MEDIA: Youku Tudou Eyes Overhaul in Pursuit of Respect

Bottom line: Youku Tudou’s new name and campaign to create more exclusive content look like good strategic moves, but it really needs to sell itself to a larger benefactor to ensure its longer-term future.

Youku Tudou to change name, develop content ecosystem

Youku Tudou (NYSE: YOKU) was once China’s top online video site when it was formed 3 years ago through the merger of the country’s 2 leading players. But those glory days are firmly in the past now, as the company has been overtaken by more aggressive names like LeTV (Shenzhen: 300104) and iQiyi, the service backed by cash-rich online search giant Baidu (Nasdaq: BIDU).

Now media are reporting that Youku Tudou is rolling out a major overhaul that will include a new name for the company, as well as a massive spending campaign to build up an ecosystem for creating its own video content. The campaign certainly seems interesting and long overdue. But I’ve argued for a while now and still believe that what Youku Tudou really needs is to consider selling itself to a stronger Internet partner, rather than trying to continue as an independent company.

According to reports in numerous Chinese media all citing Youku Tudou CEO Victor Koo himself, the company is formally ditching its longtime name, a move that was probably long overdue. The company’s current name is relatively awkward to begin with, and was the combination of the 2 leading Internet video sites that merged to form the company in 2012. (Chinese article)

The reports don’t contain any new English name for the company and only the new Chinese name of Heyi, roughly translating to unified or synchronous. The change seems like a relatively good idea, since the former name was both bulky and seemed more like a political move that helped Youku to win over Tudou’s founder Gary Wang when the 2 companies signed their breakthrough merger 3 years ago.

But moving past the largely symbolic name change, the reports also say the new Youku Tudou is aiming to spend 10 billion yuan, or roughly $1.6 billion, to develop an ecosystem to create exclusive content for its various platforms. There’s not much more detail, and I expect we’ll see more when the company makes a formal announcement.

In Search of Exclusivity

But the bottom line seems to be that Koo believes that buying programs from third-parties is too costly and lacks the exclusivity that Internet video companies will need to survive and thrive in the future. Thus it appears he wants to develop his own internal ecosystem that will encourage individuals and small companies to make their own video, which then will become exclusive property of Youku Tudou.

I expect the news should create some much-needed buzz around Youku Tudou’s stock, which hasn’t been a stellar performer lately. The company listed in 2010, and promptly saw its shares soar from an IPO price of $12.80 to as much as $64 on big hopes that the company would become China’s equivalent of Google-owned (Nasdaq: GOOG) YouTube.

But Youku Tudou failed to find a sustainable formula for profits, and investors rapidly lost interest as it got surpassed by LeTV and iQiyi. The former has benefited from its early arrival to the industry and business model that wins customers through the sale of Internet-enabled TVs, while the latter has drawn on Baidu’s big resources to spend heavily on gaining new market share. Youku Tudou found a strategic partner by selling  nearly 20 percent of itself to e-commerce giant Alibaba (NYSE: BABA) last year for $1.2 billion. But the pair never seemed to find much synergy as Koo maintained his independence.

This latest move appears to indicate that Koo has no intention of selling his company, and plans to keep seeking his own formula for success as a standalone entity. That looks like a risky strategy for a company that lost $83.5 million in its latest reporting quarter, more than triple its loss from a year earlier, as it spent heavily on product development and buying third-party content.

All that said, I do think this new drive could ignite a brief rally for the stock. But that enthusiasm will quickly fade as the new Youku Tudou continues to post widening losses on related to its new spending campaign, without any prospects of becoming profitable anytime soon.

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