Video Our Soul
------Integration plan for Youku.com & Tudou.com
By Sean / Jack / Stephen / Bing
On March 12th 2012, Youku, a leading Chinese online video Web site, is buying its biggest domestic competitor, Tudou, in an acquisition valued at $1.1 billion. This acquisition is expected to create an online video goliath, whose domestic market share will have achieved 35.5 % by the end of the merger. As two Hi-tech Internet company with limited operating history, the integration work in the real world may face unexpected and troublesome problem in the fast changing online video industry. Our final project tries to give a comprehensive integration scheme to this case.
Contents
1. Integration Plan Introduction Brand management / corporate culture / company objectives / integration framework 2. Human Resource Overall strategy / Action Plan 3. Information System Combined or Separate Action Plan? / Server System / R&D / Procurement 4. Finance Overview / Financial needs 5. Integration plan summary
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1. Integration plan introduction
In this part we will introduce how we decide the new company’s corporate strategy and how to design specific integration action plan accordingly. Highlights: We decide to preserve Youku and Tudou’s brand but use different brand positioning. The united corporate culture – speed, innovation, diverse, client service The united company goal is to become leader and influential media and community in china We will integrate server/system, R&D and procurement and not integrate marketing and sales, customer service.
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1.1 Brand management Both Youku and Tudou have become widely-recognized online video brands enjoying a high level of brand awareness. Tudou’s motto, everyone is the director of his life, and Youku’s motto, To be Chinese No.1 Video website, also assist its company to strengthen the brand loyalty. So our integration plan for brand is preservation, namely to preserve each brand but widen brand positioning differentiation. First, preservation maximizes the possibility of keeping loyal users of the two websites. Both websites provides social community services, which enables users to chat online, share personalized video and make real time comments. Video space service allows Active users to upload self-recorded videos and collect interesting videos. User data is hard to transfer from one to another, and if done, this will alter usage pattern and may cause customer loss. Second, preservation helps simplify the process of integration. We may avoid frequently happening problems in symbiosis integration, the most annoying of which is culture integration, which often becomes the root of failure in a merger.
Both companies have set foot in professionally produced content, guided user-generated content and in-house productions. We must differentiate the core business between the two companies to decrease inner competition and acquire larger market share. We hold the view that, Tudou should focus on user-generated content while Youku stick to professionally produced content and in-house productions.
1.2 Corporate Culture Youku’s corporate culture lays emphasis on speed. In the past 5 years, Youku has firmly occupied 18% market share by its company philosophy that “The fast is the winner” and “quick play, quick distribution, quick search”. Besides speed, teamwork also plays an important role in Youku’s corporate culture. Since launched in 2006, Youku encouraged its staff to make rapid process with teamwork spirit and be honest to colleges and manager. Tudou’s corporate culture is dream and innovation. Tudou resembles a traditional internet company with the feature young, energetic and creative. Their corporate culture has largely decided their product styles — Youku is fast and smooth and Tudou often supply interesting new product — and influenced their research & development strategy.
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In corporate culture integration section, we decide to choose preservation style, meaning keeping the two current culture integration coexist. And by setting a higher corporate goal and sharing common features in culture, we finally realize the merger naturally. The long-term corporate culture can be described as speed, innovation, diverse, client service.
1.3 Company objectives The merged company bears the weight of both Youku’s and Tudou’s dream. Youku positions itself as a video media promoting the broadband integrated services network in China. Tudou positions itself as a video social community through which users can share their funny video and communicate video-making experience. The united firm should simultaneously develop the two directions, so the company objectives are: Lead and guide Chinese video technology development Become the most influential internet media. Build harmonious video community for net citizens.
1.4 Integration framework Under the strategy we’ve elaborated above, we decide to first analyze the value chain and make action plan for each link on the value chain from three perspectives: Human Resource, Information system and Finance.
By using VRM (Value Reference Model), the value chain of the new company is composed of 5
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parts: server/system, research & development, procurement of content, marketing & sales, customer service. The first three parts will be the core of integration plan and the last but two will not be integrated at current according to our “two brand” business strategy”. Our reasons are as follows. The two company’s brand positioning is different and will be more different in the united company, so the marketing strategy will also adjust accordingly. The two companies own different advertisement customers. And these advertisement customers will pay advertisement service fee for the platform which can best promote their products, so sales strategy will also be different. Since the two M&S teams have separate naturally, we don’t have to intentionally integrate them.
