Alibaba – Empire builder

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Those with resources now have a substantial advantage.

• Alibaba is moving to increase its grip on the Chinese market by bidding $3.5bn for the 81.7% of Youku that it does not already own.
• Youku is the Chinese equivalent of YouTube and has around 500m active users compared to Alibaba’s core e-commerce offering which has around 350m.
• This is yet another big step by Alibaba towards becoming an ecosystem rather than just an e-commerce platform.
• In order to do this, it has to properly address the activities where spend their time on smartphones and tablets.
• Taking Youku on board gives Alibaba a very strong position in the 4^th most important Digital Life service (media consumption).
• However, key to this acquisition will be integration.
• Youku needs to be integrated into Alibaba such that its users and their data all become part of the Alibaba family.
• If Youku continues to operate independently, then much of the value that Alibaba could reap from this acquisition will be lost.
• I suspect that this acquisition is as much about keeping everyone else out as it is about expanding the Alibaba ecosystem.
• RFM sees 5 players (Baidu, Tencent Alibaba, Xiaomi and China Mobile) all trying to dominate the Chinese market.
• Alibaba will now have a platform to offer paid content like Netflix and Amazon Prime as well as a place to create an encyclopaedia of video content like YouTube.
• This acquisition will also put Xiaomi further onto the back foot.
• Its key Digital Life offering in the Chinese market is media consumption and the vast majority of the usage that it gets on its devices is users engaging with this service.
• On almost all of the other services it has no offering and it is these blanks that the company badly needs to fill.
• Couple this with a loss of momentum in 2015 and a resurgent Huawei in the home market, and it is clear that Xiaomi is finding life much more difficult this year.
• In its home market, its current rivals are the handset makers but this is soon going to change.
• To create an ecosystem from which it can earn a decent margin Xiaomi is up against Alibaba, Tencent, Baidu and China Mobile all of home are engaged upon the same strategy.
• These four have a huge advantage as they are bigger and more cash generative such that when an opportunity such as this comes up they can act quickly and decisively.
• This means that they will have the advantage when it comes to acquiring and building the assets needed to have a successful Chinese ecosystem.
• RFM predicts that the Chinese market will end with an addressable market of around 900m users which is just enough for three ecosystems to be big enough to earn high returns.
• Hence, it is those with the resources to invest now that are likely to come out on top over the longer term.
• I continue to think that Xiaomi is going to have a difficult time and is likely to need more money.
• With the last round being done at a valuation of $45bn and the peak of its momentum, a down round is not an impossibility.