Some Perspective on YOKU’s Warner Brothers Deal

28 Jun

While something akin to Netflix is still a relatively new concept in China, I think we’re in serious need of taking a step back from today’s ridiculous reaction (judging by the stock rising 35% today) to YOKU’s new deal with Warner Brothers.

China’s Youku Inc (YOKU.N) has agreed with Warner Bros Entertainment’s local joint venture to offer pay per view movies on its newly launched online paid content platform, Youku said on Tuesday.

Under a three-year agreement with Warner Bros, Youku will add 400 to 450 Warner Bros movies to its Youku Premium library.

“People are increasingly willing to pay for high-quality content, and we take the growth of Youku Premium as a sign that the market is improving for paid services,” Dele Liu, Youku’s chief financial officer, said in a statement.

Great, so YOKU is paying (paid) a lot of money for content it now has to try to sell into a market that may or may not exist.  Let me rephrase that: In order for this deal to be break even (let alone be profitable), YOKU has to convince users not accustomed to paying for “premium” content to…pay for it.  Has this strategy worked anywhere in the world?  I can’t think of any examples of any similar size/scale.

Youku Premium, officially launched on Tuesday, began beta testing in October 2010. Since then, the service has processed 200,000 paid transactions for its library of more than 300 movies and 3,880 educational programs.

According to YOKU’s annual report, they had roughly 280 million monthly visitors.  In 8 (or 9) months then, assuming this number hasn’t changed, they’ve had 2,240,000,000 visits. Two point two BILLION.  In that time, their “beta” test of Youku Premium resulted in 200 thousand transactions.  I’m not entirely sure of the scale of the beta test, but only 0.009% of site visits resulted in a transaction. That’s only 8 or 9 out of every 100,000.

While this number will surely increase significantly when Youku Premium is rolled out across the site, I’m FAR less optimistic than other participants.  I’ve been privy to semi-confirmed reports of illegally-hosted copyrighted content not just on YOKU’s competitors’ sites (of which there are many), but on YOKU’s platform, too.  Ultimately, there are two questions investors must ask themselves:

  • Why would Chinese users accustomed to getting content for free pay for it, when it can still be accessed for free with minimal effort/inconvenience?
  • YOKU hasn’t filed a 6-k yet, but from the myriad of news reports I’ve read, this is NOT an exclusive deal, i.e. the content will still be available elsewhere and Warner Brothers is still free to strike similar deals with YOKU’s competitors.  This isn’t even the first such deal Warner Brothers has struck!  Is Youku’s brand strong enough to keep users coming back?

The company is growing revenues at an incredible rate (so they claim), and the market is growing.  But in evaluating how much to pay for the stock, we have to consider more than just headlines.  Is a company worth 35% more because they signed a non-exclusive to sell content into a market not accustomed to paying for it?  I highly doubt it.

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8 Responses to “Some Perspective on YOKU’s Warner Brothers Deal”

  1. CH June 28, 2011 at 3:33 pm #

    ai…what can i say….

  2. james June 28, 2011 at 9:16 pm #

    you got you A$$ handed 2 you

    • The Analyst June 28, 2011 at 9:20 pm #

      Care to explain how? I have no position nor have I ever had one in YOKU.

      Nice try, though.

      • CH June 29, 2011 at 9:03 am #

        Well, continue watching how it develops~~wait and see ^_^

      • CH July 1, 2011 at 3:11 pm #

        36.77 now dude~~have a nice wkend

        • The Analyst July 1, 2011 at 3:12 pm #

          I have no position, why do you continue to think I do? I’ve said as much half a dozen times now…

  3. @theback9 July 5, 2011 at 8:28 pm #

    good post

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  1. Morning News: June 29, 2011 | Crossing Wall Street - June 29, 2011

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