Google bought YouTube for $1.65 billion back in 2006. Nearly a decade later the video sharing site is attracting more than a billion views a month. But YouTube isn’t a profitable business. As of last year it was yet to break even, despite accounting for about 6% of Google’s sales. That failure reflects its difficulties in establishing itself as a source of high-quality videos (aka paid content) – lagging behind Netflix and others in this regard. Instead YouTube has been struggling to expand its core audience beyond the self-published content of ‘teens and tweens’.
If a Google-YouTube alliance has proved tricky to monetise, how about a Chinese internet giant trying to combine the strengths of Amazon, Twitter and Netflix into one? At the core of this trio sits China’s biggest internet firm Alibaba (who else). It caused a buzz this week by offering $4.6 billion for the 82% of internet media firm Youku Tudou that it doesn’t already own. (Alibaba will actually cough up $3.5 billion, taking into account the $1.1 billion sitting on Youku’s books.)
Alibaba first bought into Youku in April 2014, acquiring an 18% stake for $1.22 billion as part of a push into online video. The site was founded in 2005 as one of the Chinese copycats of YouTube. Similar to YouTube, it has never turned a profit. However, the Chinese firm has been quicker to skew its business more towards subscription services. It now offers Hollywood and Chinese-made movies to 500 million monthly users and could provide “an ideal platform” for Alibaba’s own movie production units, according to Beijing News.
“Our vision is to distribute content to a broad set of users through any device they may be using,” said Alibaba Executive Vice Chairman Joseph Tsai. “Youku fits this vision perfectly.”
The buyout offer came at a 30% premium to Youku’s pre-deal price and, according to Hong Kong research firm MCM Partners, it is one of about 30 US-listed Chinese firms to get offers to go private this year (they mostly plan to relist the firms back in China at higher valuations.)
The return to acquisition mode seems to have revived investors’ confidence in Alibaba too. The company’s US-listed stock, having dipped below its IPO price recently, has rebounded more than 20% since last month. The deal may also kick off another M&A spree in China’s internet sector, especially between online video sites and media firms. “Video content has become a must-have for all social media firms,” Southern Weekend says. “Youku’s video content and distribution channel will complement well with Alibaba’s existing platforms such as Sina Weibo.”
Alibaba currently owns 30% of Sina Weibo, the popular Twitter-like micro-blogging service in China, and Doug Young, a business blogger, has suggested that Sina Weibo could be next on Alibaba’s agenda. “Or even more intriguing, Alibaba could make a potential play for Weibo’s parent and founder Sina,” Young writes.
In China’s internet sector, a bitter rival can soon become a close partner. Barely a year ago Alibaba launched an acquisitive dogfight against its archrival Tencent. Since then the two giants have agreed on a number of deals to merge competing ventures in which they have invested. These include classified advertising sites 58.com and Ganji.com, as well as the car-hailing apps Didi and Kuadi. And this frenemy relationship looked to have been reinforced this month, when group-buying site Meituan (partly owned by Alibaba) inked a $15 billion merger with Dianping (which is controlled by Tencent). In online-to-offline (O2O) food delivery services the newly merged entity will enjoy an 82% market share.
“It will reduce competition and help them win investor support, and the backing that is needed to support expansion,” said Caixin Weekly, adding that the new combination was bad news for Nuomi.com, a rival backed by Baidu, China’s answer to Google.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.