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Youku Emerging a Goliath in China Internet

The same thing will happen here. China's Internet space is a lot bigger and more competitive than the U.S. satellite radio space. This isn't a duopoly. However, Youku and Tudou are clearly the two biggest dogs in this fight and the only two pure-plays.

There's another key difference between the Chinese video space and the U.S. satellite radio players. In the satellite game, there are huge up-front costs of shooting up a satellite into space. In the Chinese online video space, there are huge ongoing costs of running this business. They're called bandwidth costs.

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The more popular your video service gets, the more videos you play, and the more bandwidth you need to pay for in order to serve them. These costs had both been weighing on Youku and Tudou since they went public and were a big reason why both had yet to show profitability.

Now, as a combined entity, they will be able share these costs over more videos being served and more ads being played. They will also likely be able to shrink their headcount to trim costs.

Bandwidth costs as a percentage of total costs shouldn't necessarily drop as a percentage of revenue right away, but the combined companies' costs should indeed drop relatively quickly.

Looking ahead, the promise of continued growth in the Chinese Internet video sector is still compelling. Youku is less of a "Chinese YouTube" and more like a "Chinese HBO" -- albeit with an ad-supported model right away vs. subscription.

There is really no equivalent to an HBO or Showtime in China today. Youku is seeking to play that role, but doing it online rather than through cable. It's like they missed the whole pay-TV-cable thing and are going straight to HBO Go.

As a combined company, Youku and Tudou will have a solid cash pile and be in a strong position to do further stock offerings to further raise cash in the future.

No pure play has a shot at them in China and it's very likely the Chinese portals won't have the focus to effectively compete.

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Victor Koo -- Youku's CEO -- is also very well-respected in China and Hollywood. He's built a strong team that will now be supplemented by more talent from Tudou.

At the time of publication, Eric Jackson was long YOKU and SINA.

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at eric.jackson@thestreet.com.
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