If Megaupload is Guilty of Copyright Infringement, are Youku.com and Tudou.com Guilty as Well?

“On January 19th, the domain names of Megavideo/Megaupload were seized and the sites shut down by the U.S. Justice Department, following their indictment and arrests of the owners for allegedly operating as an organization dedicated to copyright infringement .” (from wikipedia)

If megaupload/megavideo were a publicly-traded company, how do you think the stock would’ve reacted? We will never know, as it’s a privately held company; what I do know is, there are AT LEAST two publicly-traded companies , tudou.com (TUDO) and youku.com (YOKU) , whose businesses were built on a foundation of hosting and streaming illegal content. Are they immune to a Megaupload fall out?

I’m not an attorney, but as a (past) user of youku/tudou , and having visited their sites recently, I can assure you that they originated as, and remain, havens for illegal, copyright-infringing content. It’s a wonder that the US DOJ has not gone after them; it’s an even bigger wonder that ‘investors’ and ‘traders’ seem rather oblivious to a “megaupload” type of event and risk. If megaupload is guilty, I believe that, yes, TUDO and YOKU are guilty as well.

What amazes me is that megaupload’s founder was arrested, faces an uncertain future (at best), while the TUDO and YOKU C-level executives as well as founding investors, are probably partying like it’s 1999. TUDO and YOKU’s c-level execs and founding investors made fortunes selling absurdly overvalued stock that make megaupload’s founders’ wealth and ‘lavish lifestyle look like chump change in comparison. Megaupload and Tudo/YOKU engaged in similar behaviors, yet the legal/economic outcomes currently look like night and day. This defies common sense and nearly all notions of fairness and justice to me.

If megaupload is guilty of violating copyright/property related laws, so are youku, tudou, and a whole slew of other companies. Question is, where is the enforcement?

Now, if something were to happen to TUDO/YOKU, it’s unclear what value, beyond their net assets (less litigation liabilities and cash burn), TUDO and YOKU would leave shareholders. YOKU would be worth less than its current book value of roughly $5.50/share (trading as of market close today at $21.76/share), and TUDO, less than $7.43/share (trading at $13.11/share as of market close today). Given that revenue growth for both TUDO and YOKU has not translated to stemming cash burn, their common equity is arguably worth a discount to book value.

Side comment: TUDO and YOKU seem like pseudo-businesses; they’re more like non-profits, start-ups (that are still trying to ‘figure things out’), or ponzi schemes. Both TUDO and YOKU burn cash, even as they’ve grown revenues exponentially. They provide streaming video service that is not self-sustaining, not self-funding; they cannot survive without external capital, i.e. they are ponzi-financed.

Of course, a ponzi-financed enterprise may yet benefit shareholders, if they can convince a “greater fool” to bid for its assets, at a huge premium to book value. This, in my opinion, is the only reason both continue to trade at ridiculous multiples to revenues and book value, even as growth hasn’t stemmed losses. US investors/traders use Baidu as their rumor mill bogeyman to prop up the stocks, just as Microsoft has been used for many US tech companines.

Bottomline: the market has NOT priced in the megaupload event risk in TUDO and YOKU shares, even as the risk is real and only a matter of fair and even enforcement of the law.

I recommend shareholders should sell immediately and that prospective buyers remain cautious, and lower their entry levels, to properly reflect this risk.