Local media have been buzzing these past few days with word that online search leader Baidu (Nasdaq: BIDU) is on the cusp of clinching a deal to buy video sharing site PPS, in a move that would instantly create a solid new number-two player in China. The only problem is that this space is turning out to be a very difficult one to earn money, as reflected by an unrelated new interview showing profits could still be years away for money-losing industry leader Youku Tudou (NYSE: YOKU).This latest news from Baidu doesn’t surprise me at all, since the company has openly said it is looking for major acquisitions after raising $1.5 billion through a bond offering late last year. (previous post) Baidu has been desperately trying to diversify beyond its core search business for the last few years, but most of its ventures in areas like social networking (SNS) and e-commerce have flopped. The latest flop was in the headlines just last week, when media reported that Baidu was preparing to quietly shutter its online jobs service Baijob. (English article)
The company’s lone successful foray outside of search has been its purchase of a controlling stake in online travel services firm Qunar in 2011 for $300 million. Baidu now wants to try to replicate the Qunar success with more acquisitions of similar size. The search leader’s name has come up repeatedly in the last few months in connection with a wide range of potential acquisition targets, ranging from security software to social networking.
The latest reports say Baidu is close to a deal to buy PPS for $350-$400 million, with plans to combine the service with its own iQiyi video sharing service. (English article) iQiyi and PPS are currently the nation’s third and fourth largest players, but their combination would give them a market share of 17 percent. That would propel the new entity into the number-two position for the sector, passing the 10 percent share for the current second largest player, the video site operated by web portal Sohu (Nasdaq: SOHU). This newly combined entity could even challenge sector leader Youku Tudou, which now controls about 30 percent of the market.
So what do I think of this combination? I’ve previously applauded Baidu for its Qunar acquisition, as I do think Baidu has shown that it’s not very good at organically developing new businesses. This newest acquisition also looks smart because it would combine PPS with Baidu’s own modestly successful iQiyi. One big challenge Baidu could face would be integrating the 2 units. Among other things, media are reporting that piracy is quite prevalent on PPS, and Baidu has been making a concerted effort to tackle that problem on its own sites.
But perhaps most importantly, industry leader Youku Tudou has shown that earning profits in the video sharing space is extremely difficult, and there’s no reason to think Baidu will be able to find success in the area either. Youku Tuodu has been in business for more than 6 years now and still loses massive money, posting a net loss of $68 million last year alone.
The most recent comments from Youku founder Victor Koo certainly don’t look too encouraging either. In an interview last week, Koo refused to forecast when his company might become profitable, saying it will focus for now on developing original programs and building its mobile services. The comments mark a shift from Youku’s previous focus on content acquisition from third-party movie and TV program makers, and tells me the company is still looking for a formula for success. At the end of the day, I wouldn’t expect to see any profits from Youku Tudou for at least 2 more years, and this new iQiyi-PPS combination could face an equally challenging future to its bottom line.
Bottom line: The combination of Baidu’s iQiyi with PPS will create a solid number 2 in China’s video sharing sector, but the new entity will face integration issues and difficulty earning profits.
This article was first published in the online edition of the South China Morning Post at www.scmp.com.