China online video companies create an internet giant

China's leading online video company Youku is buying its smaller rival Tudou to create the largest video platform site with more than one third of market share.

Youku.com is buying Tudou Holdings Ltd., according to Reuters, in an all-stock deal worth over $1 billion.

The rival companies have been plagued by net losses due to rising costs and have been locked into legal battles stemming from allegations of copyright infrigement and unfair practices, said Bloomberg.

Rising costs of internet bandwidth due to larger and larger video sizes and an increasing number of smaller competitors looking for a share of the 450 million internet users in China have sliced profits for both companies last year.

Before the merger, Youku had about 21 per cent of the market share, while Tudou claimed nearly 14 per cent.

"This creates China's biggest video site, but it doesn't create a YouTube – they still have less than 50 percent market share," said Bill Bishop to Reuters, an independent analyst based in Beijing.

Many analysts welcomed the merger and said that China's online video market is still too fragmented to allow for profitability.

“They were both burning through lots of cash,” said Bishop to the New York Times. “Now they can consolidate some of those efforts and find efficiencies in bandwidth and content acquisition.”

The new company will be renamed Youku Tudou Inc.

Youku says that it expects the buyout will increase cost savings annually from $50 million to $60 million, according to Bloomberg.

The transaction still requires the go-ahead by Youku and Tudou shareholders but is expected to be completed in the third quarter.