Sept. 14 (Bloomberg) -- Tudou.com, China’s second-largest online video website, plans an initial public offering “soon” to raise funds to compete against Youku.com in the world’s biggest Internet market.
“It’s something that’s inevitable,” Chief Executive Officer Gary Wang, the 37-year-old founder of Shanghai-based Tudou, said of a possible IPO in an interview yesterday. “It should happen fairly soon. I can’t talk about specifics.”
Tudou will sell shares in a “western market,” Wang said in an interview with Bloomberg Television today without elaborating. Tudou and bigger rival Youku both say they must invest in bandwidth to broadcast videos and in copyrights for professional content that the companies say makes up about 70 percent of their sites.
“The Chinese online-media sector is growing very strongly,” said Jin Yoon, an analyst at Nomura Holdings Inc. in Hong Kong. “While we do think there is strong demand from investors, it’s, however, not necessarily a very profitable business.”
Youku held about 18 percent of China’s online-video market in the first quarter of this year, while Tudou had about 13 percent, according to a survey published by Analysys International, a Beijing-based research firm.
“Youku and Tudou share a similar strategic layout and operation mode,” according to the Sept. 9 Analysys report. While both offer user-generated content, they are also “purchasing film copyrights actively so as to widen the gap with other independent online-video websites,” Analysys said.
Tudou means potato in Chinese and is a playful reference to couch potato, Wang said. The company started its website in 2005 and has raised $135 million through five rounds of funding, including $50 million last month, from investors including Crescent Point, IDG China, GGV Capital, General Catalyst and Singapore’s state investment company Temasek Holdings Pte.
“Every one of our investors is an international investor,” Wang said in the Bloomberg Television interview. “They have to go through a western market. The Chinese market will not get them the exit they need.”
The two online-video websites also face a growing challenge from the third-largest supplier, Beijing-based Sohu.com Inc, with 11 percent of the market, according to Analysys.
Internet videos are even more popular in China than the U.S. because the traditional media in China is not very competitive, Sohu Chief Executive Officer Charles Zhang said in an interview today.
“That’s why young people born after the 1980s and 1990s are mostly not attracted to television like their counterparts in the U.S. In China, internet video provides the alternative,” Zhang said.
“For the overall online video space, the key now is still growth,” Youku Chief Executive Officer Victor Koo said in a separate interview yesterday. “When your users are still growing at very healthy double digits, you want to keep investing in the business.”
Youku is “well-financed,” having raised $110 million to date from investors including Chengwei Ventures, Brookside (Bain) Capital, Maverick Capital, and Sutter Hill Ventures. Its last round of private equity funding from existing investors raised $40 million in December. Koo declined to comment on whether the company would sell shares.
China has 420 million internet users and about 75 percent of the total already watch videos online at a preferred site, Youku’s Koo said. The period of most rapid growth in new users is already done, and now websites must expand mainly by winning market share, he said.
“Capital is a huge thing in the online-video industry,” Tudou’s Wang said. “The leading players have to raise all kinds of money.”
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