BEIJING — In a sign that Alibaba is serious about entering digital entertainment, the Chinese e-commerce giant said Friday that it is making a bid to buy the rest of Youku Tudou Inc., which, with 500 million monthly unique visitors, is one of China’s largest online video companies.
Alibaba, which purchased an 18.3 percent stake in Youku last May, said it would offer $26.60 per Youku Tudou American depositary receipt for the roughly 82 percent of the company that it does not already own. As of close on Thursday, Youku, which is listed on the New York Stock Exchange, has a market capitalization of $3.8 billion. Its shares were at $20.43 on Thursday. Taking into account cash on Youku’s balance sheet, Alibaba said it expects the deal to cost about $3.5 billion.
In a proposal sent to Youku’s board on Friday, Alibaba said it believes it is “uniquely positioned to partner with [Youku] to build a leading digital entertainment platform in China.”
“We believe that the proposed transaction, with tighter integration of our resources, will help Youku achieve exciting growth in the years ahead by leveraging Alibaba’s assets in living-room entertainment, e-commerce, advertising and data analytics,” said Daniel Zhang, Alibaba’s chief executive officer.
“Digital products, especially video, are just as important as physical goods in e-commerce, and Youku’s high-quality video content will be a core component of Alibaba’s digital product offering in the future,” Zhang said.
Alibaba’s involvement with Youku is not the company’s first foray into the entertainment industry. The e-commerce giant is the majority shareholder of Alibaba Pictures Group, a film production and investment company, as well as Wasu Media, a content creation business backed by Alibaba founder Jack Ma. Alibaba also launched Tmall Box Office, which is similar to Netflix. It is also selling smart TVs that feature an Alibaba operating system enabling users to shop, consume content and pay bills.
During an analyst call, Joseph Tsai, Alibaba’s executive vice chairman, said a key driver behind the proposed acquisition is to enable the e-commerce giant to offer more targeted products, services and advertising by leveraging user data from both viewers of Youku’s content and consumers who shop on Alibaba’s online platforms, such as Tmall.com and Taobao.com.
“Marrying user data through media and entertainment with e-commerce data could develop more targeted marketing and products and services,” Tsai said. “Merchants and brand advertisers would benefit from data integration, could do better targeted marketing solutions.”
Tsai said Alibaba sees digital entertainment as key to furthering the consumption of goods and services the company offers. “Alibaba’s growth is related to gaining the wallet share of Chinese consumers,” he said, noting that revenue in China from digital entertainment is expected to grow from $4 billion in 2014 to $14 billion by 2018.
He also said the proposed purchase would help Youku better compete in an increasingly competitive Chinese online video landscape, and that the partnership would likely lead to lower costs for content acquisition, one of the main expenses for digital entertainment companies. Youku has struggled to achieve profitability in China as more rivals have emerged. Yet Tsai said the company is clearly the leader in consumption of entertainment on mobile phones. While there was not a clear strategy outlined, the Alibaba executive said consumption of entertainment on smartphones and other portable devices is a core component of the proposed purchase.
“The addition of Youku would help us reach more viewers through mobile,” he said. “Integrating user accounts would help us package and deliver content seamlessly to users through multiple devices and lower content costs.”
As part of the deal, Alibaba said Youku’s founder, Victor Koo, would continue in his role as chairman and ceo.