Analysts say move will strengthen search portal giant's bid to take on Youku Tudou

Baidu Inc, the largest Internet search engine in China, said on Tuesday it is buying PPStream Inc's online video business for $370 million to challenge the nation's top video services provider.

PPS will merge with iQiyi.com, a popular online video website acquired by Baidu late last year, according to a company statement. PPS will continue to operate as a sub-brand of iQiyi.

After the acquisition, iQiyi.com will become China's largest online video platform by number of mobile users and video viewing time, the statement said.

Beijing-based Youku Tudou Inc currently claims to be the No 1 video platform in China.

Analysts said they believe the acquisition will strengthen Baidu's video unit although iQiyi is not yet ready to challenge Youku Tudou.

"Most of the traffic for PPS was generated by mobile application users, while Youku Tudou's major users were consuming content through web browsers," said Hong Bo, a Beijing IT expert and founder of consultancy company IT5G.

"Baidu's iQiyi will have a limited impact on Youku Tudou's advertising revenue because Youku Tudou is experienced in online advertising and enjoys large viewer numbers."

PPS had about 150 million mobile viewers by the end of March, about 10 percent of those daily active users. Before the acquisition, iQiyi had more than 100 million mobile viewers.

Each company has about 1,000 employees. Gong Yu, CEO of iQiyi, said the firm has no intention of large scale layoffs.

Youku Tudou said its daily video views from mobile devices reached more than 100 million by the end of last year.

The deal is also part of Baidu's acquisition strategy to generate more advertising profit from the online video sector.

Advertising revenue in China's online video industry is likely to exceed 30 billion yuan ($4.86 billion) by 2015, and viewer numbers are expected to hit 580 million, industry research firm Analysys International said.

"In the past, Chinese Internet companies were not used to enlarging business scale by acquisition, but the industry is expected to see more merger deals in the future," said Hong from IT5G.

Baidu spent at least $22.5 million on acquisitions last year, compared with $356 million in 2011, according to Bloomberg.

Gong said mergers and acquisitions are set to continue in coming years, because the country's video industry needs further integration.

PPS and iQiyi's integration is expected to be completed in 30 days, he said.

PPS' major business is Web-based live casts, while iQiyi focuses on licensed video content produced by professional entertainment agencies.

Gong said iQiyi will allow viewers to upload more user-generated content, a major business for Tudou.com under Youku Tudou.

The transaction is expected to be closed in the second quarter, according to the company statement. Upon completion, the PPS online video business will be consolidated into Baidu's financial statements.