Chinese Web Video Rivals To Merge

US-listed Chinese online video rivals Youku.com and Tudou unveiled merger plans Monday in a deal worth approximately $1 billion, according to Bloomberg:

The proposed deal will strengthen the new company’s ability to compete with Baidu Inc. (BIDU) and Tencent Holdings Ltd. (700) in adding online video users in a nation where Google Inc. (GOOG)’s YouTube is restricted. Youku and Tudou together accounted for more than a third of China’s Web video advertising revenue last quarter, according to research company Analysys International.

“There are huge purchasing economies for content through this merger,” said Eric Wen, head of Internet research at Mirae Asset Securities in Hong Kong. “They need to have scale, bargaining power with upstream TV producers and deter entry by Tencent and Baidu.”

The two companies have been locked in a recent legal battle over allegations of stolen content on both sides, as television viewers increasingly look to the Internet for their entertainment fix amid a crackdown on state TV content. Forbes’ Russell Flannery called the merger news the “latest sign of consolidation and search for ecnomics of scale” in an industry whose rapid early-stage growth has waned:

It’s instructive to look over the rest of China’s top 25 to see some of the larger cross-over and consolidation trends afoot. No. 1 Baidu, a search site led by the richest mainland Chinese entrepreneur Robin Li on the new Forbes Billionaires List, crossed over into the travel space last year by spending $306 million for a stake in Qunar. Baidu already owns no. 17 Hao123.com, a directory site. Alibaba Group, which is 40% owned by Yahoo and led by Chinese billionaire Jack Ma, owns three sites in the top 25: no. 3 Taobao.com, no. 13 Tmall.com, and no. 19 Alipay.com. No. 19 Renren has built it itself up in part through acquisitions, and No. 12 Soso is owned by the same company that runs No. 2 qq.com, Hong Kong-listed Tencent. No. 22 Sogou.com, another search site, is owned by No. 8, Sohu.com.

As RedTech advisors managing director Mike Clendenin recently told China Wealth, a larger trend in China’s internet space is the adjustment to slower growth. “If you look at the Internet in general, you see the maturation of the Chinese Internet,” he said. Click here for the full Mike Clendenin interview.

Analysts called the deal constructive, Reuters reports, but cautioned against conceding dominance of China’s highly competitive online video industry to the new combined company:

“This creates China’s biggest video site, but it doesn’t create a YouTube – they still have less than 50 percent market share,” said Bill Bishop, an independent analyst based in Beijing.

Youku currently leads the fragmented Chinese online video market with a 21.8 percent share, ahead of Tudou’s 13.7 percent, according to Internet research firm Analysys International.

“We know online video is way too competitive. There are 10 players, where there should be only one to two,” said Michael Clendenin, managing director of Shanghai-based RedTech Advisors.

“After this merger there are still too many players in the industry,” he said, noting others in the market such as Sohu.com Inc, Baidu Inc, and Tencent Holdings Ltd , which is trying to develop an online video platform.

“These are not small, insignificant players. So even though this is a step in the right direction in terms of consolidation, there’s still a long way to go,” Clendenin added.

Twitter is also abuzz over the deal, according to Shanghaiist.