Shares of (Nasdaq: YOKU) took a hit after posting a larger-than-expected quarterly loss last night in its first report as a public company.

The red ink streams on at China's leading video site, as Youku's deficit of $5.7 million -- or $0.13 a share -- was deeper than the $0.03 a share analysts were expecting.

The news isn't all grim. Revenue soared a better-than-targeted 183%, to $23.1 million. The negative gross margins that plagued Youku through the first nine months of 2010 were modestly reversed, as gross margins clocked in positively during the fourth quarter.

This is significant, but only if it's sustainable. Running a video-sharing site in China doesn't come cheap. A third of its revenue gets gobbled up by bandwidth costs. Content costs chew down a sixth of the revenue-mix pie. These slices should shrink as advertisers are willing to pay more to reach viewers, but Goldman Sachs' analyst prediction of profitability by 2012 is probably a reach. Even Maxim Group's 2013 target for Youku to go all Visine on us by getting the red out will be easier said than done.

It's not just the advertisers. The competition is moving in.

Rival Todou has already filed to go public. PPLive just raised $250 million from Asian juggernaut Softbank. Smaller player Ku6 (Nasdaq: KUTV) is already public.

However, Youku's real threat may come from the existing dot-com darlings.

In its latest quarter, (Nasdaq: SOHU) revealed that its share of China's online video market has grown from 3.4% to 13.4%. If digital video can be profitable, it's a safe bet that brand advertising giant SINA (Nasdaq: SINA) and leading search engine Baidu (Nasdaq: BIDU) will invest even more resources into serving up Chinese eye candy.

Youku's market cap remains too chunky for a company that isn't in an ideal situation. If there's money to be made in digital video, the players will multiply. This isn't China's YouTube. Its market leadership position isn't as clear, making it easier for competing sites. If digital video takes too long to turn the corner of profitability in China, then you probably don't want to be in Youku anyway.

Youku has come a long way since going public at a mere $12.80 a share three months ago. Unfortunately, it has even longer to go to grow into its healthy valuation.

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