Alibaba has pinned part of its future on its so-called ‘2H strategy’: health and happiness. The first plank is Big Health, or the market for general health and wellness (see WiC397). But to make people happier, the Chinese internet giant also talks about the ‘Big Culture-Entertainment’ concept. It created its Alibaba Culture and Entertainment (ACE) group in 2016. By bringing together its movie, music, sport and gaming units, plus injecting another Rmb10 billion ($1.5 billion) in initial investment, Alibaba bet that ACE would be a transformational force.
It followed a flurry of pricey acquisitions, most notably the $4.5 billion purchase of China’s then leading video-streaming platform Youku in 2015. Youku’s founder Victor Koo became a key executive at ACE.
But according to a widely forwarded article from Caijing magazine this week – titled ‘Who is going to rescue Alibaba’s Big Culture-Entertainment’ – things haven’t worked out quite as expected.
One of the problems: Youku was slow to adapt to the rise of shorter-form video and livestreaming apps, which started to bite into its business
Koo – already a billionaire in US dollar terms after selling Youku to Alibaba – made another strategic miscalculation, says Caijing, in choosing to focus more on user-generated content.
That turned out to be a mistake as rivals such as Baidu-backed iQiyi and Tencent embraced in-house production in a similar vein to Netflix.
Getting this content can be costly. iQiyi spent Rmb21.1 billion ($3.13 billion) on content last year, according to Ampere Analysis, which was about the same as the total spend of China’s top six traditional broadcasters combined.
Most of that money was used to purchase exclusives and produce original content. Youku was slower to realise that it needed to do the same to supercharge its subscription model. For instance, one unnamed Youku insider told Caijing that Koo’s team had approached Hong Kong director Wong Kar-wai to produce the TV adaption of his award-winning martial art movie The Grandmaster. But he balked at the cost when he heard that Wong wanted Rmb5 million per episode. A year later, iQiyi paid exactly that amount to turn popular internet novel Grave Robbers’ Chronicle into a TV sensation (see WiC293), setting the stage for iQiyi to overtake Youku.
According to Tencent’s latest earnings announcement last month, its video platform now has close to 89 million paid subscribers and Securities Daily said that iQiyi is sitting on a similar pool of paying customers. Both platforms expect to top 100 million users soon.
Youku has been reluctant to disclose its own figures on paying customers, the newspaper said, although industry watchers have put it at around 30 million people.
Of course, it’s unfair to lay all the blame on Koo, who lasted for less than a year in the lead role at ACE. In fact, 10 top executives have come and gone since the group’s foundation five years ago, Caijing has calculated.
Other units under the ACE umbrella have disappointed as well, including its movie production unit Alibaba Pictures, which invested more than Rmb750 million in Asura in the hope that the big budget animation would emerge as a local variant of Lord of the Rings. It turned out to be the country’s biggest movie flop and was pulled from cinemas a few days after making less than Rmb50 million on its debut weekend (see WiC419).
A Peppa Pig movie co-produced with Entertainment One, the Canadian firm which owns the cartoon franchise, got off to a more promising start this year thanks to a clever trailer (see WiC438). However, it soon lost momentum over the Chinese New Year window, with audiences complaining that the puddle-loving piggy appeared for less than 30 minutes in the 81 minute movie.
Some of Youku’s belated push into production has disappointed too. Take Pushing Hands. The drama series is basically a martial art story set in modern times. But critics say that the only real buzz was related to speculation about the lovelife of its lead actress Wang Ou, who features regularly in the gossip columns.
Alibaba is committed to investing more in content for Youku and it said last December that spending on content was one of the main reasons that its cost of revenue as a percentage of total sales increased by 10% in the past quarter.
Distributors like Netflix and iQiyi want to own their content because it brings down licencing costs in the longer term and reduces the problem of commercial partners pulling material off their platforms.
As part of that strategy, Alibaba wants closer ties between Youku and Alibaba Pictures, and the latest managerial changes at ACE saw Fan Luyuan, CEO of Alibaba Pictures, takeover as Youku’s president earlier this year.
The new boss has been wielding the axe, with reports last week that Youku will lay off 10% of its workforce. News portal Huxiu reckons this is the beginning of a bigger restructuring at ACE, while Caijing predicts that Fan – formerly a key executive at AliPay – might focus on securing other production partners such as Huayi Brothers.
More broadly, Fan has been tasked with making ACE pay its own way, Caijing says, and the days when “Alibaba could afford to lose Rmb10 billion a year [at the unit]” are over.
© ChinTell Ltd. All rights reserved.
Exclusively 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.