Youku Tudou Inc (ADR) (YOKU), Baidu.com, Inc. (ADR) (BIDU): This Company Is a Chinese Youtube in the Making, Here’s Why

Online video streaming in the second biggest economy of the world is the next big thing.

First of all, Chinese advertisers are willing to pay a lot more for video ads than just normal ads, because Internet users can’t ignore vid ads. Second, Chinese Internet users are demanding more and more video streaming. But considering that both the smartphone penetration rate and Internet access in China are still low compared to Western countries, we can be sure that this is just the beginning. That’s why many companies, from Chinese IT giants to start-ups, are willing to do whatever it takes to become a leader in the fierce Chinese video streaming market.

But how big is this market? According to iResearch, revenue from online video in China is expected to grow to 33.2 billion yuan ($5.4 billion) in 2016, up from 6.3 billion yuan in 2011: an amazing growth rate shows that this is a huge market in the making. Most of that will come from advertising.

That’s why companies like Baidu.com, Inc. (ADR) (NASDAQ:BIDU), which started as a search engine; and Renren Inc (NYSE:RENN), which started as a social network; are trying to catch up as soon as possible. Baidu’s recent acquisitions confirm that the giant is not going to let this opportunity go.  And Youku Tudou Inc (ADR) (NYSE:YOKU), which has been streaming video since 2006 and is considered the second largest video site in the world with an Alexa ranking just after YouTube, isn’t going to make its competitors’ life easy. The market certainly looks fierce, but somebody has to win. Who’s that going to be?

Baidu and its acquisitions

Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is using the more than $5 billion in cash and cash equivalents it has to reinforce its online video business, iQiyi. That’s why the company recently spent $370 million to buy PPS. By merging PPS’s user base with iQiyi’s, Baidu is expected to become the largest online video platform, by number of mobile users and video viewing time.

But Baidu.com, Inc. (ADR) (NASDAQ:BIDU) isn’t strong just because of its aggressive acquisitions (in a similar move, it recently paid $306 million for majority stake in top travel search engine Qunar). Baidu’s competitive advantage is that by owning the biggest search engine in China, it can easily shift some of its search engine traffic to its new products, like iQiyi.

PPS also happens to be a good complement to iQiyi’s traffic. Most iQiyi users watched videos via Web browser, while PPS is strong at delivering video content via mobile terminals or software. Mobile video streaming is probably the fastest growing segment and it also enjoys higher user retention rates. That’s why the PPS acquisition makes a lot of sense.

That being said, nobody knows if Baidu.com, Inc. (ADR) (NASDAQ:BIDU) will be able to succeed in its new ventures. From e-commerce to real estate, iQiyi is just another product inside Baidu’s fast-growing portfolio of products. The company is unfamiliar with most of these new businesses, but it has the advantage of counting with the most used search engine in China to drive traffic to its services.