Alibaba Has Spent 20 Billion Yuan on Entertainment and Still Lacks a Real Say in the Industry

Over the past few years, Alibaba has put more than 20 billion yuan directly into the entertainment industry.

Alibaba has never hidden its ambitions in entertainment.

Earlier this month its investment arm paid 2.4 billion yuan to become the second-largest shareholder of Enlight Media, the company behind box-office hits such as Lost in Thailand and So Young. The deal was read as Alibaba once again tightening its grip on the industry.

It was Alibaba's fourth entertainment deal in a year. Last March it took control of Culture China, a Hong Kong-listed company later renamed Alibaba Pictures. At the end of April it bought into Youku Tudou. And last November, four months before the Enlight deal, it used the same method to become the second-largest shareholder of Huayi Brothers, arguably Enlight's arch-rival.

Together these deals cost Alibaba more than 20 billion yuan. That is no small sum. The entire Chinese box office last year came to only 30 billion yuan. For Alibaba, the money equals 38% of last year's revenue, or 85% of its full-year net profit.

Add Yulebao ("Entertainment Treasure") and Taobao Movie Tickets, and in this young (if not yet very large) market Alibaba already owns one of the most complete entertainment value chains of any company, and is the one most likely to write new rules.

The effort is already showing results. After a string of acquisitions, Alibaba became, in a very short time, the most active player in the entertainment industry. At almost every link of the value chain, you can find this internet company.

But there is bad news too. For now Alibaba is still playing the role of "financier." It has not won a say in the industry to match its 20 billion yuan.

How Alibaba Spent 20 Billion Yuan

We traced the investments of the past few years through which Alibaba put money directly into the entertainment industry, or which significantly shape it. They add up to roughly 20 billion yuan. Most of the money went to six companies. Here is the "shopping list," from largest to smallest.

Youku Tudou, 7.6 billion yuan. On April 28, 2014, Alibaba and Yunfeng Capital paid US$1.22 billion (about 7.6 billion yuan) for a combined 18.5% of Youku Tudou, and Alibaba CEO Lu Zhaoxi joined the Youku Tudou board. Video sites, led by Youku Tudou, have become the most important platforms for marketing films. Last year Youku Tudou also set up its own film company, Heyi Pictures, which is moving upstream through co-productions and direct investment.

Culture China, 5 billion yuan. On March 11, 2014, the Hong Kong-listed Culture China Group announced that Alibaba would pay HK$6.24 billion (about 5 billion yuan) for a 60% stake and become its controlling shareholder. The deal closed on June 26, and Culture China was soon renamed Alibaba Pictures. Its most valuable assets are considered to be its first rights to invest in films by major directors such as Stephen Chow, Peter Chan and Wong Kar-wai.

Sina Weibo, 3.7 billion yuan. On April 29, 2013, Sina announced that Alibaba, through a wholly owned subsidiary, would pay US$586 million (about 3.7 billion yuan) for preferred and ordinary shares issued by Sina Weibo, roughly 18% of its fully diluted share capital. The crowd of celebrities on Sina Weibo is a big reason the platform still has some activity and influence. Their personal accounts have also become an important channel for promoting films. A star's influence on Weibo, measured by follower counts, follower profiles, comments and reposts, weighs more and more in how films and TV series cast their leads.

Enlight Media, 2.4 billion yuan. On March 4, 2015, Enlight Media announced that Alibaba would pay nearly 2.4 billion yuan for 99.09 million newly issued shares, about 8.8% of the enlarged share capital, making it the second-largest shareholder. Lost in Thailand, the "dark horse" of the 2012 New Year season, set a Chinese-language box-office record of 1.27 billion yuan and quickly turned Enlight, which started as a distributor, into the company most courted by investors and the industry. In 2014 Enlight released 12 films with a combined box office of 3.139 billion yuan, the most of any private film company.

Huayi Brothers, 1.5 billion yuan. On November 18, 2014, Huayi Brothers announced a private placement in which Hangzhou Alibaba Venture Capital Co., Ltd. invested 1.5 billion yuan to raise its stake to 8.08%, tying with Tencent as second-largest shareholder. Jack Ma had already bought into Huayi in a personal capacity back in 2006. Huayi can fairly be called the emblem of Chinese cinema's growth over the past 20 years, with the industry's richest resources and project experience. It was also the first entertainment company to list in China and is now the most valuable.

