October 16th has indeed been a big and memorable day for video streaming site - Youku - when it took a big sigh of relief. Alibaba (NYSE:BABA), which is the largest e-commerce company of China has given a proposition to purchase 82 percent of Youku. If the deal materializes, it will put an end to Youku’s current status as a loss-making public company while helping Alibaba in its multi-screen strategy.
Market position of Youku
Youku has been one of the major forces in the sphere of online videos in China. It is actually quite similar to YouTube in the People’s Republic of China. It is yet to report a profit, again quite like YouTube. The company is charging advertising fees from advertisers and has also started charging all those users who want to watch it finest content. However, that also signifies that users are provided with something really worth watching.
There has been a 78 percent hike in content fees over the previous year to about $117 million or 744 million Yuan in the last quarter. Baidu, which is a big business rival of Youku and is also asearch engine that is also known to own an online video website, can easily swallow such costs. In fact, Youku is too significant a rival to take it seriously.
However, the bandwidth cost that is incurred by Youku is massive and amounts to about $213 million annually. Bandwidth cost refers to expenses borne by the company in lieu of payment made for data storage and telecoms.
What Alibaba stands to gain?
But if Alibaba can handle these costs, the savings made by Youku that is taxed at about a rate of 15 percent are worth over $1.8 billion. Beyond this factor, the benefits that will be achieved by Alibaba are not quite clear at this point. There may be a likelihood of Alibaba launching its own pay TV site similar to US based pay-TV website Netflix (NASDQ:NFLX). It may also happen that Alibaba would sell a greater number of video advertising spots for its online sellers. The sky is actually the limit if we start counting the various options.
As of now Youku is quite an insignificant player and has even less than 3 percent of market value of the combined companies. An approval for the buyout will be given for sure as about 60 percent of its shares are held by Alibaba and Victor Koo – the current Youku boss who will stay on as the Chairman.