How The Youku Tudou Acquisition Can Benefit Alibaba?

Shareholders of Youku Tudou, the U.S. traded Chinese online video provider, will vote on its merger plan with Alibaba (NYSE:BABA) on March 14th and the approval will make it a fully owned subsidiary of Alibaba. In November last year, Alibaba announced that it would buy the company in an all-cash deal for $ 3.67 billion to acquire 82% of its shares. Alibaba already held an 18% stake in the company. Youku Tudou, touted as China’s “You Tube”,  is valued at less than 5% of Alibaba’s market capitalization and it holds a leading market share of more than 21% in the growing Chinese online video market.  Through Youku Tudou’s acquisition, Alibaba can add it to its e-commerce portfolio, get access to a large user base, and strengthen its already dominant position in Chinese e-commerce.

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Online Videos Will Complement Alibaba’s E-commerce Portfolio

Digital products are an important part of an e-commerce portfolio and Alibaba’s acquisition of Youku Tudou appears to be partly driven with the motive to enhance its offerings by adding high quality online videos. Its rival in North America Amazon, already offers streaming services to its Prime customers. An enhanced product offering can increase the average amount spent per active buyer on Alibaba’s platform.  We estimate that this metric will grow at a steady pace from RMB 7.68K in 2016 to RMB 9.54K by the end of our forecast period.

Further, access to Youku Tudou’s strong user base of nearly 570 million users can provide Alibaba with a broader audience to market its e-commerce offerings. While there is likely some overlap between the users of these two companies, access to additional users should benefit Alibaba. Alibaba’s e-commerce platform can also benefit from Youku’s “buy-what-you-watch” service that lets viewers buy the clothes that the actors on a show are wearing. Through an integrated campaign, viewers can be directed to Alibaba’s platform to buy these products.

Strong Foot-Holding In The Growing Chinese Online Video Market

According to iResearch, China’s online video market registered a more than 60% year-over-year growth in the third quarter of 2015 and reached $1.9 billion in size.  Youku Tudou in its Q32015 results registered a 62% increase in net revenues compared to the same period in the previous year. The company’s consumer revenues, which are derived from its subscription-based services, interactive live entertainment and its mobile game joint venture, registered a 514% increase compared to the same quarter in the previous year.  This isa significant expansion of its subscriber base.  While Youku Tudou is not profitable yet, its acquisition by Alibaba can lead to better monetization of its content, generating profitability over the long term. While competition in this market is high with players such Qiyi, Tencent and Sohu jostling for market share, we believe with Alibaba’s backing Youku Todou can maintain its leading market position in the Chinese online video market and capture higher market share. Alibaba will benefit from diversifying into this market, one that is likely to see high growth and profitability in future.

Alibaba’s acquisition of Youku Tudou is positive for its shareholders. It will complement the company’s e-commerce business and enable it to tap into the growing Chinese online video market.

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