When I heard about the Youku-Tudou merger last night I immediately thought it could represent one of two things. Either it was another sign that China’s cultural preference against mergers and acquisitions was starting to shift, or it was the Chinese equivalent of Excite@Home. In other words, two much-hyped, money-losing Web giants shoving themselves together in hopes that size will somehow solve their pressing balance sheet challenges.

The reality may be somewhere in the middle.

This much is for sure: Merging was never plan A for either company. Both Tudou and Youku are very different companies, built from very different management teams with very different cultures. While they’ve played mostly nice with one another, I’ve heard the founders of both make plenty of catty comments about the other one.

In general, Chinese entrepreneurs see merging as failure — something that is starting to change, bit-by-bit. And one of the firms that is in the middle of that is GGV Capital, a China-US investment firm that has been in the middle of several of the notable deals in the space including Yahoo’s deal to buy 40% of Alibaba and the recent Baidu-Qunar deal.

GGV’s Hany Nada is on the board of Tudou and will remain on the board of the combined entity. “This was one of the most intense M&A discussions I’ve seen in my entire life,” Nada said in an interview with PandoDaily this afternoon. “It was very constructive but there was a lot of nuance. There are a lot of factors that we don’t appreciate that are culturally really important to Chinese entrepreneurs.”

Just what the startup world needs — even more culture issues surrounding the melding of two corporate cultures.

So what drove the tie up? Over the years, the landscape around these two companies changed dramatically. In the early days of online video copycats Youku and Tudou were one of dozens of well-funded players. It was every man for himself. When these two emerged as the winners, the fighting between each other mounted with each arguing they were the largest company in the market, each claiming the other was infringing on its copyrights, and each trying to distinguish itself in different ways.

But then a reality Chinese Web companies know all too well descended upon them: Baidu, Tencent, and other Web 1.0 giants decided they too wanted to become Web video powerhouses.

Uh-oh.

In America, if an older Web giant decides to go after a disruptive startup’s market, the entrepreneur may be wary, but it’s hardly game over, particularly if the startup has as much traction as these two players did. A younger, scrappier eBay failed multiple times to beat PayPal, and even Google — which is far better at this game than most — had to buy YouTube after failing with Google Video. Google is currently flailing about with Google+ trying to compete with Facebook far too late. Has Yahoo ever succeeded in this?

In China, it’s another story. Baidu and Tencent have titanic market positions and no professed “do no evil” promises to play nice with would-be rivals on their platforms. Baidu was pushing its own products long before Search Plus Your World, and there was never an expectation the company would do otherwise. This is the biggest reason online travel site Qunar sold a large stake to Baidu last year — to get in front of that firehose. Tencent is considered even more formidable. There’s a saying among startups in China that you have three fates: life, death, or Tencent.

Getting out to the public markets was a huge step for Youku and Tudou in not falling prey to the latter two fates. Still, despite their hefty market positions, the two are still losing money thanks to the huge costs of serving all that video and still-nascent ad markets in China. Attracting a big audience isn’t a challenge at all. The audience has been bleeding these sites coffers’ dry. But like Pandora, popularity is a challenge in the sense that the more they have, the more it costs. (GGV is also an investor in Pandora, so they’d seen first hand that Tudou’s challenges weren’t limited to China nor to video.)

To beat back the threat of those huge Web 1.0 giants, a merger between the two was likely inevitable, and doing it as two publicly-traded entities was no doubt a lot cleaner and easier. According to Nada, the two companies had regularly discussed it over the last three to four years. “Each rival thought they were going to win, and the reality is neither is going to win,” Nada says. “At this point they are hurting each other more than they are helping themselves. That’s the ultimate reason why this deal happened.”

Nada downplayed the role the bigger competitive giants played in the two wanting to join forces and said the bigger challenge was just the business of content. “To win in the content space in China you need to [create] content, to be able to deliver that content, to have huge user reach and to not get killed financially in the process,” Nada says. “Right now the market is killing everyone financially; there is just not enough advertising to pay for it.”

The remaining company, which still goes by both names despite Youku’s far superior market cap, will have challenges. As the refusal to bow to the larger brand name signals, melding the two companies together won’t be a priority anytime soon, limiting how much cost savings the new entity can achieve. The biggest immediate reduction may be in content costs: The two companies can combine media libraries and no longer bid each other up for the rights to certain shows.

Down the line, Nada says there will be cost savings on the infrastructure and bandwidth but how much savings is uncertain. “Just simply combining the revenue and saving on content and infrastructure costs should be able to create a profitable company in short order,” Nada says.

The combined company will be by far the dominant market player, and each company brings its relative strengths to the table. Those include technology strengths, catalogs of licensed videos, mobile partnerships, original programming and management talent. Survival is much more assured than it was. The hope is it diminishes competitors’ zeal to enter the so-far money-losing space.

But success together is hardly guaranteed. The threat of those giants still remains, and the monetization woes persist. Remember, this is one category where China isn’t playing catch up; China is blazing the trail. There’s no big stand alone online video giant success story in the world.

YouTube might have become mightier had it not sold, but so far its struggled to even generate enough in annual revenues to justify its 2006 purchase price, and it’s moving swiftly from user generated content to more professionally produced fare. Meanwhile, Hulu is mostly buoyed by content partnerships and it worth a dubious amount without them, as evidenced by the company’s struggles to sell itself last year. It’s the same challenge Pandora is facing in the public markets now.

Forget the idea that these are copycats. If Youku Tudou can make it to strong profitability, surviving the crush of bigger competitors who have cash to burn, they’ll have accomplished something the rest of the Web world so far hasn’t.

Either way the success of the combined entities will be closely watched by thousands of Chinese Web entrepreneurs. This generation of startups has been insanely competitive with hundreds or even thousands of upstarts chasing the same opportunity. Even if most fail, there are frequently a few battling it out for market supremacy. As distasteful as it is culturally, combining forces may be the only way for this generation to come close to a Baidu or Tencent sized win.