Youku (NYSE: YOKU) is ready to take its relationship with Tudou (Nasdaq: TUDO) to the next level.
Shareholders of both Chinese video streaming websites have approved the acquisition that was originally announced in March. Now it's just a matter of Youku exchanging 1.595 of its American depositary shares for every single share of Tudou.
Youku and Tudou may be the country's leading players, but this isn't YouTube joining forces with Hulu.
Chinese traffic tracker Analysys International pegs Youku and Tudou as commanding 20.9% and 11.5% slices of the video streaming market, respectively, during the first quarter. In other words, the combined companies will still own less than a third of the market.
There will clearly be synergies realized, and Youku is going to need it. The company has yet to post a quarterly profit since going public two years ago, though some analysts see the combined company becoming profitable next year.
If it's hard to monetize video in the U.S., imagine trying to make chunky files pay off at China's lower ad rates.
Youku's trying. It's been signing up studios to its Youku Premium pay-per-stream platform. Joining forces with Tudou will also make it easier to hop on the coattails of SINA's (Nasdaq: SINA) fast-growing Weibo website. SINA snapped up a small stake in Tudou last summer, striking a partnership where Tudou lets Weibo visitors share videos using their Weibo usernames.
The only problem for Weibo is that China's biggest online companies aren't watching the video revolution from the sidelines. Baidu (Nasdaq: BIDU), Tencent, and Sohu.com (Nasdaq: SOHU) are all ramping up their streaming efforts. Unlike Youku, these companies can invest in digital video initiatives while still achieving overall profitability.
Youku's stock has come down a long way since peaking shortly after its IPO. Snapping up the equally profitless Tudou is a sound strategic move. All that Youku has to do now is show the market that it can be China's profitable streaming leader.
I've streamed enough
I initiated a bearish CapsCall rating on Youku since its IPO popped. It's been the right call so far, but the company's long-term prospects are starting to look more appealing. I may switch gears on Youku soon.
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