Temasek Holdings to milk Chinese spending power

SINGAPORE--State-owned investment company, Temasek Holdings, opened its purse strings to fund Chinese online video company, Tudou, because it wanted to capitalize on China's consumer market and its rising spending power, according to an industry analyst.

Jessica Lo, managing director and head of private equity and mergers and acquisitions practices at China Market Research Group (CMR), told ZDNet Asia that the 2010 investment sweetspot is the Chinese consumer. This explains why billion-dollar private equity funds such as Fountainvest Partners and Temasek are focusing on this demographic which has "a potential high upside", she said.

The Chinese consumer market is "where the money and investment returns are", as retail sales are projected to grow 16 percent to 18 percent this year, Lo said in her e-mail.

According to the Financial Times, Tudou, China's second-largest online video company, raised US$50 million in funds at the start of August, of which Temasek contributed US$35 million.

Most of these funds will be used to "prepare for an expected take-off in mobile video consumption and to counter new competitors in the already fragmented market", Tudou CEO Gary Wang said in the report. "There are a lot of new competitors coming in [including] the state-owned television networks, the portals and other big players such as Baidu and Tencent. We take them very, very seriously. We take everyone who has money to spend seriously."

Asked to elaborate on its investment plans, Anita Huang, Tudou's vice president of marketing and business development, said the company will look to expand its existing operations to focus on integrating professional content with user-generated content--which currently stands at over 38 million videos--and its original in-house productions.

The Chinese company will also be investing in new mobile video technology, which is a "focal area" of Tudou's future growth strategies, Huang told ZDNet Asia in an e-mail.

For instance, it is now developing video applications for all major mobile device platforms such as Google's mobile Android operating system (OS), Apple's iOS, Nokia's Symbian and Microsoft's Windows Mobile, she said. As part of such efforts, the company launched the first Chinese video app for Apple's iPad tablet in July, she added.

Windows Mobile is the predecessor of Redmond's upcoming Windows Phone 7 operating platform, with the latter expected to hit the markets later this year.

To differentiate itself from competitors such as Youku, which is another Chinese video site, Huang said Tudou's brand, loyal user base and "differentiated content"--particularly in user-generated and in-house production videos--will help distinguish the company as an "innovative video platform" player compared to its rivals.

Online video overvalued?
However, CMR's Lo expressed her reservations about the viability of these online video companies' business models.

The analyst explained: "I am not convinced that Tudou and other online video sites deserve such high valuations. Tudou has raised US$135 million [since it started in Apr. 15, 2005] but I am not convinced it has a real business model that will turn profitable anytime soon."

Citing the example of YouTube, Lo noted that despite the reach and popularity of the U.S. online video site, it continues to "drag down" Google's earnings in the country. This does not bode well for Tudou and its ilk as China's online video advertising market--which is the main revenue generator for these companies--is still in its fledgling state compared to the American market, she said.

As such, many organizations are reluctant to spend more than a small percentage of their marketing budgets on online video sites because they are concerned over the medium's effectiveness, as well as the relationship between the sites' content and their branding, the analyst observed.

Lo predicted there will be "a lot of consolidation" in China's online video sector, with either Youku or Tudou winning in the pureplay online video sites, while portals such as Sina and QQ will continue to grow in strength.

She did add, though, that based on the CMR's past interactions with brand managers, Youku's content, which she said is "more professional", and ease-of-use features for advertisers give the site an edge over Tudou.

She noted that for Tudou to compete more efficiently, it needs to develop a better business model and shore up relationships with advertisers rather than spend its money on producing more of its branded content.

"Producing content is sexy and fun but does it really make money?" Lo questioned. "What they need to do is buy content or partner with a content partner instead, and focus on building up their revenue models."

She also preached caution to investors such as Temasek, which have or are looking to splash their cash in the online video space. She said valuations are getting "out of control" and are starting to bear too much similarities to investments such as News Corp's acquisition of MySpace in 2005.

"My guess is a lot of investors will lose a lot of money investing in the online video space," said Huang. "Too many investors are chasing deals in China that are high profile but will not necessarily generate revenue."

When contacted, Temasek declined to comment.