With Youku Tudou, Jack Ma Completes Alibaba's Entertainment Map. The "Happiness" He Wants Is Still Some Way Off

Entertainment is where Alibaba has built the most. If it can start there and pull its other businesses together, it will truly be more than an e-commerce platform.

On October 16, Alibaba announced that it had made an offer to Youku Tudou's board to buy the company at US$26.6 per share. At that price, the deal will cost Alibaba about US$4.5 billion.

According to Youku Tudou founder Gu Yongqiang, the company's management, its investment-fund shareholders and Youku's founding shareholders all support the deal. So this acquisition may close much faster than the earlier take-private deals for US-listed Chinese companies.

Buying Youku Tudou gives Alibaba a louder voice in the entertainment industry. When it faces American investors, it can now say with more conviction: "We are not just an e-commerce platform. Please don't compare apples with apple trees."

Still, the logic takes a few turns. Buying a video site may simply be the start of a slow process of absorbing and integrating a business, as Alibaba did when it bought Amap and UC.

Youku Tudou looks cheaper than when Alibaba first bought in

A year ago, Alibaba paid US$30.5 per share for an 18.5% stake in Youku Tudou. This offer is a good deal lower: US$26.6 per share is 12.8% less.

That is not because Youku Tudou's shares have got cheaper. Before this offer, Youku Tudou's stock stood at US$20.43. Before news of the earlier stake broke, it stood at US$20.51.

One reasonable explanation is that when Alibaba bought into Youku Tudou a year ago, it was racing toward its New York Stock Exchange listing. To attract investors and lift its share price at the listing, Alibaba wanted to make its stock worth more through a large number of acquisitions, whether that value showed up on the books or in strategy.

More than a year later, free of the listing pressure, Alibaba naturally has no wish to pay such a high price for Youku Tudou again. Youku Tudou has also not done especially well over the past year or so, which may be another reason Alibaba lowered its offer.

The share price tells the story. Youku Tudou's stock fell steadily after April 2014. In March this year it hit a low of US$12.36, less than half its level in April last year. Rumors that iQiyi would merge with Youku Tudou later pushed it up to around US$30 for a time, but it eventually fell back to roughly US$15 to US$20.

Even so, Alibaba's offer of US$26.6 per share is a 30% premium over the price before the offer. When the news came out, Youku Tudou's stock jumped 22%.

Video sites are all fighting for good content, and that is why they lose money

Alibaba's purchase of Youku Tudou will change the competitive landscape for video sites as a whole.

iQiyi, Tencent Video and Youku Tudou are billed as the three strongest video sites in the current contest. In fact, though, Youku Tudou, the industry leader, is struggling more and more to keep up with the other two.

Just one day before the acquisition, iQiyi announced that it had overtaken Youku Tudou on both PC and mobile to become number one in the industry. Last October, at a forum, iQiyi CEO Gong Yu said: "iQiyi got started four or five years later than the others, and it has now overtaken the other players in the industry. There is one important reason: money. Throwing money at it."

Tencent Video thinks much the same way. It bought Hollywood films and the fourth season of The Voice of China, then produced a string of its own variety shows and web series, and it was these programs that won it a base of users.

Whether all that spending leads to losses is not something they worry about. Leaving aside the fact that no video site is yet profitable, iQiyi has Baidu behind it and Tencent Video has Tencent's backing. Money is simply not a problem.

Because video sites compete on money, and because Baidu and Tencent give its rivals more ammunition, Youku Tudou has grown unusually slowly over the past two years. Now that Alibaba is buying it, Youku Tudou finally has the confidence and the capital to spend, and the standing to take on iQiyi and Tencent Video.

Baidu, Alibaba and Tencent: where they will now clash across the entertainment industry

Seen more broadly, Alibaba's purchase of Youku Tudou is just one snapshot of the increasingly fierce fight among three internet companies, Baidu, Alibaba and Tencent, over the entertainment industry.

Baidu's entertainment holdings are still mainly the video site iQiyi and Baidu Nuomi, a channel for buying movie tickets online. Baidu says it will spend 20 billion yuan to win the O2O (online-to-offline) market. It is a latecomer, but it is coming on strong.

In online ticketing, Alibaba owns Taobao Movies. It has also invested in Meituan, so Maoyan can be counted as part of the Alibaba camp too. Taobao Movies has the advantage of its link to e-commerce; Maoyan is currently one of the largest online ticketing platforms.

