July 16, 2014 (Chinavestor) We are going to study the competitive environment of the Chinese online video industry, using Porter's five forces industry analysis method.
Degree of rivalry: high
YOKU is operating in a relatively competitive market. With the acquisition with Tudou completed in August 2012, it captures the largest market in Chinese online video market (over 1/3). However, it still faces competition from other video websites like iQiyi.com, and also integrated web portal with video services like Baidu (NASDAQ:BIDU), Sina Corp. (NASDAQ:SINA), Tencent (HKG:0700) and Sohu.com (NASDAQ:SOHU). The competition is for both users and advertisers. The lack of content innovation makes users easily diverted to other video websites. Also, the single profit model relying on advertising adds to the competitiveness of the industry. Unless YOKU Tudou (NYSE:YOKU) manages to differentiate itself in content and diversifies its profit channel, competition remains fierce in the market.
Threat from suppliers: high
Suppliers of the industry are video production firms and telecommunications carriers and other service providers. YOKU’s No. 1 position in terms of market shares does strengthen its negotiation power with suppliers. However, threat from suppliers remains high as companies compete for exclusive content copy rights, leading to a rising content cost. Generally threat from content suppliers is high, and in pursuit of licensed contents, YOKU is also seeking home-produced videos to reduce cost and establish competitive edge.
Threat from substitutes: medium
Substitute services of the industry include tradition media forms and unlicensed video contents. Traditional media forms like televisions, magazines, newspaper are still a more widely accepted advertising channel in China. They compete with YOKU for advertising revenues. At the same time, due to the imperfect copyright regulation system in China, some unlicensed video websites captures user traffic away at a much lower cost.
Threat from buyer: medium
In order for the company to diversity its revenue channel, YOKU need to increase its premium user subscription revenue. However, Chinese users are still not used to the pay-to-view mode and it takes time for this customer mindset to change.
Threat from new entrants: Low
The industry’s high barriers of entry comes from the high content cost and operating expenses, and also the market share pattern already established in Chinese video industry. New entrants will find it hard to start and survive; hence threat from new entrants is low.