• Will China's Successful Youku IPO Spark US Online Video Offerings in '11?

    Yesterday, China's Youku, which started as a YouTube-style user-uploaded video site, but has evolved to a Hulu-style distributor of professional video, went public on the New York Stock Exchange. It offered 15.85 million American Depositary Receipts, or "ADRs," which represent ownership shares in non-U.S. companies, at $12.80 apiece, raising over $200 million. When the market closed, the ADRs stood at $33.44, up 161%, the best one-day performance for a U.S. IPO in the last 5 years (they're up another $5 today as well). Youku, which recorded $35 million in revenue for the first nine months of this year (and a $25 million loss), had an end of day valuation of $3 billion+.

    Yes, I know what you're thinking - this is crazy, the bubble days have returned and there's a huge "China factor" multiplier at work for Youku. All of that is no doubt true. But here's something else that's true - while the global economy and stock markets have undergone wrenching change and volatility over the last 2+ years, the online video market has boomed. For certain kinds of investors (both professional and non-professional) who value growth over everything else, there are few sectors which have more appealing characteristics. As tens of millions of people have adopted online and mobile video, devices for viewing online video on TVs have proliferated, premium content has become available and business models have firmed, investors have taken notice.

    And that brings us to the question of whether Youku's success may help spark a series of IPOs by U.S. online video companies in '11. Though I have no inside knowledge and I concede this is purely speculation, I think the answer is yes, assuming the markets cooperate. In reality, private investors have been betting strongly on the online and mobile video industries for a while now. According to the data I collect each quarter, at least $1.2 billion has been raised by private video-oriented companies in the last 2 years. These investors of course expect liquidity at some point, and while there has been some industry consolidation, bigger payoffs almost always come through public offerings.

    However, even as online video usage has exploded, there have been few "pure-play" opportunities for public investors to bet on. In fact, Netflix has probably been the closest proxy, and note that as it has gained millions of subscribers this year and inked content for its Watch Instantly feature, it has cleverly been re-branding itself as a "streaming" content company (its stock has more than tripled this year to nearly $190/share).

    As other online video companies have grown nicely they now appear well-positioned to offer public investors a chance to buy in. Companies that have leading shares in key sectors would be most likely to go out first, suggesting Demand Media (which has already filed), Hulu (content aggregation), Brightcove (software, publishing), Tremor Media (advertising, monetization) plus a number of infrastructure-focused companies would be likely early candidates. Once again I have no inside knowledge and am not recommending buying any of these companies should they actually go public. 

    2010 has been a huge year for online and mobile video consumption and signs point to 2011 being even bigger. If that's the case, successful companies in the sector will continue to attract investor attention, drafting on the success of those like Youku.

    What do you think? Post a comment now (no sign-in required).

    Update: Youku closed up another another 28% today, to close at $42.70. Valuation now around $4.3 billion. Feels like '99 all over again.