Here’s How Alibaba’s Content Investment Can Drive Growth For The Company

Reports suggest that Alibaba‘s (NYSE:BABA) entertainment arm, Alibaba Digital Media and Entertainment, will invest more than $7.2 billion in content over the next three years. To put this number in perspective, Netflix is likely to spend $6 billion on content in 2017 and has a global presence. Alibaba’s media entities such as Alibaba Music, its video streaming platform Youku Tudou, its film making arm Alibaba Pictures and Alibaba gaming all come under its aforementioned entertainment arm. As foreign media players such as Netflix and Amazon Video face barriers to entry in China, this investment is an indication that Alibaba is focusing on becoming a strong player in the Chinese streaming media market. The Over The Top (OTT) content market is witnessing rapid growth in China and, with the absence of international players, this market is dominated by Baidu’s iQiyi and Alibaba’s Youku. Nearly 50% of China’s 1.3 billion strong TV audience are likely to watch content through OTT devices in 2017. Players are looking to capture this strong growth and quality content is likely to be a key competitive differentiator. Alibaba’s e-commerce business can get a boost with the growth of its media segment, since video and music streaming can be offered as perks to attract customers, while merchandise related to original programming can drive e-commerce growth.

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Building A Strong User Base

The video streaming market in China relies on advertising revenue more than subscription charges. In Q3 2015, before it was acquired by Alibaba, 79% of Youku-Tudou’s revenues came from brand advertising and 15% from subscriptions. While this puts profitability in question, since companies are investing heavily on content in the absence of sufficient subscription revenue, a large viewer base is critical to absorb high content costs and generate profits.  Exclusive content is a key attraction for subscribers. According to a survey conducted by Tencent’s online media division, 49% of the respondents said that they signed up for an online streaming service due to its exclusive content. While this segment is not currently profitable, once companies are able to hook users with original high quality content, a subscription based model can drive revenues higher to generate profits. As of June 2016, there were 514 million streaming service users in China, accounting for nearly 73% of its internet population.  However, most users are monthly subscribers, indicating that consumers “try” a service for a month to see the quality of shows. They might not renew the subscription but opt for another player the next month. In this highly competitive environment, it is essential for participants to have high quality content that can retain users. Alibaba’s investment in content appears to be directed towards this goal.

Complementing Alibaba’s E Commerce Portfolio

Digital products can complement Alibaba’s e-commerce portfolio, just as high quality online videos can attract users. The company has a dominant position in China’s e-commerce market and can enhance its offering with videos. Alibaba can also look to provide an Amazon-like prime video subscription to its users. Merchandise relating to popular shows is another area where the company’s e-commerce business can benefit from the growth of Youku Tudou, which runs a “buy-what-you–watch” campaign. This applies to merchandise of movies produced by Alibaba Pictures as well. These initiatives can have a positive impact on the average spend per active buyer on Alibaba’s platform, which is likely to increase steadily over our forecast period.

We believe the media segment is an integral part of Alibaba’s business and can contribute to the growth of its core e-commerce segment. The Chinese online video market is expected to grow significantly over the next few years and high quality content should attract and retain subscribers. Alibaba’s investment in content should give the company a competitive edge in this space and drive growth in the long term.

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