Last year, we predicted that the billion dollar merger between Youku and Tudou would bring about more consolidation in China’s online video space, and that is coming true after Baidu announced it will buy PPS Video for $370 million, as Tech In Asia reports.

Confirmation of the much-speculated acquisition will see Baidu, which raised $1.5 billion to pursue M&A activity among other things, become China’s biggest video provider, since it already owns iQiyi after buying a majority stake last November.

Baidu says it is buying PPS’s video unit alone, the remainder of its business will remain with PPS. The deal is expected to close during the second quarter of 2013.

Going forward, PPS will run as a sub-brand of iQiyi. Existing iQiyi CEO, Gon Yu, will be in charge of the new unit, with PPS president Xu Weifeng and CEO Zhang Hongyu will become co-presidents.

With YouTube and Google persona non grata in China, local players have stepped up to serve the country’s 550 million plus Internet users with video content. As smartphone adoption grows, and mobile becomes a key platform for content consumption, so the major players must adapt. With an estimated 200 million mobile users, Qiyi is in the ideal position to challenge Youku-Tudou, which claims 150 million users on mobile.

However, data from Analysys — covering all devices — gives Youku-Tudou a 30.2 percent share of China’s online video market, followed by Sohu 10.3 percent, iQiyi on 9.7 percent and PPS on 7.1 percent. Those numbers are at odds with Baidu’s claim that the addition of PPS makes iQiyi China’s ‘largest online video platform’.

Baidu has struggling to convert its search engine dominance into success on mobile. The company’s share price slipped last month following the release of its Q1 2013 earnings, which saw the firm post a slump in growth.

Mobile video is certainly one area where the market is growing in China, but margins are tight since the cost of content and infrastructure is high. The Youku-Tudou deal was notable for pooling the two companies resources which, with its combined audience numbers, have given it greater resources and more leverage for closing content deals.

Baidu has now responded, and it will be fascinating to watch how others in China’s mobile video space respond. The coming year or so could see minor players fall behind and drop out of the market.

Indeed, Youku Tudou president Dele Liu actually welcomed the heightened competition that the Baidu-PPS deal will bring, saying:

“After the success and synergy created by the Youku-Tudou merger, increasing consolidation was inevitable throughout the video industry. We are happy to see this purchase go forward; we expect this acquisition will further rationalize the industry and help reduce piracy in the sector.”