Chinese online video providers saw a boon to their stock price Monday when two of the largest companies in the market announced plans to merge. The move signaled to investors that further consolidation may come, which could help online providers control their costs.
China has dozens of privately owned video websites, which have nearly 400 million viewers. These sites are an alternative to bland state-run programming. They act as television stations of sorts, showing imported programs and advertising to the growing middle class in China.
The fast-growing and competitive industry got a major boost Monday when two of the biggest companies in the market — Youku Inc. and Tudou Holdings Ltd. — said they plan to merge in an effort to create the dominant competitor.
The move will help increase the companies' bargaining power and lower costs for bandwidth and content, their two largest costs.
Investors sent up the stock price of a number of companies across the industry, assuming this could spur further consolidation and cost-savings for other companies.
"I think it is a very good development for the whole industry," Dan Su, a Morningstar analyst, said in an interview. This marks the start of consolidation in the space, which should bode well for all the key players."
As consolidation continues, there will be fewer companies bidding on prices for content and that could help drive those prices down.
The challenge that remains for all companies in the industry, Su said, is to find new ways to differentiate themselves. That could mean more user-created content or more material the companies create independently.
Shares of Youko that are traded on the New York Stock Exchange rose $6.59, more than 26 percent, to $31.60 by early afternoon. Tudou shares more than doubled in value, rising by $22.89 to $38.28.
Shares of another industry leader, Sohu.com Inc., rose $1.48, or 1.9 percent, to $50.78. And Ku6 media Co. Ltd. shares rose 33 cents, or 15.7 percent, to $2.43.