BEIJING: Youku and Tudou, two of China's biggest online video sites, are joining forces, posing major challenges to rival operators hoping to gain a foothold in the fast-growing sector.

Under the terms of the deal, the firms will combine to form a new corporation named Youku Tudou Inc, though both companies will continue to operate as separate brands. Youku and Tudou are currently China's two largest online video providers.

"We intend to lead the next phase of online video development in China," Victor Koo, the chairman and chief executive officer of Youku, said in a statement.

"Youku Tudou Inc will represent a differentiated leader in the online video market in China with the largest user base, most comprehensive content library, most advanced bandwidth infrastructure and strongest monetisation capability within the sector."

Shareholders in Youku, which has a market capitalisation of $1.9bn according to FactSet Research Systems, will take 71.5% of this new entity. Investors in Tudou, worth $402m, are set to hold the remaining 28.5%.

Figures from comScore, the research firm, showed that China's internet users collectively watched a total of 803m videos in January 2012, measured against 688m in December 2011.

In all, 122.6m web users streamed content on Youku in the first month of this year, giving the platform a penetration of 46.6%. Cumulatively, comScore added, this group watched 4.2bn videos, giving Youku a 21.8% market share on this measure.

Tudou had an audience of just below 121m individuals in the same month, a 46% penetration of the current web video user base. Its visitors played back 2.7bn videos, a 13.8% share.

Sohu was the next most popular service for watching video with 111.1m viewers, ahead of Tencent on 102.6m and Sina, some way further back on 66.7m.

Analysys International, the research group, has reported that online video ad revenues hit RMB1.7bn $268m) in China in the final quarter of 2011, with Youku claiming 21.8% of sales and Tudou on 13.7%.

Profitability, however, remains an outstanding issue for both companies. Over the course of 2011, Tudou made a net loss of RMB511.2m, standing at RMB172.1m when discussing Youku.

"We expect to see significant synergies across a number of areas including leveraging licensed content over a larger user base and realizing efficiencies in bandwidth management and other common expenses," said Koo.

Data sourced from Youku, Analysys International, Bloomberg; additional content by Warc staff