Youku Tudou Inc (ADR) (YOKU), Baidu.com, Inc. (ADR) (BIDU): Can This Company Profit as the “YouTube of China”?

After the Hong Kong Televsion Broadcast Limited deal on Tuesday, fellow Fool Rick Munarriz made compelling points for Youku Tudou Inc (ADR) (NYSE:YOKU) to become the “Netflix of China” with a subscription-based model.

However, I’m not so sure the online video giant should abandon its YouTube-ish roots. It would put Youku Tudou in more direct competition with such online video giants as Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s iQiyi and Sohu (NASDAQ:SOHU) TV, both of which have carved out strengths in distributing professional content.

Looking at long-term demographic trends in China, Youku Tudou’s continued focus on user-generated videos — similar to Google Inc (NASDAQ:GOOG)‘s Youtube — may best lead the way for long-term profits and shareholder returns.

Why competition could crush Youku Tudou’s hopes
Youku Tudou Inc (ADR) (NYSE:YOKU) displayed serious hopes to become a purveyor of all kinds of online video with its Hong Kong TVB deal. Not only will it receive 2,500 hours of exclusive content per year (including current and past TV shows), but the deal also opens the way for co-producing original content.

Given the company’s position in the online video market, it’s not hard to see why Youku Tudou Inc (ADR) (NYSE:YOKU) made the deal and thinks it can make the transition.

Source: We Are Social. For Aug. 2012. Tencent is not a U.S.-listed stock.

Youku Tudou Inc (ADR) (NYSE:YOKU) outpaces the competition in number of hours watched. Youku.com alone attracted 129 million more hours watched than its nearest competitor, iQiyi.com. And once you combine Youku.com and Tudou.com together (the companies merged in 2012), you’ll see that they trounce the competition.

So while Youku Tudou Inc (ADR) (NYSE:YOKU) has the lead, it believes that it can continue to dictate its position in the market, whether that be a purely user-generated video website or something more.

However, I think that the company is underplaying the first-mover advantage that its competitors have already carved out in their online video niches.

Baidu acquired iQiyi.com last year because of its leadership in providing full-length movies and TV shows. In the latest earnings release, Baidu announced that it will continue to step up its “investments and [increase] sales and marketing efforts to ensure [iQiyi] captures the huge opportunities ahead.” iQiyi.com is the No. 2 most watched video site for a reason, and could be for some time.