Alibaba Entertainment Changed CEOs a Year After It Was Set Up. How Are Alibaba's New Businesses Outside E-commerce Doing?

Over the past year, Alibaba Entertainment lost 12.6 billion yuan. Jack Ma says it gets 11 years in total.

"Over the next three years, Alibaba's investment plan for its Digital Media and Entertainment Group will exceed 50 billion yuan."

Yu Yongfu said that less than a year ago. The CEO of Alibaba's Digital Media and Entertainment Group has already stepped down.

On November 15, Alibaba CEO Daniel Zhang announced in an internal memo that Yu Yongfu would no longer serve as chairman of Alibaba's entertainment group, or as president of that group and of Amap. Yu moves instead to head Alibaba's newly formed eWTP Investment Working Group; from now on his job is "global ecosystem investment" and setting strategic direction at Amap.

At the same time, the entertainment group switched to a rotating-president system. The first rotating president is Yang Weidong, who reports directly to Daniel Zhang and previously ran the Youku Tudou business group. The other rotating presidents each take one area: operations, Alimama, film, human resources, and literature. In other words, no one has replaced Yu Yongfu.

A year ago it was also an internal email from Daniel Zhang that announced the formation of Alibaba's Digital Media and Entertainment Group. Victor Koo, who had joined Alibaba along with Youku, moved into an investment role, and Yu Yongfu took over as CEO of the new group. A year later, Yu has faded out of Alibaba's day-to-day management much the way Koo did.

Alibaba Pictures, Youku Tudou, UC, Alibaba Music, Alisports, Alibaba Games, Alibaba Literature, and Damai.cn all sit inside Alibaba Entertainment. Alibaba bought them at different points and eventually folded them into the group.

At a company with more than 50,000 employees that likes to talk about "culture," a change at this level invites all kinds of readings about internal politics.

But whatever the mix of reasons behind the CEO change, Alibaba's expectation for the cluster of businesses it calls "entertainment" is clear: a second big business after e-commerce, one that brings in revenue and growth and makes good on the story that Alibaba is more than an e-commerce company.

Starting in the second quarter of 2016, entertainment was broken out of the "other" category and became a line item Alibaba discloses on its own in earnings reports.

None of the revenue streams inside entertainment is anywhere near large enough that the New York Stock Exchange requires disclosure. Bundling them and reporting them to investors voluntarily shows that Alibaba wants to tell an entertainment story to investors in the US, where it is listed.

If the numbers look good, it becomes a story about future growth — proof that Alibaba is more than e-commerce.

As Jack Ma once put it: "No internet company can hold an advantage for three to five years running. So we build echelons and fight organically — one goes up front, then steps back, then another goes up, and it comes around again. When Alibaba's B2B business needed fixing, Taobao took the front line, then Tmall, then Alipay took off, and a couple of years later it was cloud computing, then Cainiao — round after round."

So after a year, how has entertainment actually done?

Video: half as many users as iQiyi

Data from Aurora Mobile's iAPP monitoring platform shows that among the five video apps with the most monthly users, Youku and Tudou combined rank only third.

And the gap between Youku Tudou and first-place iQiyi keeps widening. Despite recent hits like Day and Night, the number of people who open the Youku Tudou app even once a month is still less than half of iQiyi's.

That is only the count of people opening the app. Video revenue also depends on time spent. iQiyi currently averages 57 minutes per user per day; Youku, 23.4 minutes.

Multiply time spent by users, and Youku Tudou's share of the market is a quarter of iQiyi's.

So far, video streaming is still a business that burns money with no end in sight. Every site keeps losing money, and the costs show no sign of easing. iQiyi has lost close to 7 billion yuan over four years. Tencent has said plainly in its earnings commentary that its online video business will take a long time to break even, and that it cannot give a date.

Over the past year, a good number of Youku's members came from traffic that Alibaba's e-commerce platforms sent its way. But Alibaba has now flagged Youku Tudou's rising content costs in two straight quarterly reports. The "steady performance" UC contributes is cancelled out by what Youku Tudou spends on content.

Music: a tenth of the users the leaders have

Alibaba Music, founded in July 2015, may be the biggest failure in the whole entertainment group.

