June 7, 2011 (Alan Cho) The amount of internet users in China has been growing at an exponential rate for the last decade. As a result, when internet video companies Youku.com Inc. (NYSE:YOKU) and Tudou announced that they would be going public at the end of 2010, many investors immediately saw the potential in this market. Initial prices at which the stocks were traded at were quite large, giving the companies market capitalization that were perhaps much higher than the companies’ actual worth.
A prime example of this would be Youku.com Inc. (NYSE:YOKU); ever since the company went public, its stock price has been in fluctuation and its current market capitalization is over $4 billion, which is very high for a company that has yet to report any net gain. Tudou, a company which is expected to have an IPO soon as well, has a similar story, with excitement revolving around a company that has yet to produce a net gain. This is not to say that the online video industry is heavily overpriced, since there may be some unseen potential. However, there is a possibility that the companies are overbought.
As of 2010, the revenue of the online industry in China was approximately 3.14 billion RMB, compared to 1.76 billion RMB of 2009. Of this, the three largest companies, in terms of revenue, were Youku.com Inc. (NYSE:YOKU), Tudou.com, and Ku6 Media.com (NASDAQ:KUTV). In terms of site traffic, Youku, Tudou, and Qiyi (run by Baidu) have been seen to be the most active. Statistics from the first quarter of 2011 show that these three companies make up over 70% of the online video market share by visiting time. This may be due to change soon, as with the recent IPOs of Youku and Ku6, other companies have begun considering entering the market. Internet search engines such as Baidu.com Inc. (NASDAQ:BIDU) and Sohu.com Inc. (NASDAQ:SOHU) have been making attempts to join the market.
Opportunities and Threats
As internet services become available to more and more of China’s population, opportunities for online video companies grow correspondingly. Living conditions and education levels are increasing in the rural areas of China, and with this, internet availability has been increasing as well. As availability increases, online video providers may see a resulting increase in activity and revenue gained.
However, there are various factors that companies must be wary of as the industry continues growing. The threat of new entrants is low due to the high amount of capital required when starting a business in the online video industry. However, existing internet companies with large financial backing may post a real threat when entering the industry. This is seen with the case of Qiyi.com, owned by Baidu.com Inc. (NASDAQ:BIDU), which has generated browsing times that have doubled within its last two quarters. http://www.chinainternetwatch.com/
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