Worth watching

Baidu’s boss: Robin Li

Since spending nearly $1.7 billion on acquiring YouTube in 2006, search giant Google has been struggling to monetise the video-sharing site. Even though the platform is very popular, industry observers think YouTube will bring in just $2.5 billion in advertising revenue this year.

That is hardly a significant component of Google’s total revenues, which hit $50 billion in 2012, which may be why Google announced that YouTube will soon charge users for subscriptions to some of its “channels” (fees are yet to be disclosed).

It remains to be seen whether people will be willing to pay for their subscription. One challenge for YouTube is that it has already become synonymous with free online video.

That’s a problem China’s search giant Baidu could soon face too, after the Chinese search firm confirmed that it will acquire the online video provider PPStream for $370 million. The acquisition will be made by Baidu’s online video unit iQiyi, which was launched in 2010 as as a streaming video service offering high-quality copyrighted content, an approach similar to that of US site Hulu.

Currently iQiyi and PPS are the third and fourth largest players in China’s internet video market respectively. Their combination delivers market share of 17% in advertising revenue, rendering it the second-largest player in the industry. By joining forces, the two will hope to challenge sector leader Youku Tudou, which now controls about 21.5% of the market, according to research firm Analysys.

The deal is another sign that Baidu is trying to diversify beyond its core search business. Then again, most of its venturing into areas like social networking (SNS) and e-commerce has been a disappointment. Just last week, Baidu was reported to be preparing to shutter its online recruitment service Baijob, says Sina Technology, a portal.

Baidu will be hoping for a better outcome in online video. According to ComScore, China’s internet users watch more than four billion hours of internet videos every month, making video-sharing sites and licenced content an increasingly important part of the internet scene.

That explains the wave of consolidation in the sector.

In 2009, Shanda announced an equity merger with video-sharing site Ku6. Two years ago, social networking firm Renren also spent $80 million to acquire video site 56.com. And there was the biggest merger in the industry last year between Youku and Tudou. At the time, the two companies said that pooling their audiences would give the new firm more leverage for closing content deals and also help in consolidating costs for hardware and bandwidth.

Meanwhile, Tencent – the country’s largest internet company by market capitalisation – has also been bolstering its video-sharing services.

Beijing Daily reckons that Baidu’s acquisition of PPS is a strategic move designed to strengthen its presence in searches on mobile phones. Although it dominates searches on desktops, Baidu’s share of search on mobile devices is less, at 35%. Hence the PPS bid, as many more Chinese are now watching programmes via online video sites using their mobile devices (it helps that high-speed telecom services are making video streaming more viable too).

Analysts have also said that advertisers can be quicker to pay for ads on mobile video sites than they are for other areas of the mobile internet.

Still, if Google hasn’t been able to make more revenue from YouTube, why should Baidu manage it with PPS? Even Youku Tudou, which started out as two separate companies more than six years ago, posted a net loss of $68 million last year. Youku founder Victor Koo also refused to forecast when the company might become profitable, instead saying it will focus for now on developing original programming and building its mobile services.

Koo’s comments also mark a shift from Youku’s former focus on content acquisition from third parties (such as TV shows). The move suggests to some analysts that Youku Tudou has yet to find a profitable formula for success.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.