A QuestMobile report from September 2017 shows how concentrated online music is: the three apps with more than 100 million monthly active users are Kugou Music, QQ Music, and Kuwo Music, all Tencent services, while NetEase Cloud Music is close to 70 million.

Xiami Music and Ali Planet together have 2.3% as many users as Tencent's music apps (Kugou, QQ, and Kuwo) combined.

On time spent, Xiami Music also trails Tencent's and NetEase's services by a wide margin.

Alibaba's music business actually started from a strong base: Xiami Music and TTPod, both bought in 2013. Xiami earned a "small but beautiful" reputation for its professional song catalog; TTPod was one of the first music players on smartphones and claimed more than 200 million users.

But Alibaba was not content to run a music player. After hiring Gao Xiaosong and Song Ke, two of the most powerful people of the record-label era, to run Alibaba Music, the company tried to consolidate the music market with the e-commerce thinking it knew best.

Ali Planet launched in March 2016. Built on TTPod, it was a large and complicated app. On top of listening to music, it added a string of specialized businesses: venue rental, which connected artists with the people who manage performance spaces; a songwriting function that put lyricists and composers together; and a production function that linked artists with producers.

So Ali Planet's positioning turned blurry. Was it for industry professionals or for ordinary listeners? Ali Planet never worked that out. Predictably, it started losing users. At the end of 2016, Ali Planet announced it was spinning off its music service and pointed users to Xiami Music. TTPod, once 200 million users strong, was declared dead.

From the second half of 2016, Alibaba Music began reshuffling its management. Yang Weidong, president of the Youku Tudou business group, took the CEO job on top of his own, then handed it to Zhang Yu, formerly president of Juhuasuan. Xiami Music became the center of Alibaba Music again, and Xiami founder Wang Hao came back from DingTalk to run it.

Over the past year, Xiami Music's biggest win was a copyright sublicensing deal with Tencent, which gave it music from the world's three big record companies (Universal, Warner, and Sony), plus YG Entertainment and JVR Music.

But online music may already be a game Alibaba is out of.

Whatever profit Alibaba Pictures has made, none of it came from the core business

In 2014, Alibaba bought ChinaVision Media Group without warning and turned it into Alibaba Pictures.

Alibaba Pictures wanted a piece of everything the film business touches: the crowdfunding product Yulebao, the ticketing platform Taobao Movie, Tmall for merchandise, and more. It covers more links of the film industry than any other company.

Alibaba Pictures spends heavily on marketing every year.

Revenue in 2016 came to 904 million yuan, against a net loss of 1.5 billion yuan. In the first half of 2017 it lost another 525 million yuan. The heavy spending on Tao Piaopiao is the main reason the numbers look bad; content has little to do with it.

In an interview this September, Yu Yongfu said Youku and Tao Piaopiao had entered a growth phase in the first stage of Alibaba Entertainment's integration, and that the main reason was "unlimited investment."

The two films Alibaba Pictures controlled itself, Once Upon a Time and See You Tomorrow, each took around 500 million yuan at the box office — spreading the investment across partners may let it recoup costs — but word of mouth on both was terrible.

Coming projects such as 《古剑奇谭之流月昭明》 and 《蛮荒记》 do not look promising either.

Films Alibaba Pictures has invested in, distributed, or produced

2015.2

Wolf Totem/Distribution, Douban score 6.9, mainland box office 710 million yuan

2015.7

Mission: Impossible – Rogue Nation/Investment, Douban score 7.1, mainland box office 870 million yuan

2016.1

Little Door Gods/Distribution, Douban score 7.7, mainland box office 80 million yuan

2016.5

Teenage Mutant Ninja Turtles: Out of the Shadows/Investment, Douban score 6.3, mainland box office 390 million yuan

2016.7

Star Trek Beyond/Investment, Douban score 7.3, mainland box office 441 million yuan

2016.12

See You Tomorrow/Production, Douban score 4, mainland box office 483 million yuan

2017.1

Journey to the West: The Demons Strike Back/Production, Douban score 5.6, mainland box office 1.657 billion yuan

2017.6

REAL/Investment and China distribution, Douban score 4.9, not released in mainland China

2017.8

Once Upon a Time/Production, Douban score 4, mainland box office 531 million yuan

At the Shanghai International Film Festival this June, Yu Yongfu set out a new strategy for Alibaba Pictures: build three pieces of infrastructure — user reach, commercialization, and content industrialization — and serve the film industry as a whole. In plain terms, help other film and TV companies with online promotion, distribution, and merchandise.

