Q+A - What do China YouTubes' IPOs offer investors?

SHANGHAI Fri Dec 3, 2010 6:07am IST

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SHANGHAI (Reuters) - China's top two online video sites, Youku and Tudou, are set to make their U.S. trading debuts over the next few months.

With similar offerings and near identical business models, here are some questions and answers about the companies.

Earlier this month, Tudou filed for an IPO of up to $120 million, while Youku said it will raise up to $169 million.

WHAT IS THEIR FINANCIAL FOOTING?

YouKu and Tudou are both online video websites that stream video clips to millions of Chinese users. Their main source of revenue is advertising. According to documents filed with the SEC, Youku's net revenue for the first nine months of the year was $35.1 million while Tudou's was $33.6 million.

Tudou's net revenue has grown an average of 317 percent over the past two years and for the first nine months of the year rose 230 percent compared to the same period a year ago.

Youku averaged a net revenue growth rate of over 1,000 percent over the past two years and saw its revenue rise 135 percent in the first nine months of the year over the previous year.

On the cost front, Youku's total operating expenses and cost of revenues collectively was about a third more than Tudou's in the first nine months of this year.

For online video sites, a large chunk of their cost of revenues goes to acquiring bandwidth.

In China's highly competitive and fragmented video space, Youku had a slight lead over Tudou in terms of market share by advertising revenue at 22.5 percent versus the latter's 18.5 percent in the third quarter, according to research firm Analysys International.

In the nine months ended September, Youku had a net loss of$25 million while Tudou had a net loss of $12.5 million.

Collectively, Tudou and Youku have raised over $200 million in private equity funding. Tudou is backed by Singapore's sovereign wealth fund Temasek Holdings [TEM.UL], Granite Global Ventures and General Catalyst Partners. Youku is backed by Chengwei Ventures, Maverick Capital and Brookside Capital.

IS THERE ANY DIFFERENCE IN OFFERINGS, BUSINESS MODEL?

Hardly. China's online video sector is fragmented and highly competitive. Tudou, Youku and Ku6 (KUTV.O) all offer user-generated content, licensed productions and inhouse productions. They rely on advertising for revenue although Tudou said it might adopt a subscription fee model similar to U.S. online video firm Hulu further down the line.

For their IPO, Tudou said it will use its proceeds to fund the development of its own content, expand its bandwidth and refine its platform. Youku said it will spend its proceeds on investing in technology infrastructure, content acquisition and sales and marketing.

Some analysts were cautious on both Youku and Tudou.

"We are generally a little more cautious on the video names because so far the business model is not very scalable," said Jin Yoon, a Hong Kong-based analyst with Nomura.

"As you have more users, you need more bandwidth and if you have more bandwidth you have more users. So user access and costs go up hand-in-hand, so there is no scalability in the business yet until we see some advertising dollars ramp up," Yoon added.

HOW DO THEY STACK UP AGAINST YOUTUBE AND HULU?

China's online video market by advertising revenue will be worth about 2.9 billion yuan ($436 million) by the end of the year, according to iResearch. By comparison, the U.S. online video market is slated to hit $1.3 billion by end 2010, according to Parks Associates.

Hulu, YouTube and Netflix (NFLX.O) are dominant in the U.S market and depend on a mix of advertising and subscription fees for revenue.

Sources recently told Reuters that Hulu is considering an effort to raise $200 million to $300 million in a public offering early next year that would help fund its efforts to expand and pay for more content deals.

Hulu's Chief Executive Jason Kilar also told Reuters this month that the company's revenue was on track to double this year to $240 million. According to media reports YouTube is due to turn a profit this year on about $450 million of revenue.

(Editing by Muralikumar Anantharaman)

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