Summary
SUMMARYThis summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in the ADSs, you should carefully read this entire prospectus, including our financial statements and related notes included in this prospectus and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Youku.com Inc.
We are the leading Internet
television company in China. Our Internet television platform enables consumers to search, view and share high-quality video content quickly and easily across multiple devices. We believe our continuous focus on offering a superior user experience
has enabled us to become the largest Internet television company in China and elevated our Youku
brand, which stands for “what’s best and what’s cool” in Chinese, to be the most recognized online video brand in China according to a 2010 survey conducted by an affiliate of the Chinese Academy of
Sciences. According to iResearch, we had approximately 203 million monthly unique visitors from homes and offices in September 2010 and approximately 61 million monthly unique visitors from Internet cafes in August 2010. We had a 40% market share in
terms of total user time spent viewing online videos in China during the second quarter of 2010, while our closest competitor accounted for a 23% market share during the same period, according to iResearch. In 2009, we had an implied market share of
approximately 14% in terms of online video advertising spend in China, based on iResearch’s estimated data of total online video advertising spend in China.
As a video content aggregator in China, we are well-positioned to benefit from the market growth potential in China’s highly fragmented and regulated content production and distribution markets, where less than half of the professionally produced television serial dramas and movies each year are aired on television or released in theaters. We have built a large and comprehensive online video content library. The majority of the videos on our website are professionally produced content, such as television serial dramas, movies, variety shows, current events reports and music videos, and the remainder is comprised of user-generated content and in-house productions. We license video content typically at fixed rates for a specified term. The average term of licenses varies depending on the type of content, with movies and television serial dramas having an average term of approximately 2.5 years and 2 years, respectively. We generally renew our licenses when they expire. As of September 30, 2010, our video content library contained more than 2,200 movie titles, 1,250 television serial drama titles and over 231,000 hours of other professionally produced content, including 194 variety shows.
Our mission is to become the primary source of video content for the Chinese population across any Internet-enabled device. Leveraging our proprietary video content delivery network, or CDN, comprised of over 5,500 servers, we provide fast streaming and upload speeds. At the same time, our comprehensive content library, coupled with an easy-to-use online interface, facilitates our providing a superior user experience, according to a 2010 survey by China Internet Week, a magazine affiliated with the Chinese Academy of Science. As a result, our Internet television platform attracts a nationwide audience, the majority of which resides in China’s more affluent urban areas.
We currently derive substantially all of our revenues from online advertising services. Our advertising solutions present brand advertisers with attractive opportunities to combine the visual impact and engagement of traditional television-like multimedia advertisements with the interactivity and precise targeting capabilities of the Internet. We strive to promote a healthy advertising environment on our website to attract mainstream brand advertisers. We believe our differentiated sales proposition has contributed to the rapid increase in the number of international and domestic brand advertisers, which increased from 7 in 2007 to 141 in 2008 and to 303 in 2009, and from 230 in the nine months ended September 30, 2009 to 343 in the nine months ended September 30, 2010.
The desirable demographic characteristics of our large user base as well as our differentiated advertising solutions and environment are key factors driving the fast growth in our online advertising revenues. We believe that wireless and web-based subscription services, which we plan to formally launch in the foreseeable future, will also increasingly contribute to our net revenues over time. We launched Youku.com in December 2006. As is customary in the advertising industry in China, we offer commissions to third-party advertising agencies who purchase our advertising services and recognize revenues net of these commissions. Our net revenues increased from RMB1.8 million in 2007 to RMB33.0 million in 2008 and to RMB153.6 million in 2009, and increased from RMB99.8 million in the nine months ended September 30, 2009 to RMB234.6 million (US$35.1 million) in the nine months ended September 30, 2010.
Due to PRC legal restrictions on foreign ownership and investment in value-added telecommunications services and advertising businesses in China, we operate our business primarily through our consolidated affiliated entities in China. We do not hold equity interests in our consolidated affiliated entities. However, through a series of contractual arrangements with these consolidated affiliated entities and their respective shareholders, we effectively control, and are able to derive substantially all of the economic benefits from, these consolidated affiliated entities.
China’s video media market has developed in a very distinct manner from those in the United States and Western Europe, resulting in a domestic ecosystem highly regulated and fragmented both in terms of production and distribution. This market is undergoing substantial changes partially due to macro trends affecting the global video media market, such as the migration of consumers online, the digitization of both new and existing content, and more convenient access to that content through increasingly faster fixed and mobile broadband connections. The combined effect of these macro trends is that the Internet has emerged as a viable video distribution channel. In China, these changes are magnified by the country’s rapid economic growth, the expansion of the advertising industry, significantly increased consumer spending, and the fragmentation of the legacy production and distribution ecosystems for video content. This has created opportunities for web properties in China with differentiated, desirable video content to aggregate large, nationwide audiences while delivering personalized content whenever users want. With disposable income growing quickly in China, these aggregated audiences have become more attractive to advertisers as well as more capable of paying for content.
China’s Internet television market is early in its development and is evolving rapidly as an increasing number of users search, view and share video content online. For the purposes of this prospectus, Internet television is generally synonymous with online video and refers to consumers’ accessing any type of video content via any Internet-enabled device. The strong consumer reaction to, and the emerging advertiser reception of, Internet television in China represents an increasing convergence of the large and fast-growing Internet market and the large, diverse and highly fragmented video media market.
