By merging their Chinese online video businesses, the leaders of Youku and Tudou have done something their comrades at other Chinese Internet companies have failed to do. Youku and Tudou have placed their business interests above their egos.

The merger publicly announced yesterday (and strangely precipitated last week by a 19% five-day trading stock price surge for Tudou) is an all-stock deal worth over USD1 billion. Youku Chairman and CEO Victor Koo will head the new combined firm, and Tudou's CEO Gary Wang will join the new business' board of directors.

While in recent years there has been some small merger and acquisition activity among China's listed Web firms — see Shanda's acquisition of Hurray — no deal comes close to the size and emotional impact that this deal makes.

Remember all the talk 10-12 years ago about Sohu.com acquiring Netease.com? Or what about the rumors of Sina.com buying both Sohu.com and Netease.com a decade ago? Those China tech titans have never merged. But what if they had? It's taken them more than a decade to come close to US1 billion in annual revenue, so think about how much faster they could have climbed if Netease's William Ding or Sohu's Charles Zhang had relented in being emperors of their respective domains and placed shareholder value above the title on their business cards.

Youku and Tudou are not Web portals, and they face a different restrictive business landscape. Combined, their businesses still control less than 40% of the Internet video market sector in China, according to statistics from Internet research firm Analysys International.

These two online video companies face a major hurdle in China that may be easier to fight with combined forces. Ultimately, they are competing with entrenched government-funded online video initiatives. By grabbing more of the advertising dollars and becoming a greater force in the market, Youku Tudou make themselves more valuable, but they also make themselves a larger target for government actions.

This merger is a recognition by both companies that they need each other to grow in the market. They probably fear Chinese government video laws and government-funded competing businesses that can swiftly undercut their own services. A small government law here, or an innocuous inspection there can unravel the online video sector in China. Never forget how a change in Chinese government policy a few years ago wiped out so many mobile business initiatives in China!

So kudos to the boards at Youku and Tudou for doing what no other major Chinese tech firms have had the guts to previously do. After recent intellectual property rights lawsuits between the firms, shareholders will now be watching to make sure the past acrimony turns to gold.