NEW YORK (TheStreet) -- After the all-stock merger between Youku ( YOKU) and Tudou ( TUDO) a couple of weeks ago, Youku's stock has receded from the $32 levels it hit the day of the deal announcement.The stock is now back down at the $24 level -- and actually less than where it traded before the deal was publicized.
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. 10 Stocks Owned by the Best Fund Managers 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. 8 Stocks Rising Fast on Rich People's Spending 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.