Introduction

Recently the Chinese Internet giant Alibaba just announced plans to buy out Youku Tudou, one of China’s top YouTube-like services, in an all cash deal. Actually, Alibaba previously spent $1.22 billion on an 18.3 percent stake in the video firm, which claims to serve 580 million users each month. Youku’s market cap is $3.8 billion, and Alibaba intends to pay US$26.60 per share, which is higher than the most recent closing share price of $20.43.

Alibaba is best known for its e-commerce services — which include its Taobao marketplace and T-Mall site for brands — but it has also made big plays in content as part of a bid to be more present in Chinese Internet’s users’ daily lives. Aside from its investment in Youku, Alibaba owns a stake in microblogging site Sina Weibo and it has a burgeoning business in content creation, including Wasu Media (a company backed by Alibaba founder Jack Ma), and Alibaba Pictures, a movie content firm.

Current situation

Alibaba is intending to take full ownership of the company — which was created when rivals Youku and Tudou merged in 2012 — to supercharge its focus on digital entertainment. Actually the Youku and Tudou merger case is also interesting, since they were once the two biggest players in Chinese online video market.

Clearly, there are further synergies for Youku and Alibaba said it plans to use its e-commerce, media and advertising platforms to “significantly accelerate” Youku’s growth.

That’s important because, to date, the company has struggled financially despite its huge and very active userbase. Youku and Tudou merged their businesses to save on common costs and expenses, but the financial good times haven’t exactly rolled in. Revenue in Q2 2015 grew 57 percent year-on-year to reach $259.6 million, but the company posted a net loss of $55.2 million for the three-month period.

Outlook

This deal can be a win-win for both Alibaba and Youku. For starters, the 30% premium given by Alibaba is about $1.2 billion. However, Youku’s annual expense on the bandwidth of data storage and telecom is worth $2130 million. If Alibaba ca cut this part of expense and infuse capital into Youku, more than $1.8 billion will be saved, which is significantly higher than the premium.

This deal gives me much imaginary space. Maybe Alibaba can create a Chinese version Netflix after acquiring Youku. Maybe Alibaba can provide its online stores with more video advertisement space, in order to increase the revenue. Most importantly, Alibaba can get huge amount of data through Youku, which can help predict the preference of consumers, and also provide advertisers with more accurate and valuable service. For example, a person who loves sports might watch many videos related to sports in Youku to build the impression for different sports brands at first. Then he will search on Taobao to buy the stuff he wants. Youku is getting close to seeing half of advertising revenue come from mobile, but it looks like it might find a better fit as a private subsidiary of Alibaba, rather than a public listing, independent business.