Meituan, more than 300 million yuan. In 2011 Alibaba invested US$50 million (about 300 million yuan) in the group-buying site Meituan's Series B round, and in May 2014 it followed on in the Series C. Meituan's influence on entertainment comes through Maoyan, its standalone movie-ticketing platform. According to figures CEO Wang Xing released at a New Year press briefing on January 18 this year, Maoyan sold 5 billion yuan worth of tickets in 2014, 16.89% of the national box office of 29.6 billion yuan.

Alibaba Has a Piece at Every Link of the Value Chain

Production, where content is king: Huayi, Enlight and Culture China

On the question of whether content or distribution is "king," Hollywood settled the argument long ago. Look at the Big Six studios that control the whole industry and at Disney in its prime, then look at the North American cinema chain that ended up sold to Chinese capital. The same story is bound to play out again on the mainland.

The film boom of the past five years came mainly from growth in distribution channels: more cinemas, screens and seats. But that does not change the fact that in this industry, content is king.

While everyone marvels that China will become the world's largest box-office market within a few years, you may have forgotten that a film here took in 1.5 billion yuan as early as 2010 (Avatar), and that the record stood for four years until Transformers: Age of Extinction broke it. Had the content not been so weak, China would have become the "largest market" much sooner.

Of the more than 350 films released in cinemas last year, fewer than 20% actually made money. Good content has never been scarcer. Projects, directors and lead actors are all in short supply, and the direct result is that resources pile up with a few big players, who band together to get through the lean times.

Of last year's 10 highest-grossing Chinese-language films, 8 were led and developed by big companies. Most belong to Enlight, Bona and Huayi, big companies that are good at pulling resources together and experienced at developing projects.

(Before the release of Journey to the West, Huayi Brothers arranged a public conversation between Jack Ma and Stephen Chow)

Owning "good content," where "good" includes selling tickets, is why Alibaba chose these companies. And the most direct way to lock in "good" content is to lock in the directors who can fill cinemas.

So Culture China, with first rights to invest in projects by Wong Kar-wai, Peter Chan and Stephen Chow; Huayi, which has Feng Xiaogang; and Enlight, which is close to Zhao Wei and Xu Zheng, were the natural targets.

Their "scale" also gives these companies better control of risk. Huayi, Enlight and Culture China (now Alibaba Pictures) together have more than 50 projects in preparation. Even if some of them flop at the box office, overall results will not suffer much. (We can check back in a couple of years.)

Marketing, where the say is growing: Youku Tudou and Sina Weibo

The biggest change in film marketing in recent years is that video sites have replaced the old web portals as the main battleground. More and more film companies have realized that a single trailer or theme-song music video does far more for a film than a stack of identical press releases.

Film marketers who once begged portal editors for space now court video sites instead. On a platform like Youku Tudou, with 600 million users, a homepage slot means millions of clicks and impressions. And compared with portals, what a studio spends on a video site can be tracked and measured more precisely: how many people watched my trailer, how many liked it, how many commented, what the viewers' gender split, ages and interests are, and whether I am doing better or worse than my rivals...

A huge audience and trackable data have let video sites like Youku Tudou build up their influence in film marketing. They are also joining whole film projects more and more often as "co-producers" (Youku co-produced more than 20 films in the past two years), and then setting up their own film companies to push further upstream.

Sina Weibo's influence is not what it was, but stars with millions or tens of millions of followers play an ever larger part in marketing films.

The classic example is Tiny Times. Guo Jingming's personal Weibo account served as the single outlet for all of the film's news and promotional material, and reposts by stars such as Yang Mi and Chen Xuedong spread it as widely as possible. (Han Han's The Continent confirmed again that the model works.)

Online influence in turn helps stars win more roles. Even if you are Lu Han or Kris Wu, who had never been in a film and could hardly be called actors, what studios care about most is getting the film onto a personal Weibo account that averages well over 100,000 reposts a post, even if in the end you only make a brief appearance on screen.

Distribution, the most mature channel: Enlight

Enlight Media, which started as a distributor, has spent several years building a field distribution team of several hundred people. Stationed in cities across the country, their main job is to stay on good terms with cinema managers, make sure promotional materials get the best spots in the cinema, and win more screenings when a film opens.

This is still the most effective way to distribute a film, and it has made Enlight the strongest distributor in the business. Many projects and companies that lack distribution muscle come knocking. That is why Enlight's 2015 slate has as many as 36 projects, some of which Enlight neither invested in nor led, and in which it acts only as distributor.

