Prospectus Summary
PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to buy our ADSs.Our Business
We are a leading online video company in China. Our “Tudou” brand is the most valuable online video brand in China, according to a report commissioned by us and prepared by Sinomonitor, an independent market research company, or the Sinomonitor report. Our website, Tudou.com, is named by the Sinomonitor report as the most favored and recommended online video website in China. Tudou.com, which was the first online video site launched in China, provides a robust online platform for Chinese Internet users to upload, watch and share videos through the Internet. By leveraging our leading industry position and highly recognizable brand, we have established a large and highly engaged user community. Our registered users increased from 16.3 million as of December 31, 2007 to 56.4 million as of December 31, 2009 and further to 71.7 million as of September 30, 2010. Our average number of new video clips uploaded daily increased from approximately 16,000 in 2007 to approximately 29,000 in 2009 and further to approximately 42,000 for the nine months ended September 30, 2010.
Our mission is to build an online video destination where people can find content they want to see, share content they create and connect with other like-minded people. To fulfill this mission, we provide a comprehensive selection of unique and differentiated, entertainment oriented user-generated content, or UGC, premium licensed content and in-house developed content on our Tudou.com website that includes entertainment, sports, finance, music and other content. Our Tudou.com website also provides an online platform that allows users to upload, share, watch, rate and comment on videos, ensuring that our users enjoy a highly engaging and interactive experience on our website. As of September 30, 2010, our content library had more than 36.3 million video clips. The volume of high-quality and differentiated content available on our website has allowed us to establish a valuable user base in China, consisting primarily of young urban educated users between the ages of 18 and 35, a particularly attractive demographic to advertisers.
We have focused on developing our online platform to provide what we believe is the best user experience in the online video industry in China. We work extensively to develop the creativity and artistic skills of our user community through signature industry events such as the Tudou Video Festival, through talent development initiatives and through providing monetary reward opportunities to producers of our most viewed UGC. To ensure a high-quality user experience, we have developed our technology platform for stability, scalability and flexibility, and have access to over 4,000 servers across China.
The online video industry and online advertising industry have grown substantially in recent years as a result of positive macro trends, such as robust economic growth in China, increases in disposable income and an increasing Internet penetration rate. In addition, individuals desire control of their media viewing experience, and advertisers are increasingly accepting the Internet as a critical part of their marketing strategy. We believe we are well positioned to capitalize on these positive industry trends and growth opportunities.
We generate revenues primarily by delivering online advertising services to advertising customers. Our online advertising customers include some of the world’s well-known brands such as Unilever, Coca-Cola, Pepsi, Volkswagen and P&G, which were our top five customers and collectively accounted for approximately 13.5% of our net revenues for the nine months ended September 30, 2010, as well as leading Chinese domestic brands such as Master Kong and China Mobile, which were our top two Chinese domestic brand customers and collectively accounted for approximately 4.7% of our net revenues for the nine months ended September 30, 2010. We work for our advertising customers primarily through advertising agencies. Such agencies include Hylink, Allyes, AdChina, JWT and wwwins Consulting, which were our top five agencies and collectively involved in 25.8% of our net revenues for the nine months ended September 30, 2010. A majority of these advertising customers and agencies have been working with us since 2007. We provide advertising services primarily through our Tudou.com website in various formats including pre-roll or post-roll video advertisements, in-roll logos, background advertisements, banners, buttons, links and stream advertisements. In addition, we provide innovative and differentiated online advertising services including event sponsorships, interactive advertising and the opportunities to purchase advertising embedded in our in-house developed content.
We also began generating revenues in January 2010 from our mobile video services that we provide primarily through a channel on China Mobile’s wireless video platform, which had an aggregate of approximately 9.1 million users with a total of approximately 15.6 million clip views in the nine months ended September 30, 2010. Through our agreement with China Mobile, we select and provide video programs based on our assessment of mobile user preferences. Users pay a monthly subscription fee for access to our video channel or pay on a per-clip basis, and we share the fees for such services with China Mobile.
Since we launched our online video platform in April 2005, our business has grown substantially. The average number of new video clips uploaded daily by our users increased from approximately 23,000 in 2008 to approximately 29,000 in 2009 and approximately 42,000 in the first nine months of 2010. Our net revenues increased from RMB6.6 million in 2007 to RMB30.9 million in 2008 and to RMB113.2 million (US$16.9 million) in 2009, representing a compounded annual growth rate, or CAGR, of 313.6% over the three-year period. Our net revenues increased by 230.1% to RMB224.8 million (US$33.6 million) for the nine months ended September 30, 2010 from RMB68.1 million for the same period in 2009. Our net loss was RMB95.9 million, RMB212.6 million and RMB144.8 million (US$21.6 million) in 2007, 2008 and 2009, respectively. Our net loss decreased by 16.6% to RMB83.7 million (US$12.5 million) for the nine months ended September 30, 2010 from RMB100.4 million for the same period in 2009.
We are a Cayman Islands holding company and conduct substantially all of our online video services in China through our variable interest entities, or VIEs. We have entered into a series of contractual arrangements with our VIEs through which we exercise effective control over operations of these entities and receive economic benefits generated from these entities. See “—Corporate History and Structure.”
