Sohu set to buy video site 56.com

Will reportedly acquire user-generated content provider

NASDAQ-listed Sohu.com Inc, operator of China's third-largest online video site by revenue, was reported Wednesday to be acquiring a user-generated content (UGC)-focused online video provider 56.com, which analysts said is a move to further its diversification amid fierce competition.

Unnamed sources familiar with the matter were quoted by domestic news portal tech.qq.com Wednesday as saying that the two sides have almost reached an agreement and the value of the deal is likely to be more than $12.9 million.

A PR representative with Sohu.com Inc said the company refuses to comment on market rumors, when contacted by the Global Times Wednesday.

Facebook-like Renren Inc, the owner of 56.com, also refused to comment on this issue.

Analysts said that Renren's decision to sell 56.com will not be a surprise, as Renren has recently decided to save its flagship business - social networking service (SNS) - by selling non-core operations.

The New York-listed SNS company turned profitable for the second quarter thanks to the sales of short-term investments, recording net income of $31.3 million, compared to a net loss of $9.3 million over the same period of 2013, read its financial filing issued on August 25.

The filing did not specifically reveal the performance of 56.com, but the UGC website's downsized evaluation could reflect its weak performance under the ownership of Renren. In October 2011, Renren bought 56.com for $80 million.

Despite 56.com's tepid performance, Xu Hao, an industry analyst with Beijing-based market research firm iResearch, believes that Sohu can still benefit from the deal if it is finalized.

"56.com, which has amassed a lot of experience in UGC and professionally generated content development, can contribute a lot to Sohu, which is stepping up its efforts to develop this segment to catch up with other online video platforms," he told the Global Times Wednesday.

UGC and self-made content are widely regarded as two major services that leading domestic online video providers expect to rely on to maintain users as well as lower costs in content purchases.

And with the popularization of faster 4G networks, more mobile users will record and upload short videos via their phones, which would boost cost-effective UGC to some extent, said Luo Lan, an analyst with Beijing-based market research firm Analysys International.

Given this outlook, Sohu has reportedly said it plans to invest twice as much this year as it did in 2013 in the self-produced content business.

Its rival Youku Tudou announced in November 2013 a plan to spend 300 million yuan ($48 million) to develop self-made content and UGC in 2014.

Amid the neck-and-neck rivalry, Luo noted that it is hard for Sohu to surpass the industry leader Youku Tudou in the near future.

Data from Analysys International showed in August that Alibaba-supported Youku Tudou topped the online video market with 24.45 percent of ad incomes for the second quarter of the year, while Baidu-backed iQiyi and PPS ranked second with 19.5 percent. Sohu's online video business held a 10.33 percent share to take third place.

Both Xu and Luo were also concerned that Sohu will be under increasing financial pressure in the money-burning online video industry, as its major rivals have either merged together or have found powerful investors.

According to Sohu's financial report released in late July, its net loss for the second quarter of the year reached $45 million, compared to net income of $22 million year-on-year, citing increased spending on content.