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2. Human Resource
In this part we will explain the HR integration strategy and propose practical integration plan for each link on the value chain. Highlights: We decide to adopt an aggressive HR integration strategy. We should keep inside resource as much as possible and start knowledge sharing program as soon as possible. The total HR integration should be completed within 9 months.
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2.1 Overall Strategy: Whether or not to integrate HR? The large overlaps in products and services provided by Tudou and Youku led to aggressive synergy targets that required a fast integration effort and major reductions in administrative overhead. The need for speed, combined with a lengthy SEC review, limited the time available for HR integration.
So our main strategy is to define the necessity of HR transformation in different links of Youku and Tudou’s business and establish quick actions to achieve certain goals to meet the growth requirements and realize the cost control synergy.
External Factors’ Perspective:
Due to the fierce competition and the dynamic condition of the market, the time constraint for post-merger growth and synergy is very tight. So the need for HR transformation is critical in this deal of Youku and Tudou.
Merger Scope Perspective:
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Because of the overlap of the markets Youku and Tudou operate in, there is less immediate need for an HR transmission here comparing to the first factor. However, this conclusion may be applicable to only market-related links on the value chain of the two companies.
Stakeholder Perspective:
Though there may be some resistance from Tudou, but the share after merger of Tudou in the new company is less than 30%, there is also rumor about Wei Wang leaving the new company in a short while, so the possible barrier for HR transformation is not significant in this perspective.
Time Perspective
The time constraint for this deal is particularly pushing; the new corporation must produce a nice financial report before the third quarter, otherwise their stock price would experience large downward pressure. Actually the PE and VC investors of both company have little patience left now.
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HR Specific factors
The HR of the two companies are quite alike in this dimension and the need for an immediate transformation is not obvious here.
In summary, the “five forces” model for the integration of HR of YOUKU and TUDOU is as follows: External Factors
HR Specific Factors
Merger Scope
Time Constraint
Stake Holder
YOUKU and TUDOU should implement an aggressive integration strategy for HR level as a whole; the transformation goal (replace the original HR systems of the two companies with a new system adapted for future growth) should be achieved within 9 months. However, the specific need for such kind of integration is slightly different for different links on the value chain under the setting of this strategy.
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2.2 Action Plan for Each Link on the Value Chain
2.2.1 HR Integration in Server/System Link The shares of the fixed equipment cost of the operation of two companies are quite similar, both are around 10 percent of the total cost, so the synergy effect from this link due to the HR system transformation will make little difference to the whole cost structure. The main goal of HR integration in this link should be increasing the efficiency of Server/System. So the actual plan here is to combine redundant HR in this link and assign the extra HR in this link to develop new projects to control the cost and promote the efficiency of the whole server management and information system. The model for HR integration in this department is described below in the graph.
The integration plan contains a training part, which is adopted for the preparation of the new function in this link; and an adjustment compensation plan: both plans should be completed in 9 months.
2.2.2 HR Integration in R&D Link The ultimate goal in HR integration and management in this link is the effective intelligence and knowledge management. The basic principles in the HR integration in this link are: i. Keep the resource inside the new company. The rivals of YOUKU and TUDOU are expecting to grab R&D employees from the two companies after this merger, like SOHU TV, the online video department of SOHU, is providing attractive compensation to attract R&D employees from YOUKU and TUDOU right after the announcement of this merger. To deal with such kind of situation, an encouragement plan is
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necessary to keep the HR in the new company. ii. Share the knowledge After the panic among employees about future uncertainties has passed, the sharing of knowledge base, which is the core asset of hi-tech companies, should be carried out. The actual plan here is to set up an EXCHANGE program to help R&D departments from YOUKU and TUDOU share their knowledge. This plan includes three parts: Position Rotation:
Employees in the same functioning group to change their position, like the webpage decoration department of the two companies could try to do each other’s webpage maintenance work and understand different coding style and techniques. Inside training:
R&D department of YOUKU and TUDOU should refine their knowledge and experience since the company’s uploaded, and inside trainings provided by each party should be provided with the position rotation simultaneously. Invention and Creation
The outcome of this plan should be clear and an innovation fund will be set up by the new company to reward the innovation appeared after this exchange plan.