(Investors all hope Enlight can help them repeat the box-office miracle of Lost in Thailand)

The projects Enlight gathers through its distribution strength also suit Alibaba, which wants to keep drawing users all year round. They can be turned into Yulebao projects or promoted and sold directly on Alibaba's platforms.

Ticketing, the biggest ticket platform: Meituan

Building on the ties with cinemas from its original group-buying deals on movie tickets, and subsidizing ticket prices heavily, Meituan's Maoyan became the country's largest movie-ticket seller in just two years.

According to figures CEO Wang Xing released at a New Year press briefing on January 18 this year, Maoyan sold 5 billion yuan worth of tickets in 2014, 16.89% of the national box office of 29.6 billion yuan. That is more than Wanda Cinemas, the top-grossing cinema chain (4.1 billion yuan).

Many in the film industry doubt the figure, but they also admit that ticketing platforms like Maoyan are gaining leverage over studios and cinemas, getting lower prices from cinemas while demanding bigger subsidies from studios.

(Meituan co-produced Breakup Buddies, last year's top-grossing Chinese-language film)

Maoyan may even move into film distribution, since its group-buying and online ticketing businesses already give it a large sales force in long-term contact with cinemas.

In the existing film value chain, Alibaba has built its own "moat" in content and distribution by taking stakes in big companies such as Huayi, Enlight and Culture China. Its investments in newcomers such as Youku Tudou and Meituan help it hold ground in the parts of the business where the new is rapidly replacing the old.

But that is clearly not all Alibaba has in mind.

Will Alibaba Change the Industry?

At a forum during last year's Shanghai International Film Festival, Yu Dong, president of Bona Group, declared that "in the future, film companies will all be working for B.A.T. (Baidu, Alibaba and Tencent)." The remark became the most hotly debated topic in Chinese film last year, and it reflected, to some degree, how wary and worried industry insiders are about internet giants like Alibaba moving into film.

The worry is not unfounded: the changes Alibaba has brought are plain to see. With one hand it has seized the big companies that already hold power in the existing value chain, hoping to use its capital to turn them into true industry giants. With the other it holds newcomers such as Youku Tudou and Maoyan that could reshape the industry, and works to remake and extend the existing entertainment value chain.

Capital

Film is a high-cost, high-risk business. This is especially true for Chinese film companies, whose businesses and sources of revenue are fairly narrow: the fate of a single film can decide the share price and a whole year's results. Yet a conservative strategy of growing slowly on retained earnings would, in a market growing this wildly, mean missing opportunities and perhaps "falling behind" in a fierce race.

That is a big reason Enlight, Huayi and others accept Alibaba's "checks," selling part of their equity to raise money for growth quickly. For one thing, the money lets them invest in and develop more films of different kinds at once and produce at scale. Huayi Brothers has just announced an agreement with foreign studios to invest in 18 films, and Enlight Media has announced as many as 36 projects it plans to shoot in 2015.

For another, Huayi and Enlight can use the money to build businesses outside film and spread and hedge their risk. For years Huayi has been looking for new ways to make money beyond film, in games and theme-park-style entertainment, while Enlight has already invested in games and is even about to start producing American TV series.

(Huayi Feng Xiaogang Movie Town at Mission Hills, Hainan)

Integrating the value chain

Starting about ten years ago, film companies took up the slogan of the "full value chain" and tried to put it into practice. Nearly every well-known Chinese film company expanded from upstream development, financing and production through marketing and distribution all the way to cinemas, so that rivals could not squeeze or bully them at some weak link.

Looking back ten years later, we find that not a single company has built a real advantage across the "full value chain." More often companies stretched their "front lines" too far and lost track of one part while tending another, or used profitable businesses to prop up losing ones, which raised their costs and eroded their profits. And no big company has managed to merge with or absorb another.

Since the "outsider" Alibaba arrived, we have instead seen some interesting attempts to join up different stages of the chain. When Youku Tudou plays a film's trailer, for example, viewers can buy tickets through a link, joining "promotion" with "sales." When a film raises money through Yulebao, "financing" and "promotion" are joined too.

Extending the value chain

Through the first two changes, the injection of capital and the integration of the value chain, Alibaba has in effect helped extend the existing value chain.