The competition between Alibaba and Tencent is fiercer. Tencent is strong in music, anime, games and literature. QQ Music has a larger market share than Xiami Music and TTPod, both owned by Alibaba Music. But that lead in market share will not let Tencent knock Alibaba out, because the music industry's resources are extremely scattered and very hard to consolidate. In the long run, both QQ Music and Alibaba Music will stay in this market.

In anime, games and literature, Tencent has set up Tencent Interactive Entertainment, which tries to bind them all together under the idea of "intellectual property" (IP). The effort has yet to show results, but games like QQ Speed, the partnership with Kadokawa, and China Literature, formed after Tencent bought Shanda Literature, are all things Alibaba lacks.

In film, the most profitable segment, however, Alibaba has moved much bigger and faster than Tencent.

Last year Alibaba bought China Vision and reorganized it into Alibaba Pictures, which became an important starting point for Alibaba's entertainment business. This summer, The Ferryman, the first project led by Alibaba Pictures, began shooting. The company has also invested in several films, including Mission: Impossible – Rogue Nation and a new film starring Kim Soo-hyun. Alibaba then folded Entertainment Treasure, its film promotion and crowdfunding platform, and Taobao Movies, its ticketing platform, into Alibaba Pictures.

In film distribution, Alibaba invested in Enlight Media, which has a very strong distribution network on the ground, and formed a strategic partnership with it. For promotion, Alibaba's own e-commerce sites are an important channel, and since buying a stake in Sina Weibo, it can use Weibo too.

In short, Alibaba has built the most complete presence in the film industry of the three internet companies, and this is its biggest advantage.

But the threats never go away. In September this year, Tencent set up two film and television companies at once, one to develop web series and the other to produce films. Tencent is a little late, but with its WeChat movie-ticket platform and ads in Moments, it may still win over many traditional film and TV companies.

So Alibaba must work out how to turn its advantage across the industry chain into a real competitive edge over Baidu and Tencent.

From content to users, Baidu, Alibaba and Tencent are ultimately fighting for time and resources

Search, e-commerce, social: judged by their main businesses, Baidu, Tencent and Alibaba are not really direct competitors. But in the age of the mobile internet, we find that everyone is ultimately fighting for users' time and the resources that come with it.

According to the latest data from the China Internet Network Information Center (CNNIC), China now has more than 550 million mobile internet users. Whether they are socializing, working, shopping, being entertained or paying offline, the time and attention they spend online each day is scattered across dozens of apps and websites. Now that screens have shrunk, it has become even harder to make these users "stick" so that they keep generating value for each platform's merchants and advertisers.

The three companies' core businesses differ sharply in how long they hold users. Analysys International, looking at data from Android, found that average time spent per user on WeChat is more than twice that on Mobile Taobao, to say nothing of Baidu's mobile search page, which users leave as soon as they have their results. The "a thousand faces for a thousand people" personalized recommendations that Mobile Taobao has pushed in recent years are meant to make you feel more like you are "browsing the shops."

Beyond their core businesses, the three companies keep users in much the same ways: through acquisitions, stakes or alliances, they draw in more partners and build ecosystems that can attract users more widely. Whether it is a video site where you can burn through several TV series in one sitting, or a payment tool people use more and more often offline, once a company enters a field, it has a chance to win new users or hold on to existing ones.

Jack Ma also has his eye on Amazon. How do the two companies' video businesses differ?

Jack Ma has said more than once that the company he founded is not a "Chinese Amazon." "Amazon and companies like it are shopping sites, where people know what they want and buy it. Alibaba is a way of life, where what people get is surprise and experience," Ma said.

Both Alibaba's and Amazon's platforms carry a great deal of video entertainment. For Amazon, video content is merchandise to be delivered quickly into consumers' hands, just like the printed books, Kindles and toys it sells. Alibaba's approach, buying Youku Tudou, is more like extending its own ecosystem, with users consuming the content directly on the original site.

Counting from the days of renting out CDs, cassettes and DVDs, Amazon entered the video business much earlier than many e-commerce sites. But from 2007 its media business slowed, as printed books and discs were rapidly displaced by the phones and streaming services that rose with the mobile internet.

