Derided as the eternal bull on China, Shaun Rein now warns US investors (and others) in Forbes against a dangerous bubble emerging from China: the IPO hype from anything coming from China, including video hosting companies Youku and Tudou.
A mania about China has gripped too many investors. Anything with China in its name gets hot in the way dot-com got people’s blood pulsing in the 1990s. Many of America’s biggest-gaining initial public offerings this year have been of Chinese firms. Many of those companies deserve high valuations, but not all of them.
Soon two Chinese online video companies, Tudou and Youku, will be going public. Both are run by intelligent, savvy and aggressive management teams that have raised more than $100 million in private equity money. I have friends involved with both companies who will probably be very angry at me for writing this, so I do not say it lightly, but investors need to be very cautious about investing in these companies and understand the risks.
Shaun Rein has serious misgivings about the business models of both loss making companies who pin their hopes on the 420 million internet users in China.
Searching for profits, both Tudou and Youkou have moved into generating more content rather than relying on user-generated content, and they have clamped down on pirated shows. A Hulu-style site might make money more easily than one with user-created content, but the cost of creating content is huge. Tudou and Youkou are not television stations; Hulu’s backers, like Newscorp and ABC, can simply broadcast their television content online. Creating content and developing a cool website take totally different management skills. Content, like the movie business, is a risky bet, because it is dependent on one-hit wonders.