Alibaba to Drop $4 Billion on Video Site

TV is dying. TV is thriving. (Photo by Melissa Segal)

Alibaba made it clear earlier today that it wants to acquire China’s top video site in a deal that would value Youku at over US$4 billion. But what does China’s ecommerce giant want with video content?

Youku and sister site Tudou (which merged in 2012) get 900 million video views each day – a figure that tripled from 18 months prior. The company has 150 million daily active users.

That’s a sizeable user base for Alibaba to snap up – but the deal is all about strategy, not sheer numbers. You could say there are five main reasons:

1. Digital is a growing part of ecommerce

Alibaba is China’s top ecommerce company. Its Taobao and Tmall marketplaces dominate the China market. Alibaba’s 367 million buyers spent US$109 billion on its online stores in April to June. While a lot of that was for physical products that shoppers get in the mail, some of that massive expenditure is for goods of all kinds – for cinema tickets, flights, and online services.

The company knows that digital products of are an increasing part of what people buy, and it needs to be in there early. Digital entertainment is a huge chunk of that.

Alibaba may have missed out on a chance to control and profit from the boom in apps and phones with its own failed smartphone OS and devices, but it’s not going to make the same mistake with the next digital content explosion.

2. Alibaba wants to cover all kinds of ecommerce

It’s not just digital content that Alibaba feels it must cover as the definition of “ecommerce” stretches. Local, web-connected services are something the company is also throwing billions of dollars at. Alibaba already has a stake in China’s top taxi app startup, Didi Kuaidi, as it evolves into a broader on-demand transportation app that’s fighting off Uber’s advances.

That’s why Alibaba has committed to invest US$1 billion to build up its mobile-oriented marketplace for local services. That comes after Alibaba found itself outrun by hundreds of startups rushing in to things like food delivery, massages, mechanics – all of which can be summoned to your home with an app.

That whole sector is often referred to as O2O – which means online-to-offline.

While this part isn’t about digital content, it shows that there’s about to be a radical reimagining of what online shopping means. Alibaba, of course, doesn’t want to be left behind.

3. People are moving away from TV

What’s happening in the US and many other developed countries is also happening in China right now – TV is dying slowly.

“I don’t have a TV at home,” says Amber Wu, a business development manager at a web publishing company. She watches one to four hours a day of online video content, she tells Tech in Asia – depending on if she’s binge watching a new series. “I think young people nowadays watch a lot of American sitcoms or movies online.” Chinese and Korean dramas are also popular, with web companies fighting over exclusive rights to stream hot new shows, pushing up the price for companies to secure the rights to stream them.

Alibaba’s TBO shown on a Samsung TV.

For viewers, it’s mostly free – and with far fewer ads than China’s staid and strictly state-controlled TV stations.

As even China’s state newspapers concede, young people are watching things online and discussing events on social media rather than consuming what broadcasters put out.

4. TV becomes just another internet screen

Video is not just about watching things – at least in Alibaba’s implementation of its existing video service within its smart TV OS. Launched back in 2013, Alibaba’s push into the sitting rooms of China features not just content but also services. You can shop from Taobao on your TV. You can use Alibaba’s Alipay to pay your electricity bill straight from your TV.

And Alipay also handles the payments for what you watch if you choose to stream a premium movie or TV series.

While most of the stuff on Alibaba’s smart TV service is free, the company recently launched China’s first subscription-only video service, modeled on Netflix or HBO. It’s called TBO. It’s priced at RMB 39 (US$6.10) for a single month of unlimited viewing, or it works out a bit cheaper at RMB 365 (US$57.30) for 12 months.

Broadcast TV may be dying off, but as Alibaba sees it, the TV screen still has a place in China’s homes – though it’s going to be used in very different ways from the past.

"We believe the living room is a very important channel,” said Alibaba CEO Daniel Zhang earlier this year.

See: For the first time ever, Alibaba’s revenue is mostly mobile

5. Hollywood, baby

Alibaba has a movie studio called Alibaba Pictures. While it has yet to produce something from scratch, it has invested in the latest Mission Impossible installment as part of a deal between Paramount Pictures and Alibaba’s film unit. The firm was also involved in promotion, ticketing, and merchandising of the Tom Cruise blockbuster in China.

With Youku a part of Alibaba, the ecommerce titan has a much bigger audience for its own content, as well as a stronger platform for all the other ways it can make money off movies, such as from pre-roll ads or merchandise.

Even before trying to snap up Youku, Alibaba founder and chairman Jack Ma described his firm as “the world’s biggest entertainment company.”

China’s tech giants get even stronger

The huge Alibaba-Youku deal, once it gets shareholder approval, will mark a new milestone in the consolidation of China’s web as the nation’s four web giants – Baidu, Alibaba, Tencent, and Xiaomi; often referred to by local media as the BATX companies – hold more power over what happens on the web.

Alibaba has a stake in the Twitter-esque Weibo, giving it some measure of social media clout that could in some way prove useful once it owns Youku and Tudou as well.

In China, online video can now be classified as ecommerce. Rivals in this space, such as Tencent with its video site or Baidu with iQiyi and PPS, need to be worried.

This post 5 big reasons Alibaba is spending over $4 billion to acquire a video site appeared first on Tech in Asia.