In September 2006, Amazon tested Unbox, an iTunes-like video service, but buying TV series or films on it was cumbersome, and it never took off. Not until February 2011 did Amazon launch another streaming platform, Instant Video, which was more like Hulu or Netflix. It kept adding large amounts of digital content from partners including Fox, Paramount and HBO to its library, with better prices for its own Prime members.

The platform now even carries Amazon's own original series. They are not yet as famous as Game of Thrones or House of Cards, but the fact that they can attract a director like Woody Allen shows that Amazon has growing clout in the field and is likely to win more exclusive users in the future.

Back to Alibaba. Neither selling video nor running a streaming service was something the company tried in its first 10 years. Back then, what Taobao and Tmall did well was give small and medium-sized sellers and brands a stage to sell goods. They did not supply products or content themselves, let alone video, which they had never touched.

Buying China Vision, and now Youku Tudou, fills in exactly these new areas Alibaba had never tried.

Jack Ma's changed attitude toward Youku is really a change in his thinking about e-commerce

After Alibaba bought its stake in Youku Tudou in 2014, the first joint project the two sides announced was a "shop while you watch" video shopping model. Through Alimama, Alibaba's advertising platform, Taobao and Tmall merchants can place ads for their products directly into Youku and Tudou videos as they play.

This is not actually a new business. In June 2009, Alibaba worked with Youku on a similar advertising project, though the model was simpler then: sellers made and uploaded their own product videos, which played on their Taobao store pages. The aim was to show products better and put buyers' doubts to rest.

Tmall has also tried a more refined version of "shop while you watch." Goddess's New Clothes, a TV program made jointly by fashion buyers, brands and a TV channel, let viewers order directly on Tmall while they watched.

But at bottom, e-commerce ads in videos are, like the soft-sell and hard-sell text ads that sometimes appear in Weibo feeds, a way for Taobao and Tmall to draw traffic from outside their main sites. And just like the pre-roll ads you block with an ad-blocking plug-in, these heavy-handed product pitches rarely stir much interest in consumers.

Whether they are brand ads Youku Tudou lands itself or ads placed by Taobao and Tmall, advertising is now an important source of Youku Tudou's revenue. Over the past four years, advertising has consistently made up more than 80% of its total revenue. Once its two biggest operating costs, content licensing and bandwidth, are deducted, very little is left.

What will Alibaba do with Youku Tudou once it owns it?

As noted above, Youku Tudou fell behind in the video-site race largely because it was short of money. Alibaba has plenty of money, and that backing can help Youku Tudou join the rivals burning cash on high-quality original series and variety shows.

In developing original series and variety shows, Youku Tudou may also work with Alibaba Pictures to develop film and TV projects together.

At the same time, as an e-commerce company, Alibaba may bring more e-commerce tie-ins to these projects, such as more product placement in films and shows and, later, merchandise spun off from them.

In addition, as a channel for playing films and shows on PC and mobile, Youku Tudou can be linked with Tmall Box and Tmall Cinema (TBO), the TV products Alibaba has developed. Content on Youku Tudou can be shared with Tmall Box, which not only enriches what both platforms can offer but also creates a more complete entertainment experience.

If Alibaba integrates these businesses well, it will indeed be more than an e-commerce platform

Through frenzied investments and acquisitions in recent years, and the steady growth of related businesses such as Alipay, Alibaba does seem to be moving in the "happiness + health" direction that Jack Ma laid out earlier:

In entertainment, Alibaba already has at least one or two businesses of its own, or partners, along each of the music, video, TV and film industry chains.

In health, Alibaba so far only holds a stake in Alibaba Health, which is listed in Hong Kong, and through its stake in Guangzhou Pharmaceuticals Baiyunshan it obtained a rare license to sell drugs online. Set against the already well-developed offline networks of hospitals and drug sellers, this is still thin.

In sports, Guangzhou Evergrande, the football club Alibaba invested 1.2 billion yuan in last year, is applying to list on the NEEQ, China's "New Third Board." As for "Alibaba Sports," recently added to the company's list of strategic directions, how it will actually operate has never been formally disclosed.

The business seen as most promising in the short term, and with the firmest footing, is finance, centered on Ant Group. Alipay reaches every consumer, and business loans reach every merchant. Whether it is a streaming membership fee, a movie ticket sold on Taobao, or money paid to a film's producers, all of it can pass through Alibaba's hands.

Graphics: Lin Yuyao