* Shares of Chinese online video firms to list in U.S.
* Both unprofitable; Hulu had profit in Q4/2009-reports
* Investors focused on cash flow, profitability
* Partners have not reached decision on Hulu IPO - source
By Melanie Lee and Clare Baldwin
SHANGHAI/NEW YORK, Dec 3 (Reuters) - Investors hoping to get a piece of the action in the booming online video industry might be better off skipping a pair of upcoming Chinese IPOs and waiting for U.S.-based Hulu to come to market.
Youku.com Inc and Tudou Holdings Inc -- the YouTubes of the world's No. 2 Internet arena -- are both set to list on U.S. exchanges, starting with Youku next week.
The fledgling Web powerhouses are enjoying sizzling revenue growth. Tudou's net revenue has grown by an average 317 percent over the past two years, and for the first nine months of 2010 revenue rose 230 percent from a year earlier.
Youku's revenue increased by an average of 1,000 percent a year over the past two years, and was up 135 percent in the first nine months of the year over the year-earlier period.
But neither company has ever made even 1 yuan in profit.
Both are also having to fend off scores of competitors in the red-hot Chinese online video market, and analysts question whether they have a compelling business model.
"The growth aspects of this industry are very attractive. But attractive end-market growth doesn't necessarily translate into an attractive investment opportunity," said Morningstar IPO analyst Michael Gaiden.
"The dotcom bust proved that growing revenue and losses at the same time is not a business plan that is viable."
Hulu, on the other hand, turned profitable in the last quarter of 2009, according to media reports.
The company is backed by media heavyweights General Electric Co's NBC Universal, Walt Disney Co and News Corp, along with private equity firm Providence Equity Partners.
Youku, China's top online video site by advertising revenue, is hoping to raise about $154 million in an initial public offering in the United States next week. Tudou, the No.2 player, is also in the queue for a U.S. listing but no date has been set for its trading debut.
Hulu, the biggest Web video service in the United States behind Google Inc's YouTube, has not yet filed for an IPO, but is expected to announce its plans in coming months.
Online video sites like Youku, Tudou and Hulu -- along with Netflix Inc and YouTube -- let users do everything from uploading their own videos to streaming clips, movies and television shows.
While they have benefited from a powerful distribution platform, the costs of content and bandwidth are rising.
Youku and Tudou have unparalleled access to China's 420 million Internet users and are in pole position to benefit from a rapidly-growing online video market by sheer dint of audience size, some analysts say.
But others contend that it would make more sense to buy into Hulu, which has branded content, experienced management and a profitable business model. Hulu is expected to file for an IPO of $200 million to $300 million.
WORTH THE WAIT?
Would-be investors may have to wait a while for Hulu to show up, however. The company is in the midst of negotiating content licenses, and a decision to move ahead with an IPO is not imminent, one source close to the company said.
Hulu is also starting to feel the heat from Netflix, which already accounts for a fifth of primetime U.S Internet traffic and is threatening to disrupt the cosy Hollywood-pay TV relationship.
At the time of its official launch in November, Hulu cut the price of its subscription service by $2, or 20 percent, giving in to users who were reluctant to pay and pressure from competitors that did not charge as much.
Still, some argue that Hulu's IPO is worth the wait.
Youku and Tudou are both hemorrhaging money. Youku's net loss widened by 22.5 percent to 167 million yuan ($25 million) in the nine months to Sept. 30. Tudou's net loss narrowed by 16.6 percent but it was still 83.7 million yuan in the red.
Youku and Tudou both post most of their content for free, relying on advertising for revenue.
Analysts say piracy is a serious risk for both firms, although they have adopted measures such as active monitoring and user feedback to counter the problem.
China's online video space is highly fragmented and competitive. Other players include Ku6 Media Co Ltd, PPS.tv, PPTV and Qiyi.com, a firm partly owned by Baidu Inc.
"Youku and Tudou are leaders now but you can't guarantee they will remain the leaders," said Nick Einhorn, an IPO analyst at Connecticut-based Renaissance Capital.
Like Netflix, Hulu is supported by a mix of advertising and subscription fees. The subscription model has the potential to create a steadier stream of income, and could put Hulu in a better position to negotiate for content.
For now, the U.S. online video market also dwarfs the Chinese market. Research firm Parks Associates expects the U.S. market to be worth $1.3 billion in ad revenue this year, while iResearch pegs the Chinese market at about $435 million.
Even venture capitalists in China emphasized the importance of profits, saying that Youku and Tudou fell short.
"Would you buy a company that hasn't made any money in the last five years and is not going to make any money until 12-18 months later?" said a managing director at one of China's most prominent technology venture firms.
"As a shareholder, I won't do it. For Google to buy YouTube, there is strategic value. But for me, I don't need strategic value, I just want to make money."
(Reporting by Clare Baldwin in New York and Melanie Lee in Shanghai, additional reporting by Kenneth Li in New York; Editing by Edwin Chan, Christian Plumb and Ted Kerr)