Youku Tudou TV: Finally Some Profit Potential

Youku Tudou explores Internet TV

After watching leading online video site Youku Tudou (NYSE: YOKU) search for most of its life for projects with profit potential, I’m happy to finally see a new Internet TV initiative by the company that looks like it could have strong prospects. We’ll need to see some more details about this initiative and whether it actually happens before I can comment too much on its actual potential. But this move into the more mainstream TV market could be just the kind of boost that Youku Tudou needs in its quest to find sustainable profits.

Despite their success at signing up subscribers, online video sites like Youku Tudou, PPTV and Xunlei have had much more difficulty making money from their business. The dilemma is similar for many other news and social networking sites, whose users are happy to sign up but are far more reluctant to pay for services that they can find elsewhere for free.

Youku Tudou and its rivals still get much of their money from advertising. Most have experimented with premium pay-per-view content through licensing deals with Hollywood and Chinese studios, but have found limited success with those offerings. A more promising channel would be to offer their content over self-developed Internet-based channels, similar to traditional TV channels that earn big advertising revenue because of their big audiences. But only a handful of companies have developed such channels so far due to technological constraints. I also suspect setting up such channels could be difficult due to regulatory roadblocks encouraged by traditional TV station operators.

All that is starting to change with the roll-out of a new generation of set-top boxes that are allowing users to watch Internet-based programs on their TVs. PC giant Lenovo (HKEx: 992), and start-ups LeTV (Shenzhen: 300104) and Xiaomi have all rolled out such products in the last year, and now it looks like Youku Tudou may be preparing a similar initiative. (English article)

Details on Youku Tudou’s new Internet TV project are quite scarce, and it does indeed look like this initiative is quite new. The reports say simply that the project will operate separately outside of Youku Tudou’s core video sharing business. It is being led Youku Tudou Chief Technology Officer Leo Yao, who will report directly to CEO Victor Koo.

This kind of project with strong profit potential will be critical to the future of Youku Tudou, whose US-traded stock was once a favorite of investors but has languished in the last 2 years due to its inability to earn profits. The company lost a hefty $37 million in its latest reporting quarter, and Koo has declined in recent interviews to forecast when his company might become profitable. Youku Tudou’s s shares initially soared after its 2010 IPO on bullishness about the video sharing business. But they later gave back most of their gains, even though they remain well above their IPO price of $12.80. The shares posted a 7.2 percent gain in the latest trading day in New York, indicating that perhaps investors are cautiously optimistic about the new Internet TV project.

As I’ve said above, I like this kind of Internet TV initiative because it could finally bring Youku Tudou the kinds of mass audiences it needs to attract major advertisers. The big risk is that traditional TV stations, all of them state-owned, may try to fight back by working with regulators to erect barriers that prevent or restrict any new competitors from entering the highly controlled market.

Xiaomi was forced to pull its Internet TV product shortly after its launch last year for failure to get proper licenses, though that issue looked like a simple company oversight. I would expect traditional media to get more aggressive about defending their turf from these new Internet TV players in the next couple of years, though it’s also quite possible that more open-minded regulators in Beijing may see the new competition as a welcome and needed development to boost innovation in the sector.

Bottom line: Youku Tudou’s new Internet TV initiative could help the company move toward its goal of sustainable profits, though it could face resistance from traditional TV stations.

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This article was first published in the online edition of the South China Morning Post at www.scmp.com.

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