While I gobbled up some shares in Youku.com, Inc. (NYSE:YOKU) during the company’s IPO, I’m starting to wonder if I made a poor decision. If the company can’t take its sudden windfall from this massive IPO and start making cash, I’ll run for the hills, but I’m willing to give Youku the benefit of the doubt for now. Here’s why:
1) Good lineage. Youku.com was founded in 2006 by Victor Koo, the former President of the wildly successful Chinese Web portal Sohu.com, Inc. (NASDAQ:SOHU).
2) Size. Youku.com is China’s biggest online-video company. If the company can maintain its position and continue its growth, it stands to be just as much of a cultural force as YouTube is in the U.S. Let us not forget either that China already has more Web users (an estimated 420 million) than the entire population of the U.S. – and there are still hundreds of millions more Chinese who will likely keep the Web growing in China for several years to come.
3) Direction. Since filing for its IPO, Youku has maintained that it will use its IPO funds to “upgrade technology, buy videos and expand sales and marketing” as it looks to change from a user-generated video site into more of a premium-based video site along the lines of Netflix, Inc. (NASDAQ:NFLX). Already Youku licenses professionally-produced videos from more than 1,500 content partners. Netflix’s model is obviously more profitable than YouTube’s. If Youku can maintain its market leadership and meld subscription-based services with free user-generated videos, it should have the best of both worlds in a single online destination.
Youku’s CEO Koo also emphasizes the company’s desire to move into the mobile video streaming market. Good thinking. China’s got the largest mobile market in the world with more than 750 million mobile users generating more than $7.55 billion in subscription fees every month (the equivalent of $2,900 per second!). If Youku can get a small piece of that income, they could quickly move their books into the black.
4) Growth. According to Youku’s IPO filing, revenue at the company increased 135 percent to 234.6 million yuan ($35.1 million) in the first nine months of 2010. Sales at the company have more than doubled this year, and the Chinese online video market has more than doubled, too. As the company changes tack from user-generated video to professionally-produced content, it’ll be interesting to see if they can keep costs low and start turning a profit. If they do that, maybe buying into Youku’s IPO won’t turn out to have been such a bad idea after all.
Could you tell me if China bought NetFLix?. Thanks.