The plan should be completed in 6 months to provide a base for growth estimation. 2.2.3 HR Integration in Procurement Link The major portion of cost-saving synergy is from this link: a fully combined purchase department will save the administration cost as well as increase the negotiation capacity of the new company as a buyer of copyrights. The specific strategy for this link is quite simple: set up a uniformed purchasing and editing committee to manage all the procurements of copyrights and investments in original content right after the merger. A quick budget control in this department is critical to the HR integration of YOUKU and TUDOU.
The combination and transformation of HR in this link should be complete as soon as possible, no later than 3 months.
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2.2.4 HR Integration in Sales & Marketing Link Due to the nature of the market positioning and brand management, no HR integration on this link is recommended.
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3. Information System
In this part we will introduce the information system integration plan for each link on the value chain. Highlights: Action plan for different links should be designed separately. Cost-saving from the information system is significant. Develop New CDN system instead of integrating the current system
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3.1 combined or separated action plan ? Information is one of the key elements of the company. Especially in merged entity, integration of information can create the core value of synergy. Bring two core information from two different companies can be a matter of complexity, since the characteristics of information could be different and the source could be different. However, if the company could have done the integration of the information, and let the employees from both companies to learn how to use it, they can coordinate the resource and save some cost, and then finally they can make huge synergy. The companies such as Youku and Todou is rely on the video content, for integration of the content, integrator should consider about the platform which provide the space for content to be archived, R&D which is the market & consumer research, and the procurement of the content.
For the HR integration and financial integration, we suppose the integration action should be done in one playground, but for the integration of the Information system, we should separate the action based on the companies’ value chain.
With this respect, we would separate three part as Server/system integration, R&D integration and Procurement integration. In each part, we will describe the action plan and expected effectiveness to the business. This process will be mainly focused on two dimensions, cost savings and synergy by merging two different source of information.
3.2 Server/ System Youku/ Tudou relies on proper operation and maintenance of its website and its network infrastructure. On the value chain of the business, website is placed on the latest part, we will manage it as two different website. In this reason, we would not set the integration strategy for website but consider only about network infrastructure.
Network infrastructure, we call it Server/system, should be integrated properly. Any malfunction, capacity constraint or operation interruption would affect badly on the business. The satisfactory performance, stability, security and availability of the service is critical to maintaining the
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company’s reputation. Reputation leads more users and advertisers to use our service.
A key element of the merged business is to generate a high volume of user traffic on both website. Accordingly, any failure to maintain the satisfactory performance, stability, security and availability of the service may significantly harm the company’s reputation.
3.2.1 Cost Savings by integration of Server/System Youku spent 29 million US dollars for the Bandwidth cost. Table 3-1. Youku, Cost of Revenues
Tudou have built a server/system with access to over 4,000 servers across China Table 3-2. Tudou, Cost of Revenues
Internet bandwidth costs represent the fees the payment to bandwidth vendors, which are telecommunications companies in China, such as China Telecom and China Unicom. By integration of the server/system function, the companies can not lower the cost of this cost. Because the cost is aroused depend on its traffic. So the company absolutely should increase the cost of this part.
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However, the company can consider building its own CDN system. (Content delivery network; a large distributed system of servers deployed in multiple data centers in the Internet. A CDN operator gets paid by content providers such as media companies and e-commerce vendors for delivering their content to their audience of end users. In turn, a CDN pays ISPs, carriers, and network operators for hosting its servers in their datacenters)1. Since both Youku and Tudou were using CDN operators system and paid for them, the cost must be huge currently. There could be an up-front cost for the early period, but at the end, the company can save a lot of money by the time the company grows bigger. This can be enjoyed by the company who has economies of scale.
