After shopping around for an investor for much of this year, money-losing video sharing site PPTV has finally found a new patron in retailing giant Suning (Shenzhen: 002024). I’m quite happy to see this latest development in China’s rapidly consolidating online video space, as it means I can finally stop writing about all the latest rumors that have popped up for the last 6 months surrounding PPTV. Rumors of this particular tie-up first emerged about a month ago (previous post), and I’ll admit that this deal doesn’t look particularly attractive to me.
But all that said, PPTV and its investors must be breathing a big sign of relief, as the company will now get some much needed cash through the new tie-up with Suning and Chinese private equity giant Hony Capital. Under the deal, Suning and Hony will give $420 million for 44 percent of PPTV, with Suning contributing $250 million of that. (English article) It appears that debt repayment or a write-off is also involved in the tie-up, since the 2 sides are saying the deal values PPTV at just $568 million — far less than the $1 billion market value that the investment would otherwise imply.
The deal hopefully marks the end of a long odyssey this year for PPTV as it sought to raise cash to fund its operations, which are thought to be losing money. Some of the earliest rumors emerged back in May, when reports said PPTV was in talks for a major investment from web portal Sohu (Nasdaq: SOHU), which also operates a popular video-sharing service. But those talks later fell apart, and later reports had the company on the cusp of signing a tie-up with e-commerce leader Alibaba as recently as August.
This particular deal comes the same week that media have reported that Sohu is now close to a deal for a strategic investment in Xunlei Kankan, which is now China’s only remaining major independent video sharing site. (previous post) If that deal results in a tie-up, it would create a Chinese video sharing market led by Youku Tudou (Nasdaq: YOKU), Baidu (Nasdaq: BIDU) and Sohu in the top 3 positions, with Suning emerging as relatively a distant fourth.
So, what do I think of this deal? From PPTV’s perspective, it certainly looks like a good tie-up. As one of China’s biggest traditional retailers, Suning is now investing heavily to build up its e-commerce and other Internet businesses. That means that PPTV is likely to become the foundation for Suning’s future video-sharing business, and that PPTV should get plenty of cash and relatively light oversight from its new controlling stakeholder.
I’m less convinced that this particular deal is attractive for Suning, whose Internet focus so far has largely been on e-commerce. Social networking (SNS) and even online search seem like logical new areas for Suning to explore, as both have some relevance to its core e-commerce business. But video sharing looks a bit more removed, since companies in the space now get most of their revenue from advertising.
Of course, it’s possible that Suning will try to use this acquisition to greatly expand PPTV’s paid video service by selling more movies and TV shows online, and by creating more original premium content. But all of China’s major players in the space have already tried that approach, and so far none has had much success. Global industry titan YouTube doesn’t get much money from paying customers, though US-based Hulu has been more successful with the pay-to-view business model.
All that said, it will be interesting to see what Suning does with PPTV under this latest tie-up. Perhaps PPTV could get the resources and other support it needs to quickly grow and become the Chinese equivalent of Hulu. But I suspect it will more likely end up a misfit for Suning, which could end up selling the investment if PPTV doesn’t turn profitable in the next 2-3 years.
Bottom line: Suning’s strategic tie-up with PPTV is a strange partnership that will likely end in disappointment.