The loss-making company, formed by a merger between Youku (whose English name looks suspiciously like YouTube, while its Chinese name means “best and cool”) and rival Tudou (meaning “potato”) admitted its revenue for the upcoming quarter would come in below analysts’ forecasts.
Founded by Stanford MBA and Chinese internet veteran Victor Koo, Youku has always struggled to make money despite being China’s largest video-sharing site. And now, just like Google and Facebook, Youku is grappling with how to make decent revenue from its booming mobile phone traffic. The core of the problem is that advertisers are generally less confident about the value of ads on mobile phones and tablets, so they buy less ad space and want to pay lower prices. It doesn’t help that smaller phone and tablet screens provide less advertising real estate.
Youku did not really dwell on this issue in its earnings announcement. It said it that its daily mobile video views exceeded 100 million by the end of 2012. The company added optimistically: “in 2013, we also plan to start monetizing the significant growth in our mobile traffic.” In other words Youku, like many of its peers, has not quite worked this out yet.
Broker Maxim Group slapped a “sell” rating on Youku’s shares in early February, partly because of concerns that the mobile internet trend will make the company less likely to turn a profit in future. This quote from Maxim’s note, which was reprinted in investment magazine Barron’s (paywall), makes sobering reading for anyone invested in internet companies that rely on advertising. Maxim analyst Echo He said of Youku:
“Mobile ad revenue may have lower gross margin than PC ad revenue, at least in the initial years. First, we believe the same content may carry more ads on PC than on mobile and that an increase in time spent on mobile may cause a decrease in time spent on PC. Thus, the more traffic from mobile, the lower Youku’s gross margin.”
The internet, then, is one sector where being based in fast-growing China is not any guarantee a company will make money.