Does Combination of Youku and Tudou breach China Anti-monopoly law?

Reportedly(the report is in Chinese), the two Chinese leading video websites, Youku.com Inc. (NYESE: YOUKU) (“Youku”) and Tudou Holdings Ltd. (NASDAQ: TUDOU) (“Tudou”) jointly announced today that on 11th March, 2012, they have signed a definitive agreement for the combination of Tudou and Youku in a 100% stock for stock transaction, which has been approved by each party’s board of director but still waiting for the shareholders’ approval, and is planned to be completed in the third quarter of 2012.I think, it shall be noted that some anti-monopoly issues may be arisen from the combination of the two Chinese biggest video websites, which possibly resulting adverse impacts on the rights and interests of consumers and fair competition.

I.         There’s a chance for the Youku Tudou Inc. (“Youku Tudou”) to have a dominant market position in the video share market.

It is reported by the Southcn.com (the report is in Chinese)  that the joint market shares of Youku and Tudou account for more than 80% in the China domestic video market, however, the data released by Bloomberg in August 2011 show Youku accounts for 23% and Tudou accounts for 14%. To the large gap between the data, I think it depends on the different calculation method. Maybe the data released by Bloomberg includes the market share of online film and television playing; on the contrary, the data released by the Southcn.com refer to the market shares of market segment and user uploading.

According to the Anti-monopoly Law of People’s Republic of China (Anti-monopoly Law), under the circumstances that the market share of a business operator accounts for 1/2 or more in the relevant market, or the joint market share of two business operator account for 2/3 or more in the relevant market, a business operator may be presumed to have a dominant market position. Accordingly, the combination of Tudou and Youku taking obvious advantages in market segment of video share is possibly presumed to be in a dominant market position. However, the Anti-monopoly Law specifies lots of restrictions to prevent the enterprises having dominant market positions from abusing dominant market positions, the purpose of which is to protect the legal rights and interests of consumers and the competitors from unfair competitions.

II.       The small and medium video websites will face larger pressures of competition.

With the combination of Youku and Tudou, the joint market shares they occupy increase rapidly, which makes them take advantages such as attracting more folk video procedures to upload in competitions with such small and medium video websites as Ku6.com, 56.com, 6.cn, which is certainly legal. However, if Youku Tudou would take use of such advantages in requiring the folk video procedures only upload videos to their websites, or asking any third website not to insert such exclusive contents as their competitors’ videos, it should be regarded as abusing dominant market position. The above possibility is not my imaginary fears, but in fact there happens much in the current Chinese competitive market.

III.      It is possible the user experience will decrease after combination.

In the perspective of economics of scale, surely the combination is beneficial to the shareholders of Youku and Tudou, however, isn’t actually good for consumers. For example, when there is competitive relationship between Youku and Tudou, they would restrict the time and length of advertisements that are inserted in videos to maintain the users. However, through combination, the previous competition disappears, therefore to the consumers, there may be longer loading time, much more advertisements or even subtitles advertising.

IV.     A prior review by the authority is necessary?

According to the Anti-monopoly Law, the combination of Tudou and Youku is concentration of business operators. Additionally the concentration of business operators that will or may restrict or eliminate competition shall be regarded as monopolistic conducts.

The Provisions of State Council on the Standard for Declaration of Concentration of Business Operators (the “ Provisions on Standard for Declaration”) regulates that if the total turnover of last accounting year gained by all the business operators involved in concentration of business operators in China is more than RMB 2 billion, moreover there are 2 or more business operators whose turnover of last accounting year gained in China is more than RMB 0.4 billion, they shall make a prior declaration to the Ministry of Commerce under the State Council (MCSC) , otherwise they shall not do concentration.

As per the separate 2011 financial statements of Youku and Tudou, the net revenue are RMB 0.89760 billion and RMB 0.5122billion, the total is less than RMB1.5 billion, which doesn’t meet the standard for declaration described above, therefore the prior declaration is not necessary for the combination of Youku and Tudou.

Finally, despite it is unnecessary for Youku and Tudou to declare to MCSC for review in prior, the Article 4 of the Provisions on Standard for Declaration regulates that to the concentration of business operators that isn’t satisfied with the standard for declaration specified in this article, but is indicated it will or may eliminate or restrict competition according to the facts and evidences collected by legal procedures, the MCSC shall do investigation pursuant to laws. Therefore, if the competitors doubt about the combination of Youku and Tudou and are able to submit effective evidences, they can submit the evidences to the MCSC and request for investigation.

 

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Author: Mr. You Yunting
Founder & Editor-in-Chief of Bridge IP Law Commentary
Partner & Attorney-at-law of Shanghai DeBund Law Offices
Email: Bridge@chinaiplawyer.com, Tel: 8621-5213-4900,
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Bridge IP Law Commentary is a website focus on the introduction of commercial laws in China, especially the intellectual property laws. All the posts here are our original works. And all news or cases referred here are from public reports, and our comments or analysis are of due diligence, neutrality and impartiality, representing our own opinions only and are our original works. You may contact us shall you have any opinions or suggestions.

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