Chinese video leaders Youku and Tudou merge to cut costs

The top end of China’s emerging online video segment will now benefit from cost savings after the merger of leading pair Youku and Tudou was approved.

Shareholders of the companies voted in favour of March’s proposal this weekend. The companies, each of which are listed in New York, will survive on Wall Street as the unified Youku Tudou Inc.

Chinese online video is set to explode, but reviewing this pair’s recent performance shows why consolidation is necessary.

Tudou’s Q2 net loss doubled to RMB 154.7 million ($24.4 million) from last year. Youku’s Q1 net loss trebled to RMB 156.1 million ($24.8 million).

By merging, the duo aims to save $60 million on content licensing, bandwidth and other areas. As fast as Chinese online video appetite is growing, vendors are having to spend on intelligently delivering optimising distribution for patchy broadband networks. Just 20 percent of the country enjoys over 2Mbps, according to Akamai.

Youku had a leading 21.8 percent of Chinese online video revenue in Q1, ahead of Tudou with 13.7 percent, according to Analysys International.

They operate much like YouTube (NSDQ: GOOG), majoring on user-uploaded videos but doing an increasing number of deals with domestic TV show makers and global movie companies to host ad-supported and premium videos.

Competitors have been building and buying to stay in touch. The big Sina (NSDQ: SINA) portal had targeted video as its main investment area. It had bought up stakes in Tudou. Now it will end up without influence in Tudou and struggling to build its own capability. Tencent and Baidu (iQiyi) are well-placed to self-fund their own video expansion.