Going by the financial reports, promotion and distribution have indeed brought in a fair amount of revenue.

But promotion, distribution, and merchandise sit near the tail end of the film industry.

2015 was the year Alibaba Pictures lost the least, and its accounts show that this owed mainly to financial income. Bank interest and foreign-exchange gains of 894 million yuan were the company's single largest revenue line that year.

Even setting competition aside, Alibaba Pictures' own business is not doing well. Tao Piaopiao counts for more in film promotion and distribution. Inside Alibaba Pictures, meanwhile, the personnel changes have not stopped. Zhang Qiang, whom the company poached from China Film Group, moved from CEO down to co-president. After Yu Yongfu's brief transitional stint, the film company went to Fan Luyuan, who built "Quick Pay" and Yu'ebao at Ant Group. Fan also founded Alibaba's ticketing platform, Tao Piaopiao.

On top of ticket subsidies, Alibaba Pictures' spending on Tao Piaopiao has no ceiling, and it has indeed won the app a large supply of films and a large share of the market. Two months ago, Weiying Technology and Maoyan Movie merged into one company; the integration is now largely done, and Tencent put nearly 1 billion yuan into the new firm. The money-burning war will go on. Tao Piaopiao has built no barrier of its own.

Alisports: nobody knows what this company does

Alisports was founded in July 2015. After it launched, it signed deals with many sports associations and agencies, trying to become the basic platform for the sports industry. Now that the bubble in sports has deflated, few people pay it much attention.

In September 2016, the Reignwood LPGA Classic, a golf tournament that had skipped 2015, was confirmed to resume, with Alisports as a new sponsor and co-operator, spending at the million-dollar level on the event. There have been plenty of deals like it.

The last time Alisports made the news was a partnership with the Zhejiang provincial sports bureau, under which the two sides would "use high-tech internet features to raise the profile of the Hangzhou Marathon and jointly build a smart Hangzhou Asian Games."

UC performs best, but it doesn't make money either

Last August, UC Browser — by then more than two years inside Alibaba — changed its name. The word "Browser" disappeared and the brand became simply "UC." UC promoted itself from a browser to a "new-style big-data media platform" and moved into content.

A year after that shift, UC founder He Xiaopeng — also president of Alibaba Entertainment's New Mobile Business Group and president of UC — left to work full time at XPeng, the internet car company he had founded years earlier.

In both the second and third quarters this year, Alibaba's earnings reports pointed to UC's positive contribution. In each of the last two quarters, entertainment revenue has leaned on UCWeb's value-added services, such as its news feed and mobile search. The data show that Baidu still has the most monthly readers of news, but UC has been passed by Tencent News, and Toutiao keeps closing in.

Worth noting: we cannot be sure that everyone who opens Mobile Baidu or UC is there to read news.

If UC were an independent company, its current scale would be very good indeed, and it is also the biggest content gateway in India. But UC is Alibaba's content-traffic gateway, and Alibaba is dozens of times the size of Toutiao and a little bigger than Tencent.

Among the other giants' gateways, Baidu has three: Mobile Baidu, baidu.com, and Baidu Mobile Assistant. Tencent's WeChat and QQ already cover nearly everyone on the Chinese internet.

The rest: games and app stores

Back in 2010, Jack Ma said flatly that Alibaba would never do games, because "if all the kids are playing games, what happens to the country's future?" But over the last two years, as the global games industry passed $100 billion in market value and the mainland became the largest market by share, Alibaba has moved into games too.

In January 2016, the UC 9Game business was spun out of UC, renamed Alibaba Games, and run as its own company. But Alibaba's games business is still mostly distribution.

By this September, Alibaba announced a formal Games Business Group, with an Open Platform division and an Interactive Entertainment division under it; Guangzhou Jianyue Information Technology, founded by former NetEase COO Zhan Zhonghui, was folded in at the same time. The strategy Alibaba disclosed puts 1 billion yuan into a dedicated fund for building an ecosystem around game IP.

