.3% market share in the video sharing sector, compared with Tudou's 32.9%.
To compete, Tudou changed its strategy. While it continued to encourage
user-generated content, the company shifted its main focus to TV programs and
movies. In late 2008, it launched a high-resolution service called "black bean"
to play professional content.
It also improved its network infrastructure, but was reluctant to spend freely
on bandwidth as Youku had done. "I could easily increase our traffic
immediately," said Wang in November 2008. "Just give a phone call to the
telecom operators and tell them to increase our bandwidth. But what is the
point? Not all traffic is worth pursuing.
"In 2007, we competed with our rivals on traffic. But by early 2008, I realized
that competition on traffic was a black hole. Unless you have the support of
Google," said Wang, alluding to YouTube's corporate parentage, "the business
model is not sustainable."
Helen Wong of GGVC, a venture capital investor that has backed Tudou,
highlighted the contrasting development of the two rivals. "Youku was more
aggressive in spending money. Tudou chose to test the business model before
letting the bandwidth flow freely," she said.
Koo, however, disagreed that higher spending on bandwidth was the only reason
for Youku’s lead on Tudou. “Apart from bandwidth, [the site’s] brand name,
content and technology also count. I believe a better overall user experience
is the key to Youku’s dominance.”
Koo's "aggressive" approach to spending cash was with good reason - he believed
the benefits would quickly follow, given the extra benefit of showing TV shows
and movies compared with amateur video. "As our content is similar to that of
the mainstream media, it is easier to get advertising," he said.
Both Youku and Tudou formally introduced advertising programs in 2008. Their
revenue was mainly from display and video ads from a broad spectrum of Chinese
and international brands, from automaker Ford to leaders in the computer and
electronic gadgets field, such as Samsung, Hewlett-Packard and Lenovo.
Sporting-goods makers were represented by Nike, Adidas and Li-Ning, while
movie-goers' favorites Coca-Cola and KFC were among others recognizing the
value of the sites. This is very different from YouTube, which relies mainly on
ads from Google's AdSense network, Koo said.
Youku’s revenue reached 200 million yuan in 2009, said Koo. Most was from brand
advertisements, although it has some ads from Google and Baidu. And, some
revenue came from its partnerships with e-commerce sites (such as Taobao,
China’s leading online auction site) and wireless value added services
providers. Tudou's ad revenue was also increasing fast. It has increased 40%
from the previous quarter, said Van der Chijs in December.
Yet such are the high bandwidth requirements for carrying video, vastly higher
than is required for merely carrying print, that growing ad revenue probably
means Tudou and Youku are still making losses, say analysts. "It takes $1
million to $2 million a month to run their operations," said an industry
expert.
Perhaps so, but the winds of fortune turned strongly in favor of Youku and
Tudou in mid-2009 to the extent that Tudou co-founder Van der Chijs said
earlier this year, "We think we can afford to increase our bandwidth again."
That is thanks to a significant cut in the cost of bandwidth after a
government-enforced shake-up in the Chinese telecommunications industry. "The
competition of telecom operators increased after the telecom restructuring.
There are three providers, instead of two. Moreover, their network capabilities
have increased," said Wong of GGVC in December. "The unit cost of bandwidth was
reduced by 65% compared with a year ago."
With more bandwidth, Tudou's market share is again about same as Youku, said
Van der Chijs in December. But, Koo believed Youku was still leading Tudou. A
check at Baidu Index, which measures popularity of a site based on searches in
the leading Chinese search engine, showed Youku was about 40% more popular than
Tudou.
Recently, Tudou placed advertisements to hire a public relations director for
international media. Industry insiders said this could mean the company is
ready for a listing overseas.
Youku, on the other hand, raised another US$40 million from its investors. “The
new investment is to further develop our platform and scale up our operation,”
said Koo, “We are also open to strategic investments from other internet
companies, as it can make us even stronger.” Market talk says Youku was talking
to other Internet companies, such as Sina, the country's leading Chinese portal
and Baidu, the leading Chinese search engine.
Without a doubt, the competition between the two will further intensify in
the coming year. The winner will head for an IPO. The loser will probably
be sold to another internet company.
Recently, smaller rival Ku6 was acquired by wireless value-added service
provider, Hurray, which is 51% owned by Nasdaq-listed Shanda, a leading online
game player in the mainland.
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