Over the past year, pay-per-view films have been the fastest-growing business at every video site. They give studios a new source of revenue (the price of online rights to a cinema blockbuster jumped to more than 10 million yuan last year) and lengthen a film's life. Enlight Media teamed up with 360 to launch an "online cinema," with Triumph in the Skies as the test case: it went on pay-per-view 18 days after its cinema release, while it was still showing in theaters.

Alibaba's arrival has also tied film more directly to e-commerce, games, merchandise and even tourism. While a film is in cinemas, its merchandise appears in Tmall stores, and a game of the same name is pushed to users through channels such as Mobile Taobao along with news of the film. All of this is still at a very early stage, but every effort points the right way: extending the value chain to earn more money beyond the box office.

But... Influence Is Hard to Build

Small companies are showing more vitality

While Alibaba ties its influence in entertainment to the futures of the industry's big companies, some small companies showed great vitality over the past year and even won themselves more influence.

Of the 29.6 billion yuan mainland box office in 2014, more than 40% (nearly 12 billion yuan) came from small companies outside the five big private distributors. Hits such as Breakup Buddies and My Old Classmate also came from small companies.

With hot money flooding into film and the industry becoming more specialized over the past few years, the huge gap in money and resources between small and big companies has gradually narrowed, and it has become easier to put together a "blockbuster." Experienced, well-connected directors and producers who used to "work for" big companies have gone off to start their own, and now threaten their former employers.

(My Old Classmate grossed more than 450 million yuan on a production budget of under 20 million yuan)

Last year's top-grossing film, Breakup Buddies, for example, was run by Ning Hao's "Bad Monkey Film Unit," his first project as lead producer since leaving Pony Media. Ferris Wheel Films, founded by Du Yang, a producer from Huayi, and Song Ge from Wanda, made My Old Classmate last year and invested in Breakup Buddies, for a combined box office of more than 1.5 billion yuan. Huayi Brothers' own box office last year was only 1.8 billion yuan.

Of course, it is still unrealistic to expect these small companies to catch up with or overtake Huayi and Enlight any time soon. But their skill at developing projects, their flexibility and their feel for what audiences want are already enough to give them a louder voice in the competition ahead.

Resources are scattered and hard to pull together

As we said earlier, China's big film companies all want a "full value chain," so each has staked out its own territory and goes its own way, more starkly than in most industries. Alibaba's arrival cannot change this quickly.

A simple example: the rivalry between Huayi and Enlight will not soften just because they now share a shareholder. Don't expect the two to pool their strengths or team up against other competitors. The market keeps growing and the pie keeps getting bigger, so everyone does their own thing. It is nowhere near a zero-sum game.

Besides, the entertainment industry is far less open than the internet. You have to know and understand the rules of the game and the unwritten codes of how people deal with each other before the bosses of these film companies will treat you as one of their own, and before you can work with any ease in this business, or at least without hitting a wall at every turn. Wanda, which hoped to build influence on the strength of its cinema chain, and LeTV and Youku Tudou, which marched in under the banner of the internet, have all paid this price. Imagine how hard it would be for Alibaba to bring together companies that look down on one another.

To these film companies, Alibaba is just a "financier," not an "insider." What they value is the money, the platform and the room for future business it can offer. They do not need it meddling in their projects or their plans. That is also why each of them sold only a small slice of equity.

Alibaba has far less feel for film than for selling things

As an e-commerce company, Alibaba does everything in order to find users, connect them with goods, keep them hooked, and then sell more goods. Twenty years of results show that this is also what it does best.

Its feel for film is much weaker than its feel for selling things. Put another way, what Alibaba cares about is not "making good films" but how many viewers (users) it can attract.

Film happens to meet that need. It is the form of entertainment that young people take part in and spend on most widely, and people go often enough that it keeps pulling users back.

(Alibaba Pictures' first film, The Ferryman, is directed by Zhang Jiajia, produced by Wong Kar-wai and stars Tony Leung)

So you will notice that both the projects Alibaba Pictures launches, such as Zhang Jiajia's The Ferryman, and the projects Yulebao favors, such as the Tiny Times series, lean heavily on fans. Here, fans and users matter more than the story.

What Alibaba wants is for film audiences, while they consume films in all kinds of ways on its platforms, to buy something else as well. Last year the mainland box office was 29.6 billion yuan, while Tmall's sales on Singles' Day (November 11) alone reached 57.1 billion yuan. That second number is the one Alibaba really cares about.