Chinese Ads Shift from TV to Internet
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JP Morgan recently started coverage on Chinese internet television company Youku (NYSE: YOKU). The firm currently views Youku as overweight and set a price target at $30. Morgan is bullish on a general shift in Chinese ad spending from TV to online video. Upcoming ad rate hikes, inventory expansions, a favorable content amortization schedule, and the achieving of quarterly profitability in 2013 are all viewed as positive catalysts.
Youku’s internet television platform enables consumers to search, view, and share video content across various devices. Their content library consists of primarily professionally produced content, including television serial dramas, movies, current events reports, variety shows, and music videos. It also provides user-generated content and produces a wide range of its own content. Youku’s advertising services consist of in-video, display, sponsorship, targeting solutions, viral video advertisements, product placements, and sub-licensing content services. That is quite a wide variety of advertising solutions, certainly more than your average television network has to offer.
In March, Youku merged with Tudou (NASDAQ: TUDO), another Chinese internet video company. The combination of the two makes them China’s largest internet video company. Prior to the merger, Youku and Tudou were ranked as the number 11 and number 14 website in China, respectively; the merger produced an industry leader. As such, the two companies control a large portion of China’s media advertisement revenue. As ad spending shifts from television to online video, Youku and Tudou stand to create a large economy of scale in the sector.
In terms of China’s online advertising dollars, Sohu (NASDAQ: SOHU) is a large competitor for the video providers. Sohu already maintains a solid advertising base. Sohu is an online media, search, gaming, community, and mobile service company. Their brand advertising business offers advertisements on its portal websites to enhance their clients' brand awareness online. They also provide pay-for-click services similar to Google’s AdWords, search directory placement, and online marketing services. Sohu is more diversified in its product offerings and therefore has the opportunity to provide more value for advertisers seeking brand exposure.
The shift from television to online advertising can be a slow, volatile change for many companies. The key is to provide advertisers with something unique. Online advertisers expect more value for their money, so innovation is key. If Youku and Tudou can continue to create great added value for advertisers they have a shot at taking advertising revenue away from companies such as Sohu.
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