MARKET WATCH

MARKET WATCH

OPINION

Will Youku-Tudou Work?

Youku.com and Tudou.com, China’s top two online video websites, on March 12 announced they would merge through a stock swap to form an industry leader in the world’s largest Internet market.

The deal, worth an estimated $1.04 billion, will become the largest stock-swap merger in China’s Internet market.

Youku is listed on the New York Stock Exchange while Tudou in August 2011 issued an initial public offering at the Nasdaq. Once the deal is completed, Tudou will delist its shares.

In reaction to the surprising move, stock prices of the two companies staged a robust rally, a re fl ection that investors see a promising future for the combination.

It is widely expected that the new entity,named Youku Tudou Inc., will achieve signi fi cant synergies and strong revenue growth.However, it remains to be seen whether the new company could make full use of the integration and create a win-win situation.

Benefits of the merger are truly tangible—it could help save costs as competition reduces. For example, because of the closer tie-up, both companies could decrease expenditures on marketing, broadband Internet access, human resources, as well as licensed video content. Moreover, the combination is set to further expand their customer base and deliver a fi rm boost to advertising revenues.

However, realizing those benefits is based on full integration of the two giants.According to the merger plans, Youku and Tudou will coordinate their product development and technology teams, as well as administrative systems. But they will retain independent operation of the two brands and their own online video platforms. That has increased uncertainties on the outlook of the merger.

Youku and Tudou combined control more than one third of China’s online video market,but both firms are spilling red ink, and we cannot take it for granted that the combination could bring them back to the black. The only way to turn loss into pro fi ts is to increase user viscosity. In this regard, the Chinese fi rm has a lot to learn from YouTube.

YouTube enjoyed explosive growth as Internet users uploaded volumes of video clips to the website. This enriched video content of YouTube and also allowed the website to wean off reliance on traditional video suppliers—television stations. That is how YouTube strengthened its user viscosity.

YouTube sources part of its revenues from advertisements inserted in uploaded video clips.In addition, it provides licensed video content such as movies and music to licensed users and shares the charges with content providers.Moreover, it also inserts ads in the licensed programs and shares ad revenues with content providers. The increasing number of customers generated handsome ad revenues, allowing YouTube to make pro fi ts.

As China’s online video websites attempt to replicate YouTube’s success, the key is to build a pro fi table business model and increase user viscosity, instead of simply expanding market share. How to improve customer interaction and build a solid market foothold would be the most important question for the newly established Youku Tudou Inc.

THE MARKETS

Banking Separation

The U.S. banking giant Citi sold its 2.71-percent stake in Shanghai Pudong Development Bank (SPDB) for around $668 million.

Citi China CEO Andrew Au said the transaction marks a new phase in its longstanding strategic relationship with SPDB.

“China remains a top priority market for Citi and in 2012 we will continue to invest in China in support of our growing client base across all lines of business,” Au added.

Earlier this year, the U.S bank has won approval to set up its own sole-branded credit card business in China after running a business with SPDB for almost a decade.

China Mobile Slows Down

China Mobile, one of the country’s largest telecom operators, reported a net profit of 125.87 billion yuan ($20 billion) for last year,reflecting a growth of 5.2 percent year on year, boosted by steady growth in users and wireless traf fi c and services.

The company saw its revenue grow 8.8 percent from a year ago to reach 528 billion yuan ($83.8 billion) in 2011.

But its average revenue per user, a key barometer to determine the long-term growth rate of telecom firms, dropped to 71 yuan($11.3) per month last year from 73 yuan($11.6) in 2010.

As mobile penetration in China becomes increasingly saturated, China Mobile has experienced a gradual slowdown in earnings momentum and faces intensifying competition from rivals China Unicom and China Telecom. The three companies are competing for new users of 3G services that offer faster data speeds and more revenue per user than second-generation services.

China Mobile said it plans to devote the bulk of handset subsidies this year to newer 3G handsets as it aims to grab a slice of the fast-growing segment.