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Youku the perfect choice for Alibaba

China Daily, November 1, 2014

• Just 24 hours later, Ma told a conference in Laguna Beach, California that he was "looking for partners" in Hollywood. He and his team were due to meet representatives from some of the biggest studios to find deals for the rights to distribute US shows at home, or to invest in the companies, people familiar with the matter said.

  Koo said that Youku is not currently in talks with Alibaba or Ma about increasing their stakes, which they took earlier this year.

  Spokesmen for Alibaba and Youku declined to comment on the prospects of a takeover by Alibaba.

  In his own speech, Ma said that Alibaba's films would be watched on mobile devices and tablets. Mobile users account for 60 percent of traffic and 30 percent of sales at Youku, which is based in Beijing.

  Youku "has critical value to Alibaba's ecosystem", said Guo Chenggang, a Hong Kong-based analyst at ITG HG Ltd, and that Alibaba is more likely to raise its stake in the company than let it slip into a rival's hands.

  Revenue at Youku will more than double to $1.2 billion by 2016, according to analysts' estimates compiled by Bloomberg. That is also when the company is projected to return to profitability after at least six years of losses.

  Youku would not just be a launchpad for Alibaba's new US content - the company has its own hit Chinese shows such as Searching Divas and is set to run the first Chinese version of reality show Big Brother next year.

  Exclusive content helps Alibaba draw traffic and advertising revenue to compete with Tencent, China's second-biggest Internet company, and Baidu Inc, the country's largest search-engine operator.

  "That explains why Internet companies such as Alibaba, Baidu and Tencent have been so keen in boosting their video content," said Ricky Lai, a Hong Kong-based analyst at Guotai Junan International Holdings Ltd. "It helps grow the entire business."

  Beijing-based Baidu, for example, bought Internet-video business PPStream Inc in June 2013 for $370 million and combined it with its existing service iQiyi.

  A takeover valuation for Youku would be low if based on a multiple of its sales or earnings, said Mewawalla at CM Research. The company's value compared to Alibaba, which has a market capitalization of $243 billion, might be better measured by Youku's users, he said.

  "To Alibaba, its value would be strategic," Mewawalla said. "Its value would be a multiple of users, with a relatively high value placed per user."

  Each Youku viewer generates an average of 8 yuan of revenue annually for the company, and new content would help raise the figure, Koo said.

  Alibaba may not need all of Youku just yet, however.

  Owners of Alibaba's set-top boxes can already watch TV channels and high-definition movies, shop online and play games.

  The company has also been making deals with film companies. It struck an accord in July with Lions Gate Entertainment Corp to stream titles such as The Hunger Games in China. In March, it agreed to take control of a Hong Kong-based film producer now called Alibaba Pictures Group Ltd. Yet there may be room for more.

  Ma has described his plan to create an "ecosystem" through takeovers.

  The value of Alibaba's pending and completed acquisitions this year has already more than doubled from 2013, according to data compiled by Bloomberg. The company may not stay Youku's minority shareholder for long.

  "It has a tendency to gain full control of its investments," said Pang at Core-Pacific Yamaichi.

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