Sohu Buys Renren Video Unit, Amid New Spending Binge

Renren sells 56.com to Sohu

A couple of new reports are shining a spotlight on the turmoil rippling through the online video space, following a period of huge optimism that ended earlier this year with a crackdown by Beijing. One report shows a major consolidation that took place last year could be getting ready to enter a second round, with word that struggling social networking (SNS) firm Renren (NYSE: RENN) is selling its 56.com online video unit to Sohu (Nasdaq: SOHU), one of the sector’s leaders.

The other report details a new spending binge on self-produced original programs by another leader, Baidu-backed (Nasdaq: BIDU) iQiyi. That trend is accelerating following the regulatory crackdown, which has made purchasing popular TV programs and movies suddenly much more difficult. That’s forcing sites to find other ways to keep their viewers entertained and maintain their viewership.

The rapid series of twists and turns in the sector saw companies like leader Youku Tudou (NYSE: YOKU), iQiyi and Sohu video suddenly emerge as investor darlings last year, as they began to challenge traditional TV stations. But calls of protests from the state-owned TV industry sparked a crackdown this spring, forcing video sites to cancel plans for Internet TV products and sharply cut back buying of popular foreign-produced TV shows and movies. That shift has taken a toll on online video stocks, with Youku Tudou and Sohu shares both losing nearly half of their value since the beginning of the year.

All that said, let’s take a look at the latest development in the space that cites unnamed sources saying Renren has reached a deal to sell its 56.com video site to Sohu. (English article; Chinese article) The word “sell” is almost an exaggeration here, since Sohu is reportedly paying a paltry $13 million for the asset. I suspect this particular asset was losing big money for Renren, which is probably giving the site to Sohu essentially for free just to get rid of it. Investors didn’t seem to care about the move, with Renren’s laggard stock largely unchanged on the news.

Meantime, the other online video news bit has iQiyi founder and CEO Gong Yu gushing about his company’s recent surge in spending on original programming. (Chinese article). This particular trend was already occurring even before the crackdown, but appears to be accelerating now that the online video sites can no longer depend on large volumes of foreign-made products to give them an edge over traditional TV stations.

Gong has discussed the recent spending binge in several recent reports, saying one of iQiyi’s most recent original series cost as much as 5 million yuan to produce, or nearly $1 million. That’s not a huge amount of money for a one-time project, but it would quickly add up if iQiyi and its peers start to produce lots of such shows to draw in more viewers and advertisers.

iQiyi can afford that kind of spending spree thanks to funds from cash-rich parent Baidu. So can money-losing Youku Tudou, after it raised $1.2 billion in cash earlier this year by selling nearly 20 percent of itself to a group led by e-commerce giant Alibaba (NYSE: BABA). (previous post) Sohu can probably also afford this kind of a spending binge, and its purchase of 56.com indicates it has no plans to leave the space soon. But the few remaining other mid-sized players, such as recently-listed Xunlei (Nasdaq: XNET), could find the road more difficult due to their limited funds. That could spark a new wave of selling of these mid-sized players to their larger cash-rich rivals over the next 2 years.

Bottom line: The sale of Renren’s 56.com site to Sohu could mark the start of a new round of consolidation in the online video space, driven by the top 3 players as they ramp up spending on self-produced programs.

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