China’s internet video sector appears set for further consolidation as Web titans Sohu.com Inc (SOHU.US) and Tencent Holdings (00700.HK) are said to be in talks for a merger of their video portals in a bid to challenge No. 1 player Youku Tudou (YOKU.US) and to boost their mobile exposure.
The planned deal is proof that the once crowded online video market is entering a stage of winner- takes-all. Youku Tudou has been gaining market share and achieving better economies of scale after the merger of Youku and Tudou in 2012. This is forcing the smaller players to review their position in the market.
Rumor has it that Sohu and Tencent have had extensive closed-door meetings regarding a potential online video partnership.
The two sides are said to have come to a tentative agreement to merge their online video businesses, establishing a new company that will be headed by Sohu CEO Charles Zhang. Tencent will be a strategic partner, without management control, according to reports.
Zhang on Monday denied such plans, but observers say the speculation over the Sohu-Tencent tie-up is not without ground. The two have already merged their internet search engine businesses last September, as their individual search engine operations failed to pose a significant challenge to market leader Baidu Inc (BIDU.US).
Online video is one of the most popular pastimes for Chinese internet users, with a penetration rate of 69 percent in 2013. However, operators have been struggling to find a sustainable, profitable business model.
In 2013, China’s online video market had total revenue of 12.8 billion Yuan, marking an increase of 41.9 percent over the previous year. Thanks to the increasing ownership of mobile devices, the online video market maintained rapid growth as site owners procured high-quality content to lure users.
For internet companies like Tencent and Sohu, online video is a new source of advertising dollars. Most local firms cannot afford the extremely high television advertising fees on national channels such as China Central Television; so, their budgets are expected to gradually shift to online video portals.
While the online video market has been dominated by desktop usage previously, the mobile segment is seen as the big growth driver in the years ahead as more people migrate to smartphones and 3G or 4G mobile services.
With users tending to show higher “stickiness” to mobile video on demand, it will be the focus of most online video platforms in the upcoming consolidation.
For Tencent, given its proven strength in developing mobile internet products such as the smash hit instant messaging platform WeChat, boosting the mobile video offerings is likely to be a key agenda.
While it remains to be seen if, and how, Sohu and Tencent will team up in this field, it won’t be a surprise if Tencent also seeks to buy into other market players.
The initiatives could pay off as the online video market expands significantly on the back of improving content and accelerating commercialization of mobile internet.
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