Our Industry
According to the China Internet Network Information Center, or CNNIC, a non-profit state-owned research center in China, the number of Internet users in China reached 420.0 million as of June 2010. Significant growth potential exists as the Internet penetration rate in China was only 31.8% as of June 2010 compared to 74.1% as of December 2009 in the United States, according to CNNIC. According to ZenithOptimedia, an independent market research firm, Internet advertising expenditures in China grew from US$1.0 billion in 2006 to US$3.3 billion in 2009. ZenithOptimedia estimates that such expenditures will increase to US$9.5 billion in 2012, representing an expected CAGR of 42.9% from 2009 to 2012. The Internet is expected to surpass newspapers as the second largest advertising medium in China after television by 2011, according to ZenithOptimedia.
China’s online video industry is still in the early stages of development and continues to evolve rapidly as an increasing number of users are seeking more control of their media viewing experience. According to iResearch Consulting Group, or iResearch, the total number of online video users in China was estimated to have reached approximately 309.0 million in 2009, a significant increase from 82.2 million in 2006 and is expected to grow at a CAGR of 36.3% from 2006 to 2012, driven by increasing Internet penetration rate, improving video quality and more video content being available online. The recent growth in user penetration rates has allowed China to surpass the United States, in terms of number of users. In 2009, China was estimated to have approximately two times the number of online video users as the United States, according to iResearch. Advertisers are recognizing the importance of online video advertising as a major part of their online advertising strategy. The online video industry is one of the fastest growing segments in online advertising, with a CAGR of 138.7% from 2006 to 2009, and is expected to grow at a CAGR of 76.2% from 2009 to 2013, according to iResearch.
Due to the increasing rollout of 3G networks and related mobile infrastructure in China, mobile devices are playing an increasingly important role in China’s Internet development. The number of mobile Internet users in China reached approximately 276.8 million as of June 2010, a significant increase from approximately 117.6 million and approximately 233.4 million as of December 2008 and 2009, respectively, according to CNNIC.
Our Strengths
We believe that the following competitive strengths enable us to compete effectively and to capitalize on the rapid growth in the online video industry in China:
Our Strategies
Our objective is to strengthen our leading position in the online video industry and to establish Tudou as a leading media company in China. We intend to achieve our objective by pursuing the following strategies:
Our Challenges
We believe that the following are some of the major risks and uncertainties that may materially adversely affect us:
See “Risk Factors” and other information included in this prospectus for a discussion of these and other risks and uncertainties.
Corporate History and Structure
We are a Cayman Islands company and conduct our business operations principally in China through our PRC subsidiaries and VIEs. Foreign ownership in Internet-related and mobile value-added service businesses is subject to restrictions under current PRC laws, rules and regulations. To comply with the applicable PRC laws, rules and regulations, we conduct our operations in China through a series of contractual arrangements entered into with our VIEs, namely Quan Toodou Network Science and Technology Co., Ltd., or Quan Toodou, Shanghai Suzao Network Science and Technology Co., Ltd., or Shanghai Suzao, and Chengdu Gaishi Network Science and Technology Co., Ltd., or Chengdu Gaishi, and their respective shareholders, through which we exercise effective control over operations of these entities and receive economic benefits generated from these entities.
However, these contractual arrangements may not be as effective in providing us with control over the VIEs as direct ownership of these companies. In addition, these VIEs or their shareholders may breach the contractual arrangements with us. In such cases, we would have to rely on legal remedies under PRC law, which may not always be effective, particularly in light of uncertainties in the PRC legal system. For detailed analysis of risks associated with these contractual arrangements, see “Risk Factors—Risks Related to Doing Business in China.”
The following diagram illustrates our corporate structure and the place of incorporation of each of our subsidiaries and VIEs, as of the date of this prospectus.
Direct ownership Contractual arrangements: See “Corporate History and Structure—Our Corporate Structure—Contractual Arrangements with Quan Toodou and its Shareholders, Contractual Arrangements with Shanghai Suzao and its Shareholders and Contractual Arrangements with Chengdu Gaishi and its Shareholders.”Corporate Information
Our principal executive offices are located at Building No. 6, X2 Creative Park, 1238 Xietu Road, Xuhui District, Shanghai 200032, People’s Republic of China. Our telephone number at this address is (86-21) 5170-2355 and our fax number is (86-21) 5170-2366. Our registered office in the Cayman Islands is at the offices of Maples Corporate Services Limited at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.
Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is www.tudou.com. The information contained on our website is not part of this prospectus. Our agent for service of process in the United States is CT Corporation System located at 111 Eighth Avenue, New York, New York 10011.
Conventions Used in This Prospectus
Unless otherwise indicated, references in this prospectus to:
Unless otherwise indicated, information in this prospectus: (i) assumes that the underwriters do not exercise their option to purchase up to an aggregate of additional ADSs representing Class B ordinary shares from us, and (ii) does not include 12,240,118 ordinary shares, consisting of 1,057,500 Class A and 11,182,618 Class B ordinary shares, issuable upon exercise of outstanding options or reserved for future issuance under our share incentive plans.
This prospectus contains translations of certain Renminbi amounts into U.S. dollars at specified rates. Unless otherwise stated, all translation of financial data from Renminbi into U.S. dollars in this prospectus has been made at the noon buying rate in effect on September 30, 2010, which was RMB6.6905 to US$1.00. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. See “Risk Factors—Risks Relating to Our Business and Our Industry—Fluctuations in exchange rates have resulted in, and are expected to continue to result in, foreign exchange losses and to adversely impact our profitability.” On November 5, 2010, the noon buying rate was RMB6.6622 to US$1.00.