Caixin
Apr 30, 2019 05:58 PM
BUSINESS & TECH

In Depth: Never-Ending Competition Leaves Online Video Pioneer Youku in Search of Direction

* Rumors spread last December that Alibaba plans to offload money-losing streaming site Youku Tudou, as it falls behind in a fiercely competitive sector

* Despite early promise, Youku has failed to keep up with rivals willing to spend big to garner market share, a situation unlikely to change as its new president is embarking on a cost-cutting drive

(Beijing) — When Alibaba took over Youku Tudou Inc. nearly four years ago, many saw the e-commerce giant as a deep-pocketed patron that could help the video streaming site fulfill its destiny to become the YouTube of China.

Fast forward to the present, when Youku has been folded into Alibaba’s larger entertainment business, and Youku itself may be scaling back spending under new leadership. Such a shift would come just months after the company’s former chief left to assist in an investigation, wording that often points to possible corruption.

The shakeup may have helped to fuel market rumors in December that Alibaba was giving up on Youku, and might be preparing to sell it to Beijing ByteDance Technology Co. Ltd., a news and video aggregator tipped to become China’s next tech giant.

Both Alibaba and ByteDance denied the rumors at the time, calling them pure speculation. But industry watchers said such rumors may have gained traction because Alibaba has fewer reasons now than ever to keep Youku due to its lackluster performance. Despite Alibaba’s efforts since buying Youku, the unit is believed to still be losing money in a fiercely competitive industry where rivals are spending aggressively to build up their content libraries.

So where did it all go wrong for a company that once held such promise?

Youku.com was a pioneer at its founding in 2005, landing the title of China’s first major streamer of user-generated video content. Like its U.S. contemporary YouTube, it provided a service where users could upload, share and watch video clips. It would go on to broaden its offerings by broadcasting films and programming licensed from movie studios and TV companies.

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It quickly became popular and boasted 264 million visitors a month before it became the first Chinese video site to float in New York in 2010, despite still making large losses. The company raised $233 million in its listing and its stock soared 160% on its first-day of trading.

Attractive story

Investors especially liked the Youku story due to China’s media environment for broadcasters at that time. That landscape was dominated mostly by a hodgepodge of state-run TV stations that operated on a near-monopoly basis in their local markets. By comparison, companies like Youku were more market-oriented and could instantly reach a national audience at low cost by distributing over the internet.

In 2012, Youku took over one of its biggest rivals, Tudou Holdings Ltd., in a deal worth over $1 billion that created a clear industry leader. The new Youku Tudou focused on lower cost productions at that time, seeking to fulfil its responsibility as a listed company to make profits.

But that decision may have marked the start of the company’s longer-term decline, industry watchers said. While Youku Tudou was watching its bottom line, rivals with wealthy backers were rapidly burning through cash to create high-quality content like TV series and variety shows to win market share.

One such rival was iQiyi Inc., a service backed by search giant Baidu. The company raised eyebrows when it forked out 185,000 yuan ($27,500) per episode for exclusive China rights to the wildly popular 2013 South Korean TV series “My Love From the Star,” even though the market rate for most such shows was less than 4,000 yuan per episode. The series became one of the most popular Korean dramas in recent years, generating 2.8 billion online views for iQiyi.

Following the hit, iQiyi went on to splash out another 24 million yuan in 2016 to stream another South Korean blockbuster, “Descendants of the Sun,” on its platform exclusively. It hit the jackpot again, as the drama garnered nearly 100 million views in its first week alone, and shored up the service’s paid member growth.

Lifeline in Alibaba

As sites like Youku and iQiyi gained traction with viewers, they were also coming under pressure to cultivate a “pay as you watch” business model in a country notorious for its piracy. Youku, iQiyi and the sector’s current third major player, Tencent Video, are all still believed to be deeply in the red.

As the competition heated and Youku continued to lose money, it accepted a buyout offer from then-stakeholder Alibaba in 2015 and delisted from the New York Stock Exchange the following year. Alibaba then went about trying to connect its various entertainment and content businesses with its traditional e-commerce operations.

In 2016, it set up a digital media and entertainment division, consolidating its recently acquired assets in filmmaking, gaming, literature and video such as Youku Tudou, Alibaba Pictures and Alisports.

The new unit posted losses of 19.7 billion yuan in 2018, and 13.2 billion yuan in 2017, as it spent heavily on original productions and buying copyrighted content. Alibaba did not release specific figures for Youku. By comparison, iQiyi lost 9 billion yuan in 2018, and 3.7 billion yuan in 2017.

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A Youku advertisement in Jinan, East China's Shandong province on Feb. 13. Photo: IC Photo

The competition comes as the three industry leaders battle for market share. According to data released by respective companies, paid members of iQiyi totaled 87.4 million as at the end of 2018, while those of Tencent Video hit 74 million as of last June. Youku last published user data in late 2016 when it said it had 30 million paid subscribers.

New man in charge

While Youku was trying to keep up with the competition, the company underwent a major shakeup last December with the sudden departure of its President Yang Weidong. Alibaba revealed that Yang was “assisting mainland authorities with an investigation into an alleged case of seeking economic benefits,” after Chinese media said he had embezzled funds from an upcoming Youku entertainment show.

Youku later appointed Fan Luyuan, who also serves as chairman and CEO of Alibaba Pictures, as the unit’s new president. After barely four months in the job, Fan has embarked on a cost-cutting spree, sources told Caixin.

A slew of projects that Youku signed on to before Yang’s departure have had their budgets cut, said one person in the entertainment business who requested anonymity. “Youku isn’t worried about the prospects of the projects, it just wants to cut costs,” the source said.

A Youku spokeswoman had no immediate comment on the situation.

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At the time of the ByteDance rumors last December, some were speculating Alibaba might want to get rid of Youku in exchange for a tie-up with the highflying news and video aggregator.

ByteDance owns news aggregating app Jinri Toutiao and short-video app TikTok, and is also one of the world’s most valuable unicorns — startups worth more than $1 billion. It’s widely seen as a rising challenger to China’s biggest tech trio of Baidu, Alibaba and Tencent.

Market watchers said ByteDance could benefit from a potential Youku purchase because an established streaming site could help it complete its entertainment empire.

But for now, at least, Youku’s fate rest is resting squarely on Fan’s shoulders.

“All eyes are on Fan now to see if he can salvage Youku,” said an analyst from the media and entertainment industry. “He doesn’t know much of the production processes and it will take time to get familiar with Youku’s team and business operations.”

Tang Ziyi contributed to this report.

Contact reporter Jason Tan (jasontan@caixin.com)

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