Youku, Alibaba planning pop-up ad-buying service

What might happen when China's largest online-retail company and the country's equivalent of YouTube Inc team up? One possibility: an extreme form of product placement that encourages viewers to buy whatever their favorite movie star is wearing.

Chinese Web video company Youku Tudou Inc may develop technology that can recognize clothing, furniture and other products in a video and deliver pop-up ads with links to buy the items on an Alibaba Group Holding Ltd store, Victor Koo, the chief executive officer, said in a recent interview. He said the ads may resemble the floating text and links that sometimes appear within YouTube clips. Those annotations are added manually by the video's creator.

Getting bombarded by pop-ups in the middle of Star-Lord battling aliens in Guardians of the Galaxy could get really annoying, but the ads have serious potential to be effective. Digital advertising in China has some growing up to do.

It is why many Internet companies in the nation choose to make money through paid add-ons, such as digital stickers or other premium features. For example, ads make up just 8.3 percent of revenue for Tencent Holdings Ltd, the country's most valuable public Internet business. Youku has been working on advertising programs since 2008, Koo said. Yet the company continues to lose money, posting a loss of $95 million last year.

Alibaba, which is expected to soon hold a record initial public offering in the United States, bought a 16.5 percent stake in Youku earlier this year. Koo expects the two companies will share information to improve their businesses, and he said Youku could benefit from the computing resources of Alibaba, which has a hosting service similar to Amazon.com Inc.

"We really view Alibaba as a strategic investor," Koo said. "This will certainly accelerate how Youku Tudou can grow."

Koo demonstrated an app in Silicon Valley called Houzz as an example of the type of product placement Youku and Alibaba could accomplish together. The app lets users browse pictures of stylish living rooms, kitchens, bathrooms and bedrooms, and then tap on furniture and fixtures for information on where to buy them.

Koo said Youku could achieve something similar in video because the company has been working with Hollywood for years on payments and advertising initiatives. Youku has negotiated exclusive rights to stream some of the world's biggest movies and television shows.