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Barely a week goes by these days without a new "flavor of the day" for China's acquisitive Internet titans, who are moving their focus to video content makers with 2 big new acquisitions by Alibaba and LeTV (Shenzhen: 300104). These deals are somewhat logical, as most of China's biggest Internet names now own Internet video and TV products and these content providers can help to supply exclusive material for those operations. But if history is any indicator, this kind of in-house production is almost certain to fail because it strips these content makers of the flexibility they need to survive by selling into a competitive marketplace.

The first of the big content deals came earlier this week when Alibaba said it would pay HK$6.24 billion, or about $800 million, for Hong Kong-listed ChinaVision Media (HKEx: 1060), a maker of TV shows and movies. (English article) Alibaba doesn't have a major online video sharing site yet, but I suspect we'll probably see the company make a major purchase in the space sometime later this year to compete with rivals Baidu (NASDAQ:BIDU) and Tencent (OTCPK:TCEHY). Alibaba does have an Internet TV product, which it rolled out last year in partnership with TV maker Skyworth (OTC:SWDHF).

Meantime, media are reporting that LeTV, one of the largest independent Internet video and TV companies, has just signed its own deal to purchase another production house, Flower Film, for 900 million yuan ($150 million). (English article; Chinese article) The reports also say that LeTV is in talks to buy out its digital media content provider LeTV New Media Culture for about 300 million yuan. It will help to finance the deals by issuing about 300 million yuan worth of shares.

I'm not extremely familiar with China's fragmented world of filmed content makers, though many big names have recently invested in individual production deals, including Baidu's founder Robin Li and Huayi Bros (Shenzhen: 300027), one of the country's most successful producers. (Previous post) Still, I know there are plenty of small production houses around the country, and I fully expect names like Baidu, Tencent and leading video sharing site Youku Tudou (NYSE:YOKU) to quickly follow Alibaba and LeTV's lead and make their own purchases in this area.

So now that I've predicted the next big buying binge, I should say why most of these new purchases are likely to fail. Put simply, the U.S. model has shown that content makers can survive and thrive only when they remain independent. Such independence allows them to work with lots of different channels, such as websites, cable TV stations and big Hollywood studios. They can use that competition to create bidding wars among buyers, and also to sell their products into a wide range of different markets.

Pairing a content-making company with a single channel such as an online video site immediately deprives it of access to the competitive marketplace for selling its products. Thus, for example, ChinaVision will now be allowed to only sell its films and TV shows to Alibaba's Internet TV channel, which is unlikely to pay a premium for those products. Flower is likely to wither under LeTV's ownership for similar reasons.

Of course, the big problem right now in China's Internet landscape is that there's too much cash, and the big players are all scrambling to make the latest major acquisition to justify their lofty valuations. As I've said above, I expect we'll see some major purchases of content makers by Tencent and Baidu later this year, probably of similar magnitude to Alibaba's. Youku Tudou could also make such a purchase, though it's also possible that the company could be purchased itself by Tencent, Baidu or another cash-rich company.

Bottom line: Baidu, Tencent and possibly Youku Tudou are likely to follow Alibaba and LeTV in purchasing major content producers this year, in a bid to beef up their video products and services.

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Source: Film Makers In Vogue For LeTV And Alibaba