Tencent has confirmed its long-rumored merger of Cloudary, the online publishing business of Shanda. Both companies internally yesterday announced their joint venture, named Yuewen Group, which will include all online publishing sites and digital reading services owned by the two, as first noted by Tencent’s online news site QQ.com.

Tencent thus will become the biggest online book publisher in China, as Cloudary owns the largest publishing sites, and Tencent has its own huge user base. After the merger it will have few competitors in the market. As licensing book rights to TV drama and film production companies or game developers has become increasingly popular, as one of the biggest gaming companies by user base and revenue, Tencent will be able to develop more games from book rights held by Cloudary.

Consuming literary works online is widely popular in China. Readers can either buy finished works or subscribe to chapter releases on digital publishing sites. Pricing is based on the number of Chinese characters, and publishing platforms share revenues with registered authors.

It is believed this business model was created by Qidian.com which was launched in 2002 by the amateur writers union CMFU and began charging for premium content in 2003.

After Shanda Literature (renamed Cloudary in 2011) was founded in 2008, it acquired Qidian and another five literature publishing sites: hongxiu.com, readnovel.com, rongshuxia.com, xs8.com and xxsy.net. The company would acquire or invest in further online publishing sites and publishing companies, such as tingbook.com (audiobooks), zubuent.com (multi-media content), Huawentianxia (print book publishing) and Zhongzhibowen (book publishing and rights licensing).

Licensing content from its literature sites or affiliate companies would soon become another major revenue source to Cloudary. The company also developed Bambook, an e-reading device similar to Amazon’s Kindle, though it hasn’t proved popular.

Cloudary’s platform, thought to be the largest in China, totalled 1.6 million authors and 6 million titles as of March, 2012, according to its filing. It claimed 66.9 million monthly unique visitors in the first quarter of 2012, citing iResearch reports.

Cloudary filed for US IPO in 2011 but decided to withdraw the application in 2013. The founding team of Qidian left Cloudary in early 2013 to help Tencent build a competing site, Chuangshi. Tencent would later establish Tencent Literature, which now includes Chuangshi and all digital reading services available for Tencent users, naming Qidian founder Wu Wenhui chief exective officer. Wu Wenhui and Liang Xiaodong, CEO of Cloudary before the merger, will be co-CEO of the Yuewen Group, according to the QQ.com report.

It is believed that most digital publishing services in China are not profitable. In 2011 Cloudary recorded US$111.4 million in revenues, with 63% from online businesses, but still made a loss of US$5.7 million.

As it is believed the Cloudary model has a better business model than other digital publishers, it’s even less likely that the latter make any profits. For example, Alibaba’s Taobao marketplace has dissolved its digital publishing division. It’s unknown whether the Chinese e-commerce giant has given up on digital book publishing altogether or if it will come up with a different model. For Tencent or Baidu, another major player in China’s digital content market, profitability of their digital publishing business isn’t the overriding concern as their respective core businesses, gaming and search marketing, are still highly profitable. To Tencent, offering the widest collection of digital books to its more than 800 million monthly active users, or owning the book rights for game or film production, will be far more important.

Editing by Mike Cormack (@bucketoftongues)

Tracey Xiang is Beijing, China-based tech writer. Reach her at traceyxiang@gmail.com

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