It is too early to judge the new business, but catching NetEase and Tencent in games from a standing start will never be easy.

At the end of last December, Wandoujia, the app-distribution platform Alibaba bought for $200 million, was formally folded into Alibaba Mobile; Wandoujia, Alibaba Games–9Game, PP Assistant, the UC App Store, Shenma Search, and YunOS were all merged into "Alibaba App Distribution."

But the mobile app market today largely lives inside the phone makers' own stores. Every new phone comes with an app store preloaded, and users have little reason to install another one that does the same thing.

Besides the stores run by Apple, Xiaomi, Huawei, and OPPO, the third-party stores of Tencent, Baidu, and 360 were all there before Alibaba.

Rivals are raising more and more money

On November 8, China Literature listed in Hong Kong. It closed its first trading day up 86%, the largest IPO (initial public offering) on the Hong Kong exchange in recent memory.

By that math, the two Tencent-affiliated companies now account for 12% of the entire Hong Kong exchange's market value.

Investors in Hong Kong have already made Tencent the big theme replacing Li Ka-shing. From China Literature to Yixin, Tencent-linked stocks are four to five times oversubscribed the moment they list there.

Meanwhile, Bloomberg reported, citing people familiar with the matter, that Tencent Music has hired investment banks for a public offering, planning to list in Hong Kong in 2018 and raise at least $1 billion.

iQiyi is preparing to list in the US, to tell the Netflix story.

In music, video, and even ticketing, Alibaba's rivals are all preparing to go public. Once listed, the money they can mobilize will no longer be limited to transfusions from Tencent or Baidu.

At the same time, Alibaba's e-commerce business is throwing off substantial profit and has delivered good-looking results for several quarters running. That has sent the stock up, but it also means Alibaba has to keep that profit growth attractive — it can no longer pour unlimited money into cash-burning businesses.

Entertainment is not yet a growth story Alibaba can tell

Alibaba has always wanted to stress that it is not only an e-commerce company. After a string of acquisitions, putting video, music, film, and even UC together was supposed to produce another big business after e-commerce — a new pillar outside the core, the way Prime membership and cloud computing are for Amazon.

But going by the financial numbers, entertainment is not yet growth you can count on.

Alibaba's largest source of revenue is still e-commerce — Tmall, Taobao, Juhuasuan, Freshippo, and Alimama among them — which made up 84% of revenue in the most recent quarter. Outside e-commerce, the other three segments are all still losing money.

Entertainment's share of revenue, meanwhile, keeps falling. In the most recent quarter it was 8.7% of Alibaba's total revenue, well below the 10.52% of the same quarter a year earlier.

At the same time the loss ratio keeps widening. In the most recent quarter, Alibaba Entertainment's loss ratio passed 70%. That means for every 100 yuan of revenue it brings in, it spends 170 yuan.

The fast revenue growth entertainment showed earlier came mainly from Alibaba consolidating the accounts of Youku Tudou and UCWeb, which brought the two companies' advertising and mobile value-added revenue onto its books. But the revenue growth that added to Alibaba as a whole falls far short of the e-commerce profit it consumes.

The best performer right now is cloud computing. Luckily for Alibaba, the world's three largest cloud providers — Amazon, Microsoft, and IBM — are all still working out how to exist in China at all, and fourth-placed Google does not even dream of entering the market.

Alibaba's own management does not think about entertainment the same way. Yu Yongfu has talked about investing in Youku with "no ceiling on spending," while Alibaba Group Vice Chairman Joseph Tsai told an earnings call that over the long run Alibaba's content spending will come down.

"Big entertainment is about bringing people happiness. We are giving Big Entertainment 11 years. A lot of people in China aren't happy. Right now, Alibaba's entertainment business isn't meant to make money. We hope that in 10 years, Alibaba's entertainment business will promote cultural exchange between China and other countries." That is how Jack Ma put it in a speech at Hupan University this March.

Whether making money is really the point is hard to say. But a business that cannot stop the bleeding probably will not last 10 years.

Charts by Fangyi Gong

Cover image from Visualhunt.com