"We intend to lead the next phase of online video development in China,"said Victor Koo, founder, chairman and chief executive officer of Youku. On March 12, 2012, Youku Inc. (NYSE: YOKU) and Tudou Holdings Limited (NASDAQ: TUDO) announced that they had signed a definitive agreement for Tudou to merge with Youku in a 100% stock-for-stock transaction.

Under the terms of the agreement, Youku and Tudou shareholders will own 71.5% of shares, and shareholders of Tudou American Depository, a U.S. dollar-denominated equity fund of foreign corporations, listed on New York Stock Exchange (NYSE), will own the balance. The combined entity will be named Youku Tudou Inc. According to the press release, Youku's ADSs will continue to be listed on the NYSE under the symbol "YOKU".

The competition for the Chinese online video market has intensified. According to Chinalabs, a number of Chinese video sharing sites, such as 56.com, Ku6.com and Qiyi.com have gained 9.05 %, 8.24% and 7.11% market shares, respectively. However, online video sites are not able to generate reliable revenues except through advertising. Youku derives all of its revenues from online advertising services.

Tudou filed a prospectus form – publicly traded companies are required to file this form to disclose information – with the U.S. Securities and Exchange Commission in August 2011.

According to its summary, Tudou typically enters into advertising contracts with third-party advertising agencies. “We pay agency fees to third-party advertising agencies that purchase our advertising services and recognize revenues net of these agency fees.”

Youku has suffered losses since its initial public offering in 2010. Youku had a net loss of 204.68 million Yuan (US$ 31.01 million), while Tudou suffered a net loss of 347.4 million Yuan (US$ 52.6 million) in 2010. The net loss continued into the 2011 financial year. According to unaudited 2011 financial results, Youku reported a net loss of 47.474 million Yuan (US$ 7.445) for the third quarter, which ended September 30, 2011.

Besides continued losses in the Chinese video market, the new merged Youku Tudou Inc will have about 51% of market shares, according to Chinalabs. “Youku Tudou Inc. would establish a clear and dominant leadership position in China's online video sector and become one of the largest Internet properties in China,” said Koo.

“Small and medium size video sites will face competitive pressures as a consequence,” commented Yunting You, a lawyer with the Debund Law Office in Shanghai.

Tudou, the largest online video-sharing platform presents user-generated videos and professional content, such as movie clips, TV series and music videos, while Youku offers a combination of licensed professional content, user-generated content and self-produced web video content. This merger will create the country's largest online video-sharing platform and reduce the cost of licensed professional content.

“The greatest assets of Internet companies are users, teams and brand,” said Yongqiang Gu, chief executive of Youku. “With these three assets, reaping revenues and profits is just a matter of time.”

Both Youku and Tudou have started to extend their video services and content offerings to mobile platforms. According to the prospectus form filed in May 2011, Youku intends to develop and introduce products and services for and on various media platforms, such as mobile phones and tablet devices.

Tudou has worked closely with China Mobile as well as other regional operators, and mobile and handheld device manufacturers to extend its video services to mobile users since 2009.

According to the prospectus form filed in August 2011, Tudou begins to generate revenues in January 2010 from its mobile video services. According to the form, Tudou had an aggregate of approximately 15.8 million users with a total of approximately 27.7 million video views in 2010 and an aggregate of approximately 15.1 million users with a total of approximately 27.2 million video views for the six months ending June 30, 2011.

“Youku and Tudou share a vision for the future of online video in China and how to deliver the best user experience possible,” said Gary Wang, founder, chairman and chief executive officer of Tudou.(Pucong Han. )