Depreciation expenses of the server cannot be reduced by integration. However the labor costs related to server/system management personnel can be reduced. If the company can put server and all hardware in one place in similar area, they can minimize the personnel’s wage cost. Also, the company can reduce the warranty cost if they use the same brand of servers such as Dell or Cisco.
3.2.2 Cost Savings Using Bargain Power Moreover, the merged entity can have bargaining power in deal regarding the internet bandwidth cost. We are not sure, but there is a possibility that China Telecom and China Unicom can
increase Internet bandwidth leasing prices. But the merged entity can be the most powerful business in the domain, company can have the bargain power. Mobile video services costs represent service fees paid to mobile application store operators and handset design companies in connection with Youku/Tudou’s mobile video services. If the
Youku/Tudou can deal with those players with strong bargain power, we believe that there going to be a cost savings.
3.2.3 Other expected Effectiveness by sharing Data Back-Up Data back-up is also the benefit of the company. In this kind of business, different servers share and back up the data of one another by allowing the company to provide backup to failed servers. As we mentioned above, the stability of the service is very critical in this business. So if the
1
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merged company can back up the data respectively, it can secure more than any other companies and it will become a competitiveness against other competitors.
3.3 Research & Development Integrated Information System for R/D should provide the archive which has well-organized list. In Youku/Tudou business, information system provides a database of user data, advertising records, licensed content and UGC(User Create Content). If those data get into one bucket, it ensures the effective communication among various departments and offices in merged entity.
3.3.1 Build well-organized Archive First of all, when the deal was on discussion, everyone could expect the synergy of sum of all content. Important thing to be done in this process is make the database organized very well. Information system should be re-build for the researcher in the company. Company should develop centralized information system which is align to the content’s view information, advertisement information (Advertisement attached to the content), up-loader’s information, and if it is possible, viewer’s information also. If the researcher can pull out the integrated information when they needed, it could be the most valuable asset of the company. Among the benefit, the most useful data could be user data. The merged entity can share the user data, it means the company can have more reliable resource for the user’s behavior and taste. Also for advertising records, if both entities can share the advertising records, the company can try to develop or excavate the more profitable contents from the web. For approving the capability of using the data, we also can consider the development of new technology. It is described following this;
3.3.2 Develop Advanced Technology for employees and also for users The way of using content can be challengeable for researchers in both companies, mostly because of its characteristics. Since by now, there are no technology which can recognize the content of the file without open it. However, Tudou has its unique content filtering technology; it helps to identify the illegal content. If the company can invest resource to develop its technology to identify the detail of the content, Youku/Tudou probably can be the best online video service
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company. Google is still trying to improve its technology to be perfect; Google has been trying to invent the search engine for video, not by its title but by its finger print.(content of the video clips). With this respect, ability to access content that users want to view, will be the research competitiveness.
3.4 Procurement
3.4.1 Cost saving by sharing licensed content and using market power Intellectual property infringement has been problematic to this kind of business. Youtube also had a problem in the past, but they block the illegal content, and instead, they dragged the content providers to upload their content for their own webpage on Youtube. It could be possible because its strong market presence. Needless to say, Youtube also buy a licensed content. Eventually, the success of the business will rely on the volume/ variety of the content without intellectual property infringement. In this respect, Youku/Tudou got to have competitiveness against other small competitors. The reason is as below;
First, Youku/Tudou should have strict rule for not to allow the illegal content on their service. In a short term of period, it will make the company lose the users. However in the long term, company can get out of the possible law suit and unexpected loss. Moreover, the platform could be more provider-friendly environment. After that, Youku/Tudou can attract the providers to upload their content by themselves without any payment from the Youku/Tudou. The merged company already has more than 50% of M/S after
2
merger. If the provider upload their legal content on
Youku/Tudou, both parties can share the advertisement profit. This can be the win-win strategy for both parties. Second, Youku/Tudou just save some cost by purchasing licensed content together. We can assume that licensed content can be charged per view. However we also can assume that there would be a up-front cost to purchase. If Youku/Tudou deal as one huge client against the provider, they can lower the up-front cost. The merged entity definitely has a bargain power now.
