Increasing competition in China's online video market has pushed the two biggest players to a merger that will create the largest company in the industry.

Youku.com Inc, the country's top online video provider, agreed to buy its main rival, Tudou Holdings Ltd, in a stock-for-stock transaction, the two companies said.

Although the two faced off earlier in a copyright dispute, their surprise merger appears to be a rational response to the problems that online video websites have in making ends meet, said analysts.

The deal came as the companies were battling for market share, spending heavily to buy licensed content.

"Funding pressures are the main reason for the deal," said Shi Jialong, a Hong Kong-based analyst with CLSA Asia-Pacific Markets.

The costly battle for dominance left both companies in the red last year. Youku reported a net loss of 172.1 million yuan ($27.2 million), though that was down 16 percent from the previous year, while Tudou had a net loss of 511.2 million yuan.

"After the merger, there might be a fall in copyright purchase prices, which is good for the industry in the short term," Shi said.

Xie Wen, a Chinese IT critic and former president of Yahoo China, agreed. However, he added that the new company still faced fierce competition with portals that provide similar services.

Youku had 21.8 percent of China's online video market in the last quarter, followed by Tudou with 13.7 percent.

They were closely followed by the portal Sohu.com Inc, with 13.3 percent, according to the domestic research company Analysys International.

Other rivals in the segment include Baidu Inc and Tencent Holdings Ltd.

Xu Weifeng, president of PPStream Inc, an online video service provider, said the merger is good news for other players since they will have one less rival.

However, the merging companies "are still under pressure from low profit margins, which must be resolved after the merger", he said.

Youku's market value, at about $2.85 billion, is six times Tudou's.

Chenlimin@chinadaily.com.cn