Summary:

After threatening to sue each other for copyright infringement in December, the largest players in China’s fast-growing online video market…

Youku executives
photo: Youku

After threatening to sue each other for copyright infringement in December, the largest players in China’s fast-growing online video market have now decided to join forces, to milk what could become a prosperous market sector.

Youku has proposed buying all Tudou’s stock in a deal valuing it at more than $1 billion. The transaction, if approved by shareholders, would create a combined company, “Youku Tudou Inc”, but Tudou will retain its brand.

The motivation is saving on the escalating cost of securing broadband infrastructure to deliver video to audiences.

“This transaction would also lead to improvement in the industry structure and the underlying economics of the online video sector in China,” Youku CEO Victor Koo says (via announcement).

“We expect to see significant synergies across a number of areas including leveraging licensed content over a larger user base and realizing efficiencies in bandwidth management and other common expenses.”

Chinese online video revenue grew 48 percent through Q4 alone, to 1.48 billion RMB ($234 million), and was up 139 percent over the year, according to Enfodesk, Analysys International. As broadband adoption grows there, the online video opportunity becomes greater.

This isn’t just a significant deal in China. Both Tudou and Youku went public in New York in 2010 and 2011, raising a combined $375 million.

Youku has 25.3 percent of the segment’s revenue, Tudou 14.5 percent. They operate much like YouTube (NSDQ: GOOG), majoring on user-uploaded videos but doing an increasing number of deals with domestic TV show makers and global movie companies to host ad-supported and premium videos. Competitors have been building and buying to stay in touch.

The big Sina (NSDQ: SINA) portal had targeted video as its main investment area. It had bought up stakes in Tudou. Now it will end up without influence in Tudou and struggling to build its own capability.

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