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Chinese YouTube competitor seeks $120m IPO

Tudou is number two video site in China

Tudou, one of China's leading video sharing sites, is seeking to raise $120 million through an initial public offering on the Nasdaq Stock Market to help sustain operations as it strives to become profitable.

Launched in 2005, Tudou has grown to become China's second largest video sharing site in a market dominated by domestic companies. Tudou held a 16 percent share, while Chinese rival Youku controlled 20 percent during the second quarter of 2010, according to Beijing-based research firm Analysys International. Popular American sites such as YouTube or Hulu are blocked in China or do not stream their videos outside the US.

But like many of these video sharing sites, Tudou has yet to become profitable and faces growing internet bandwidth costs from hosting so many videos. The company recorded revenues reaching 224.8 million Chinese yuan ($33.8 million) for the first nine months of 2010, a 230.1 percent increase compared to the same time last year. Despite soaring revenue, which has primarily been driven by online advertising, Tudou still reported a total net loss of 83.7 million Chinese yuan, ($12.5 million) for the period.

"What's encouraging is the rate of growth," said David Wolf, CEO of Wolf Group Asia, a Beijing-based technology consultancy. "But they do have a fundamental cost problem."

While Chinese video hosting sites like Tudou and Youku allow users to upload their own videos in the same way as America's YouTube, the companies increasingly rely on licensed content to attract viewers. The need for licensed content comes as both sites work to eliminate the uploading of pirated videos. In the case of Tudou, the company has faced 280 copyright infringement cases in China, 91 of which it lost.

Now video hosting sites are spending more money to purchase the rights to feature legitimate content. Users of Youku can now watch new episodes from the ABC television series Desperate Housewives, complete with subtitles. Chinese video hosting sites are also producing their own original content, with Tudou having developed its own drama series for internet viewing.

But acquiring such content has saddled the companies with an additional cost on top of Internet bandwidth. Already, Tudou is financed through private investors, and has raised more than $135 million, according to the company.

"It's become a very, very costly business. The cost of private capital cannot support its continued growth," Wolf said. "I think the private well is dry essentially, and this is the reason they are going for an IPO."

Tudou has made some progress in reversing the outflow of cash. The net loss it incurred for the first nine months of 2010 narrowed compared to the 100.4 million Chinese yuan ($15.1 million) loss it reported for the same period last year.

At the same time, Tudou expects its revenues to increase as more Chinese users head online. Currently, China has 420 million Internet users, according to the China Internet Network Information Center, a number that is projected to grow. Of those 420 million users, about 63 percent watch videos online.

Tudou now has 71.7 million registered users, with a library of more than 36.3 million video clips as of September this year. Tudou currently generates most of its revenues through online advertising, hosting commercials for such brands as Coca-Cola, Pepsi and Volkswagen, as well as domestic companies.

Media outlets have also reported that Youku plans to file for an IPO in the future, but the company has made no official comment on the matter.


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