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Youku’s market share in terms of total user time spent viewing online videos in China: 36% in 2009 to 37% in 2010, according to iResearch / Tudou’s market share is about 14%, according to Bloomberg 18 / 29
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3.4.2 Cost saving by sharing in-house made content Content costs primarily consist of premium licensed content purchaing and content produced in-house, advertisement production costs, and salaries and benefits for our content team. If the merged entity can merge the in-house content producing team and produce/use content together, they can expect cost savings.
Table 3-3. Youku, Cost of Revenues
Table 3-4. Tudou, Cost of Revenues
3.4.3 Synergy by procurement from each other’s Service According to our R&D integration strategy, Youku/Tudou are supposed to share the content and user information. After researchers’ analysis about the user behavior of each service, procurement personnel can re-upload the content on more appropriate service. For example, Youku’s users show a tendency to like documentary by the result of analysis, then procurement personnel find the documentary content from merged database and upload more content on Youku. It can be done vice versa. For doing this, both website should get approval from the uploader to agree terms and condition that the content can be uploaded to the other service(Either Youku or Tudou) by
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companies’ employee. This strategy can attract more customer by providing them variety of content what they want to watch. Eventually, this will lead the each service have its unique brand image. For instance, Tudou is fit for youngsters and entertainment prefer users, Youku is popular for classical music fan and non-fiction fan. When this brand identity become more solid, it would be helpful for the advertisement. Since the group of users is obvious, Youku/Tudou can distribute the advertisement with charging high rate. The merged company does not have to worry about losing advertisement customer because the profit will be consolidated.
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4. Finance
In this part we will introduce how to finance for and support the action plan of HR and Information system. Highlights: Cost of revenue and operating expenses are still growing rapidly Cash is sufficient for HR and Information system integration plan
两家公司处于长期直接竞争状态，且都缺少外在支持，合并属于无奈之举。优酷和土豆 Both Youku and Tudou have shown healthy growth patterns, but huge operating costs have 的经营模式高度相似， 是直接竞争对手， 双方经营性亏损在 2011 年下半年都出现了环比扩大， 资料来源：公司资料、国信香港 开始相互指责和诉讼对方侵犯自己的影视剧版权。 考虑到 2012 年一季度广告行业季节性衰退 两家公司处于长期直接竞争状态，且都缺少外在支持，合并属于无奈之举。优酷和土豆 companies. If we take a look into 以及成本压力持续增大的趋势， the cost structure of Youku and Tudou, we can find that over 80% 这种亏损可能仍会继续扩大。 同时两家公司都没有门户网站、 的经营模式高度相似， 是直接竞争对手， 双方经营性亏损在 2011 年下半年都出现了环比扩大， 搜索引擎等平台提供流量支持，也没有其它业务产生净现金，可谓都处于生存线边缘。 become a big burden for both companies. EBIT has remained negative since the foundation of two
经营性利润(EBIT)(单位：千元)
季度收入(单位：千元）
开始相互指责和诉讼对方侵犯自己的影视剧版权。 考虑到 2012 年一季度广告行业季节性衰退 both companies put a substantial amount of money into lawsuits against each other with respect to 以及成本压力持续增大的趋势， 这种亏损可能仍会继续扩大。 同时两家公司都没有门户网站、 搜索引擎等平台提供流量支持，也没有其它业务产生净现金，可谓都处于生存线边缘。 copyrights violation and illegal competition.
of the total cost comes from bandwidth and video content. It is worth mentioning that last year,
From a financial perspective, justifications of Youku and Tudou’s merger is to substantially lower 互联网及软件行业 分析师：邱琳 4 the cost of the combined entity through centralizing the procurement management of bandwidth and video content. The combined entity will share the same video content resource base, thus 互联网及软件行业 分析师：邱琳 4 avoiding the cost of hostile competition against each other. In the meantime, we expect several rounds of lay-offs after the merger, which is going to lower the human expenditure considerably.
