Alibaba's proposed $3.5 billion buyout of Youku Tudou, a deal that would take the New York Stock Exchange-listed Chinese video site private if accepted, is mainly about advertising with e-commerce sprinkled in.
Last year, Alibaba forked out $1.2 billion for a 18 percent stake in the company, which claims a monthly viewership of more than 500 million people in China. The duo have collaborated closely since then, particularly around advertising and identifying mutual users, but, in a call with analysts, Alibaba vice chairman Joe Tsai admitted that the e-commerce giant needed to buy Youku Tudou outright in order to unlock further synergies and business potential.
"We've worked with them in various parts of the business, including advertising and data integration, but a lot of cooperation is just partial," Tsai said. "We'd like a closer integration of our resources."
The deal is less about financials — Youku Tudou has struggled to post profits despite impressive year-on-year revenue growth — and much more about eyeballs.
Alibaba is interested in aligning with Youku Tudou because the service, which hosts both YouTube-like free content and Netflix-style paid videos, reaches a demographic that its e-commerce services are yet to fully penetrate: youths. Likewise, with the majority of views — and nearly 50 percent of advertising — coming from mobile devices, closer relations could help Alibaba increase footfall to its mobile apps and services, where it is yet reap the same success with advertising as desktops despite seeing high levels of sales from mobile devices.
It's often overlooked that Alibaba makes its money from selling advertising and not by charging commission on transactions, and that's another area where Youku Tudou could add value. Tsai explained that, by matching IDs from Alibaba and Youku Tudou, the company can learn more about users and better tailor advertising and content to them to produce higher returns for advertising partners, and an improved experience for customers themselves.
Despite those focuses, it isn't only about ads. As we mentioned in our earlier story, Alibaba has made a big push for entertainment with its own Netflix-style service in China, smart TVs and set-top boxes, and even a motion picture company, among other pursuits. Adding Youku Tudou to its stable bolsters that with a major viewing platform on board, while it could also help nab content deals at better prices — since it can offer a larger userbase to drive down content acquisition costs — and it allows Alibaba to continue to explore potential synergies between its shopping and payments services and entertainment content. Tsai outlined a possible scenario that could see Youku channels funded by advertising from Alibaba's network in the future, but that seemed to be a hypothetical scenario rather than explicit excerpt of the product roadmap.
Youku Tudou's CEO and founding shareholders have approved the deal, which values the company at $5.1 billion — an increase on its $3.9 billion market cap — but Alibaba's offer remains subject to approval from all shareholders. Assuming that is granted, it is likely to be some time before the deal is completed, since it involves a NYSE firm going private.