According to iResearch, the size of China’s online video market, as measured by total revenues, grew rapidly from RMB0.5 billion (US$78 million) in 2006 to RMB2.8 billion (US$413 million) in 2009, representing a compound annual growth rate, or CAGR, of 74%. China’s online video market has become increasingly concentrated, with the top five players accounting for 83% of the total user time spent watching online videos in China during the second quarter of 2010, according to iResearch.
We believe that the following strengths contribute to our success and differentiate us from our competitors:
Our mission is to become the primary source of video content for the Chinese population across any Internet-enabled device. We intend to achieve our mission by expanding our content library and user base, enhancing our brand and better monetizing our user traffic. More specifically, we plan to implement the following strategies:
We expect to face risks and uncertainties related to our business and industry, including those relating to our ability to:
In addition, we expect to face risks and uncertainties related to our corporate structure and doing business in China, including:
See “Risk Factors” and other information included in this prospectus for a discussion of these and other risks and uncertainties associated with our business and investing in our ADSs.
On September 20, 2005, our founder, Victor Wing Cheung Koo, incorporated 1Verge Inc. in the Cayman Islands. On June 20, 2008, we changed the company name from 1Verge Inc. to Youku.com Inc. On November 14, 2005, we established our wholly owned subsidiary, 1Verge Internet Technology (Beijing) Co., Ltd., or 1Verge Internet, in Beijing, China. On April 27, 2010, we acquired all of the equity interest in Jet Brilliant Limited, or Jet Brilliant, a Hong Kong company, which wholly owns Beijing Jet Brilliant Advertising Co., Ltd., or Jet Brilliant Beijing, an advertising company established in Beijing, China. Jet Brilliant operates as our intermediary holding company. For descriptions of the tax implications of having Jet Brilliant as our Hong Kong intermediary holding company and the relevant PRC laws and regulations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Taxation—PRC” and “Regulation—Regulations on Tax—Dividends Withholding Tax.”
The following chart illustrates our corporate structure as of the date of this prospectus:
PRC laws and regulations currently limit foreign ownership of companies that provide value-added telecommunications services. To comply with these restrictions, we conduct our online video operations in China primarily through our consolidated affiliated entity, 1Verge Information Technology (Beijing) Co., Ltd., or 1Verge Information. 1Verge Information is our website operator and Internet content provider, and holds the licenses and permits issued by both the telecommunication and broadcast media authorities as well as other ancillary licenses and permits to conduct our online video operations. PRC laws and regulations also restrict foreign ownership of companies that conduct advertising business by requiring a Sino-foreign joint venture’s foreign investor to have previously had two years’ direct advertising operations as its main business outside of China, and a wholly foreign-owned enterprise’s foreign investor to have previously had three years’ direct advertising operations as its main business outside of China. As a Cayman Islands company, we are a foreign legal person under PRC laws and we have not been involved in any advertising business outside of China for the requisite number of years. We conduct our advertising business in China primarily through our consolidated affiliated entities, 1Verge Information and Jiaheyi Advertising (Beijing) Co., Ltd., or Jiaheyi. Jiaheyi is an advertising agency, which plays an immaterial role in our business and contributed less than 1% of our total net revenues in each of 2007, 2008, 2009 and the nine months ended September 30, 2010. We intend to begin the process of liquidating Jiaheyi in 2011. Jet Brilliant is a Hong Kong company which satisfies the requirement of having three years’ direct advertising operations, and therefore was approved by local branch of the State Administration for Industry and Commerce, or the SAIC, to establish Jet Brilliant Beijing on May 19, 2009, a wholly foreign-owned advertisement company. As we acquired Jet Brilliant on April 27, 2010, Jet Brilliant Beijing will conduct our advertising agency business in the future. However, we do not expect that the advertising agency business will play an important role in our overall business in the future.
Our wholly owned subsidiary, 1Verge Internet, has entered into a series of contractual arrangements with 1Verge Information, Jiaheyi and their respective shareholders, which enable us to:
We do not have equity interest in 1Verge Information or Jiaheyi. However, as a result of these contractual arrangements, we are considered the primary beneficiary of 1Verge Information and Jiaheyi, and we treat them as our consolidated affiliated entities under the generally accepted accounting principles in the United States, or U.S. GAAP. We have consolidated the financial results of these companies in our consolidated financial statements in accordance with U.S. GAAP. For the three years ended December 31, 2007, 2008 and 2009, and the nine months ended September 30, 2010, we received nil service or license fees under the amended and restated exclusive technical and consulting services, trademark license and domain name license agreements referred to in “Corporate Structure—Agreements that Transfer Economic Benefits to Us” from 1Verge Information or Jiaheyi as neither of them has yet to achieve profitability. For a description of these contractual arrangements, see “Corporate Structure.” For a detailed description of the regulatory environment that necessitates the adoption of our corporate structure, see “Regulation.” For a detailed description of the risks associated with our corporate structure and the contractual arrangements that support our corporate structure, see “Risk Factors—Risks Related to Our Corporate Structure.”
Our principal executive offices are located at 5/F, SinoSteel Plaza, 8 Haidian Street, Beijing, 100080, the People’s Republic of China. Our telephone number at this address is +86 (10) 5885-1881. Our registered office in the Cayman Islands is located at Clifton House, 75 Fort Street, P.O. Box 1350, Grand Cayman, KY1-1108 Cayman Islands. Our telephone at this address is +1 (345) 949-4900. We also have three representative offices in Shanghai, Guangzhou and Chengde, and a branch in Xi’an, China.
Investors should submit any inquiries to the address and telephone number of our principal executive offices set forth above. Our website is www.youku.com and the information contained on this website is not a part of this prospectus. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 400 Madison Avenue, 4th Floor, New York, New York 10017.