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Youku 2011 Q4 Cost Pie
Bandwidth Content Tax 4% 13% 37% Depreciation and Amortization 1% Others
45%
Tudou 2011 Q4 Cost Pie
Bandwidth Content Tax Depreciation and Amortization Others
8% 8%
6% 40%
38%
4.2 Financial needs after the merger 4.2.1 Cost of revenue and operating expenses are still growing rapidly
Despite Tudou and Youku both have used equity financing to raise funds for future business development, we believe the combined entity is still facing fast-growing cost of revenue and operating expenses in the foreseeable future. Therefore, financial needs still exist in major cost centers: bandwidth, content and mobile platform R&D.
Tudou: cost of revenues increased by 118.5% to RMB 160.1 million (US $25.4 million) from RMB 73.3 million in the corresponding period in 2010. The increase was primarily attributable to increased Internet bandwidth costs, content costs and mobile video services costs. Internet
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bandwidth costs totaled RMB 70.4 million (US $11.2 million), or 42.3% of net revenues compared to RMB 27.4 million, or 27.9% of net revenues in the corresponding period in 2010. The increase in Internet bandwidth costs was primarily due to increased traffic to our website and our focus on enhancing our users' experience. Content costs totaled RMB 66.5 million (US $10.6 million), or 39.9% of net revenues, compared to RMB 22.7 million, or 23.2% of net revenues, in the corresponding period in 2010. Content costs consisted of amortization of the premium licensed content, salaries and benefits for staff, as well as the production cost for content produced in-house. The increase in content costs was primarily due to an increase in the amount of licensed content purchased. The mobile video services cost totaled RMB 13.2 million (US $2.1 million), or 7.9% of net revenues, compared to RMB 3.4 million, or 3.5% of net revenues, in the corresponding period in 2010. The increase in mobile video services cost was primarily attributable to the increase in mobile video services revenues.
Youku: Bandwidth costs as a component of cost of revenues were RMB109.7 million (US$17.4 million) in the fourth quarter of 2011, representing 35% of net revenues, compared to 34% in the corresponding period in 2010. The increase of bandwidth costs in absolute dollars was primarily due to increased bandwidth capacity to support the growth of traffic to our website to further enhance our user experience. Content costs as a component of cost of revenues were RMB90.7 million (US$14.4 million) in the fourth quarter of 2011 with our change in accounting estimate to accelerate amortization of content costs starting in fiscal year 2011. If the Company had continued using straight-line amortization for purchased content costs as in the corresponding period in 2010, the total content costs would have been RMB62.5 million (US$9.9 million), representing 20% of net revenues in the fourth quarter of 2011 as compared to 17% in the corresponding period in 2010.
4.2.2 New IT systems We believe IT integration is the best time to introduce new IT systems, such as Content Delivery Network (CDN) and Enterprise Resource Planning (ERP). We would need a one-time big investment to acquire these systems, and given the current bandwidth and content costs are already high, we would consider another round of debt or equity financing to support the
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establishment of our new IT systems.
4.2.3 Human resources Hiring is not going to freeze even though we decide to centralize Procurement, Human Resources and Administration, and cut off at least 1/3 of existing head accounts in these departments.
Marketing expenditure is expected to increase considerably for both companies after the merger as each is planned to launch multiple new product lines over the next 2 years. Therefore, we believe we will still cash out to support the expansion of our sales and marketing teams.
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5. Integration Work Summary
In this part we will reinstate the important conclusions in the above report and give Gantt Chart for the action plan. Highlights: The whole integration will be finished within 2 years. The entire integration action plan serves for the united firm’s strategy and goal. A Gantt Chart shown all the action plan
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We start our project with the strategy level, including brand management; brand positioning, culture integration and company objectives, aiming at heading in the right direction. This lays solid foundation for the further decision making, namely all the action plans we announce are consistent with the strategy we agreed on. Then we use value chain theory to analyze what needs to be integrated in each link.
In HR integration work, we find that this merger should adopt an aggressive integration plan due to the five forces analysis. And several start-up programs with respective purposes should be launched in each link. In Information system integration, we find new CND system should be developed in order to deeply integration the server and system. At the same time, data integration will be the most annoying but significant step. We find the company has no problem to support the HR integration and Information system integration plan in terms of financing.
Below is the Gantt Chart for each integration plan. Following this integration design, we believe the new Youku&Tudou will realize its company goal and server net citizens with a brand-new appearance with heart and soul.
