Youku and Tudou merged in 2012, forming a combined entity, Youku Tudou. The two services continue to operate under their own brand names and online streaming platforms after merging.
Alibaba first invested in Youku Tudou in April 2014, through a $1.22 billion funding round together with Yunfeng Capital. The investment allowed Alibaba Group to acquire 16.5% stake in Youku Tudou. In October 2014, Alibaba and Youku Tudou collaborated to drive the adoption of big data in online video marketing in China.
In September 2015, Alibaba launched its own video streaming platform, Tmall Box Office (a service similar to Netflix in the US), offering more than a thousand movies with hundreds of them being exclusive, and 90% delivered via a paid service. By leveraging Alibaba’s film production unit and online payment business, Alibaba Pictures and Alipay and Youku Tudou’s large user base, the deal is a win-win situation for both services. The deal enables these two services to have the largest combined user base and revenue in the competitive Chinese online video market.
The acquisition is in both sides’ interest from both a financial and strategic perspective. In the Chinese market where Advertisement-supported Video on Demand (AVoD) service is dominant, the increasing price of content rights has led to the decrease in profit. Therefore, paid subscription services are being introduced to the market by most of the online video platforms in China, such as iQiyi, Sohu and LeTV. However, the number of paying customers is still small as Chinese online users are not accustomed to pay for content.
The acquisition of Youku Tudou is also part of Alibaba’s wider long-term strategy:
- Diversification of revenue sources: Against economic slowdown in China and rising of e-commerce competition, as well as facing lawsuits and allegations, Alibaba is seeking to diversify its source of revenue and better leverage its market position. With this acquisition Alibaba aims to consolidate its video service as it believes video will be its next growth engine. Alibaba is better known to the outside world as an e-commerce company, but it has been very aggressive in expanding beyond its core business, such as by launching China’s first online subscription streaming service Tmall Box Office (TBO) and cloud-based web services. It also owns Alibaba Pictures (a Hong Kong studio it acquired in 2014) which produces high cost, premium original content (e.g. the latest Mission Impossible film). Alibaba’s strategy is similar to that of its American counterpart, Amazon. Amazon’s focus in 2015 and 2016 will be to expand its products beyond e-commerce to web services and video content with the launch and development of Amazon Prime Instant Video. The e-commerce business is a strong revenue generator, but has not yet translated in profits. To keep investors happy, Alibaba and Amazon must start recording profits, so a diversification of revenue sources will be crucial for both companies in the next 2-3 years.
- Competing for a larger share of China’s growing online video market: The Chinese online video ecosystem is fragmented with players like Baidu iQiyi, Tencent Video, LeTV, Sohu, as well as Youku Tudou. Youku Tudou is the biggest online video platform with the highest viewing time, but it has struggled to monetise its content through advertising and subscription. As online video becomes increasingly popular with brand advertisers, the three largest online advertising players, BAT (Baidu, Alibaba and Tencent) are all looking to expand their video ad offerings. Baidu is expanding its video platform iQiyi and Tencent offers video services via Tencent video. Alibaba needed to make a bold statement to compete with its two main competitors; acquiring the next largest video player was the fastest way to market. However, as monetisation has so far been a challenge for Youku Tudou, Alibaba will need to invest further to improve ROI on online video advertising and offer better video content, to entice the largely reticent Chinese online audience to pay for the use of the video platform.
- Growth through acquisition: IHS expects to see further acquisition announcements from Alibaba in the next twelve months. There have been talks about the possibility of Alibaba buying Sina Corp, which also owns a 58% stake in Sina Weibo, one of the most popular microblog sites in China. With access to Sina Weibo, Alibaba (and Youku Tudou) would able to push it content further to even more users, in the same way Wechat and Tencent Weibo (Chinese messaging apps) are pushing out Tencent Video. The move to mobile will be critical for the Chinese online tech giants as an increasing number of users are consuming content via multiple devices and will determine the winners and the losers in the Chinese online video space.