Speculation is growing over another large potential deal in China's online video industry, coming after leading firms Youku and Tudou announced their merger in March 2012.
Baidu, China's largest Internet search engine by market share, is reportedly in talks with video website PPStream (PPS) over an acquisition of PPS by Baidu's video unit, iQiyi.com.
PPS has denied the reports, but a source close to the matter told the Guangzhou-based South Metropolitan Daily Tuesday that Baidu has sent a term sheet for equity investment to PPS about the deal and will soon start a due diligence investigation.
The newspaper said the deal would be worth $350 million, paid mostly in cash.
On March 22, PPS denied the rumors of a takeover, saying that the company had abundant capital and good cash flow, as well as having a sound business as an independent website.
It issued another denial Wednesday, saying that it would focus on doing its own job well and that the company had partnered with Television Broadcasts Limited (TVB) to offer TV series in 2013.
Gong Yu, CEO of Baidu's wholly owned subsidiary iQiyi.com, refused to comment on the issue Sunday when reached by the Global Times.
PPS has been seen as an attractive acquisition target since 2012, with Internet giants Sohu and Tencent reported to be among the interested buyers.
PPS president Xu Weifeng said in September that the company should have gone public in 2011. PPS had considered a listing but decided against it due to the weak capital market in the US at the time.
PPS is one of the few profitable firms in the online video sector thanks to its gaming advantages, and it offers a good platform to display advertisements, said Zhang Fan, an analyst with Internet consultancy Analysys International.
Zhang told the Global Times Thursday that there would be more takeovers of video websites by other Internet firms because video websites have good monetizing potential.
Even if the news of Baidu's proposed takeover of PPS is not true, there will be more consolidation in the sector soon, as the domination of the market by bigger firms is growing, Yan Huawen, an industry analyst with Internet consulting firm iResearch, told the Global Times Wednesday.
More deals coming
According to official data, China had 450 million online video users by the end of 2012. And domestic online video firms earned 8.83 billion yuan ($1.42 billion) in advertising revenue during the year, up 82.7 percent year-on-year, according to statistics released by Analysys International on March 14.
Despite the merger between Youku and Tudou, Analysys listed them separately as their operations are still independent from each other. Youku took the lead in terms of market share in 2012 with 21.5 percent, followed by Internet firm Sohu's video unit with 10.3 percent, iQiyi with 9.7 percent and Tudou with 8.7 percent.
PPS, PPTV, Letv and Tencent's video unit each had a share of 6-7 percent, the data showed.
Industry analysts believe that there are five top firms in the sector - Youku Tudou, Sohu's video unit, iQiyi, Letv and Tencent's video unit - as they are either listed firms themselves or are backed by cash-rich parent companies.
Although Youku Tudou has become the biggest video firm, its leading position is threatened by Sohu, Tencent and iQiyi, which are all spending heavily on content, as it is the key aspect of competition in the sector, She Qingzhou, deputy president of online video company Beijing Funshion Online Technologies Ltd, told the Global Times Thursday.
Sohu offers American TV series, while Youku Tudou specializes in dramas produced by TVB and iQiyi is known for its cartoons. Their different specialties will help them catch greater attention from advertising clients, which are still the main source of revenue in the sector, said Yan from iResearch.
Zhang from Analysys said the smaller video firms need to expand their business models, such as trying the gaming-video combination model used by PPS.
"Smaller video companies are seeking ways to survive, as there is a gap between us (small companies) and the top video firms. So we need to have our unique positioning and characteristics to gain recognition from the capital market and users," said She.
Funshion specializes in films and its cooperation with BesTV New Media Co, a subsidiary of Shanghai Media Group (SMG), also allows Funshion to offer programs jointly produced by Funshion and SMG, She said.
Tao Chuang, CEO of video website PPTV, told the Global Times Thursday that his company is open to strategic cooperation with other firms, and it will be careful to choose the right time to go public.
Despite the intense competition, more video firms have been reporting profits recently.
PPS and Letv have been making a profit since 2009, and PPTV and Funshion said they began to make a profit at the end of 2012. Tao predicted that more video firms will begin to make profits this year and in 2014.
Because many online video users are spending less time on their computers due to rising use of mobile devices like smartphones and tablets, some video firms have accelerated their push into the mobile market.
Youku and PPS were the most downloaded video apps for iPad and iPhone users respectively by 2012, and the iQiyi app was the most favored video app by Android-based phone users, data from Analysys showed.
The traffic from mobile access to iQiyi accounted for 33 percent of the total at the end of 2012, compared with only 6 percent at the beginning of the year, said Wang Liyuan, a member of the marketing staff, noting that its total traffic doubled in 2012.
Wang told the Global Times Wednesday that the company has an app especially for cartoons, and it launched papaqi, a mobile video recording and sharing app in February.
Sohu's video unit will continue to offer new content for mobile users, Sun Jin, a member of the unit's PR staff, told the Global Times Thursday.
Tao with PPTV said their mobile users increased fourfold in 2012 compared with the year before and its traffic from mobile access now accounts for 30 percent of the total.
"Youku Tudou has its advantages in the computer-based video market, but mobile Internet use offers a chance for smaller companies to catch up with the top ones," She said.