Alibaba Wants to Be China's Netflix and YouTube All Rolled Into One

This article has been updated and originally appeared on Real Money on Nov. 1, 2016.

With major U.S. online video services largely shut out of China and Beijing spending heavily to grow broadband penetration, Alibaba (BABA) sees a big opportunity to create a Chinese streaming giant. And while the company still faces a couple of deep-pocketed rivals, its assets and spending commitments leave it a force to be reckoned with.

Alibaba announced on Monday that it's creating a new business unit that features online video leader Youku Tudou (acquired earlier this year for $3.5 billion), the Alibaba Pictures film studio and the UCWeb mobile web browser unit, in addition to the company's music, gaming and literature businesses. Yu Yongfu, formerly the head of Alibaba's mobile unit, will head the business.

(On Tuesday morning, the Chinese Internet giant reported better-than-expected earnings of 79 cents per diluted share for the third quarter, topping analysts' estimates of 69 cents per share. Revenues clocked in at $5.14 billion, beating analysts' estimates of $5.03 billion, as the company's cloud computing business reported big gains. Shares of Alibaba were up 0.6% to $101.71 Wednesday morning). 

In tandem with the video assets move, Alibaba announced that it is launching a new $1.54 billion entertainment fund to finance new projects. The fund follows an October deal with Steven Spielberg's Amblin Partners through which Alibaba obtained a stake in Amblin and agreed to co-produce movies for global audiences.

Last year, Alibaba launched Tmall Box Office, a Netflix-like video service that features a mix of Chinese and foreign content, and cost $6.10 per month. Before that, the company spent $805 million to buy a 60% stake in ChinaVision Media, which later became Alibaba Pictures, and $382 million to buy a stake in studio Beijing Enlight Media. The company also has a stake in financial newspaper and TV network owner China Business News.

The assets, together with the reach of Youku Tudou, UCWeb and Alibaba's e-commerce empire, leave the company well-positioned to create, distribute and promote video services that feature a mixture of licensed and original content. Those services, in turn, could act as a growth driver for a company seeing slowing (albeit still substantial) e-commerce transaction growth.

With the Youku acquisition providing a boost, Alibaba's digital media and entertainment revenue rose 302% annually in the September quarter to $541 million, growing to comprise 11% of the company's total revenue, up from 4% a year earlier. At the same time, the unit's big content investments led it to post a $211 million adjusted EBITDA loss.

In a statement accompanying Alibaba's September quarter results, CEO Daniel Zhang noted that the company sees "huge potential in our newly integrated digital media and entertainment unit."

Meanwhile, gross merchandise volume (GMV) growth for Alibaba's core Taobao and Tmall marketplaces has slowed to the low-to-mid 20s in recent quarters after seeing much stronger growth in prior quarters. Slowing GDP growth and high e-commerce penetration rates within China's middle class have led GMV growth to moderate. Revenue growth is still stronger, thanks to improving mobile monetization.

Slowing e-commerce growth has led Alibaba to bet heavily on its video and cloud infrastructure businesses to act as future growth engines, as well as to dial up its foreign M&A activity. The video efforts face competition from Chinese search giant Baidu  (BIDU) and messaging/gaming giant Tencent; they respectively claim China's No. 2 and No. 3 online video platforms after Youku, and prevent the latter from having a YouTube-like market position. But in China at least, Alibaba doesn't face much competition from U.S. video providers.

Google's YouTube remains blocked in China, and Apple's Chinese online book and movie services were recently shuttered by regulators. And while Netflix (NFLX) has launched in most other big international markets, it hasn't done so in the Middle Kingdom. In the company's third-quarter shareholder letter, Netflix said a "challenging" regulatory environment is keeping it from launching in China for now, and that it will focus in the near-term on licensing its content to local service providers.

Should Netflix do so, look for Alibaba to be one of the firms to license the company's content. It certainly looks as if Jack Ma's company is doing whatever it can right now to remain China's most formidable online video player.

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