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Youku (NYSE: YOKU), a popular Chinese online television company, has been working to clean up its reputation and offer licensed content in an attempt to draw advertising dollars from foreign and domestic companies. The company has faced struggles with piracy lawsuits, government censorship, and the state-owned media’s web expansion. In the most recent quarter Youku posted a significant loss due to an increase in operating expenses, but the extra costs incurred to clean up their reputation might have been worth it. Revenue increased 96%, which was in line with the company’s growth estimate of 90% to 100%. For the third quarter, Youku is predicting revenue growth of 70% to 80%. In an effort to continue that growth, Youku agreed to acquire competitor Tudou Holdings (NASDAQ: TUDO) to create the largest Chinese online-video company by advertising revenue.
Tudou, also an online video company, can be found in a similar state as Youku and recently reported a net loss in the second quarter. The company attributed this to an increase in the cost of internet bandwidth and content. Bandwidth costs nearly doubled compared with the same quarter from the year prior, while content costs increased approximately 55%. The company also reported higher operating expenses due to costs related to the Youku merger. Still, the company’s revenues increased 47.3% year over year, mostly due to a 47.4% increase in online advertising sales. Though both Youku and Tudou experienced higher costs this quarter, they both also experienced higher revenues. The pending merger between Tudou and Youku is expected to help both sites achieve profitability and higher revenues. The revenues should not pose much of a problem. However, to improve profitability the companies will need to work on cutting costs. The deal is expected to close this month.
Youku and Tudou are not the only Chinese online companies with big plans. Sohu (NASDAQ: SOHU), China’s fifth most visited website, has recently made plans with its online game developer Changyou (NASDAQ: CYOU) to take web gaming unit 7road.com public. The news of the IPO, along with a special one-time cash dividend from Changyou, fueled the biggest gains in the two stocks since 2008 and 2009, respectively. Executives claim the IPO plan was an effort to attract and retain talent. We might be seeing a lot more IPOs from China in the near future as the China Securities Regulatory Commission’s draft rules recently showed plans to let workers choose for as much as 30% of their wages to be paid in the shares of their publicly-traded employers.
Sohu recently reported a decrease in profit as the company posted slower growth in advertising sales and their spending to upgrade services rose. However, the company did beat earnings per share estimates and revenue increased 28.6% year over year. The increase was driven by strong search and gaming revenues. The IPO might go far in providing funds to cover any future upgrade spending. However, the major revenue source for online companies is advertising. For Sohu to reach maximum profitability the company needs to work to attract more advertising revenue.
Online companies are in an extremely competitive market as there is little to no barrier to entry. Advertising revenue is limited and difficult to get. The merger of Youku and Tudou, making largest company in terms of advertising revenue, will ensure that they continue to receive that revenue and bring them more of it. Sohu and Changyou’s IPO of 7road.com will allow them to attract top talent to produce quality games, bringing in more players and, hopefully, more advertising revenue. Youku and Tudou are making good choices in order to stay competitive and on top of their industries. Sohu, on the other hand, needs a more well-defined plan of action to enhance profitability. Mergers and IPOs are both positive changes, but they do not always equal higher revenues and profitability.
MaryPosey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Sohu.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.