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  1. Home
  2. / Investing
  3. / Technology

Alibaba Wants to Be China's YouTube and Netflix Rolled Into One

The company's creation of a new media unit and entertainment fund show its seriousness about becoming a video powerhouse as Chinese e-commerce growth slows.
By ERIC JHONSA
Nov 01, 2016 | 08:04 PM EDT
Stocks quotes in this article: BABA, BIDU, NFLX

With major U.S. online video services largely shut out of China and Beijing spending heavily to grow broadband penetration, Alibaba (BABA) sees a big opportunity to create a Chinese streaming giant. And while the company still faces a couple of deep-pocketed rivals, its assets and spending commitments leave it a force to be reckoned with.

Alibaba announced on Monday that it's creating a new business unit that features online video leader Youku Tudou (acquired earlier this year for $3.5 billion), the Alibaba Pictures film studio and the UCWeb mobile web browser unit, in addition to the company's music, gaming and literature businesses. Yu Yongfu, formerly the head of Alibaba's mobile unit, will head the business.

In tandem with the move, which comes ahead of Wednesday's September quarter earnings report, the Alibaba is launching a new $1.54 billion entertainment fund to finance new projects. The fund follows an October deal with Steven Spielberg's Amblin Partners through which Alibaba obtained a stake in Amblin and agreed to co-produce movies for global audiences.

Last year, Alibaba launched Tmall Box Office, a Netflix-like video service that features a mix of Chinese and foreign content, and cost $6.10 per month. Before that, the company spent $805 million to buy a 60% stake in ChinaVision Media, which later became Alibaba Pictures, and $382 million to buy a stake in studio Beijing Enlight Media. The company also has a stake in financial newspaper and TV network owner China Business News.

The assets, together with the reach of Youku Tudou, UCWeb and Alibaba's e-commerce empire, leave the company well-positioned to create, distribute and promote video services that feature a mixture of licensed and original content. Those services, in turn, could act as a growth driver for a company seeing slowing (albeit still substantial) e-commerce transaction growth.

With the Youku acquisition providing a boost, Alibaba's digital media and entertainment revenue rose 286% annually in the June quarter to $472 million. At the same time, the unit's big content investments led it to post a $150 million adjusted EBITDA loss.

Meanwhile, gross merchandise volume (GMV) growth for Alibaba's core Taobao and Tmall marketplaces has slowed to the low-to-mid 20s in recent quarters after seeing much stronger growth in prior quarters. Slowing GDP growth and high e-commerce penetration rates within China's middle class have led GMV growth to moderate. Revenue growth is still stronger, thanks to improving mobile monetization.

Slowing e-commerce growth has led Alibaba to bet heavily on its video and cloud infrastructure businesses to act as future growth engines, as well as to dial up its foreign M&A activity. The video efforts face competition from Chinese search giant Baidu  (BIDU) and messaging/gaming giant Tencent; they respectively claim China's No. 2 and No. 3 online video platforms after Youku, and prevent the latter from having a YouTube-like market position. But in China at least, Alibaba doesn't face much competition from U.S. video providers.

Google's YouTube remains blocked in China, and Apple's Chinese online book and movie services were recently shuttered by regulators. And while Netflix (NFLX) has launched in most other big international markets, it hasn't done so in the Middle Kingdom. In the company's third-quarter shareholder letter, Netflix said a "challenging" regulatory environment is keeping it from launching in China for now, and that it will focus in the near-term on licensing its content to local service providers.

Should Netflix do so, look for Alibaba to be one of the firms to license the company's content. It certainly looks as if Jack Ma's company is doing whatever it can right now to remain China's most formidable online video player.

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TAGS: Investing | U.S. Equity | Technology | Consumer Discretionary | China | Markets | Entertainment | Stocks

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