Launch of rival video platform to give Alibaba a boost
Alibaba has announced that it will launch a new online video streaming platform called Tmall Box Office. The platform will be launched in two months, with 90% of the content requiring subscription, and will allow users to view content from both China and overseas.
It has been widely reported that Tmall Box Office is a new Netflix-type service in China, but it should be remembered that this industry isn’t new in China, and I have frequently discussed the online video market. The launch of Tmall Box Office will put it into direct competition with established market leaders Tencent Video, Baidu’s iQiyi and PPS, and Alibaba-backed Youku Tudou. Whilst unsurprising that Alibaba will soon lead the market along with its BAT rivals, its 16.5% stake in Youku Tudou will likely be a problem for the firm.
Youku Tudou announced in its first quarter earnings (see Earnings review: Youku Tudou rallies on strong guidance) that it is working with Alibaba to develop its ecommerce business, which will help to monetize its content, and Alibaba has helped Youku Tudou to compete financially with Baidu and Tencent. However, Tmall Box Office will now be in direct competition with Youku Tudou for both content and subscribers.
The launch of a video streaming platform is part of the firm’s wider smart home ecosystem strategy. Alibaba began retailing smart air conditioners (see Alibaba unveils 'Smart Living' strategy) on its Tmall platform that can be integrated into its smart home ecosystem, and has been selling routers to integrate other appliances. The launch of a media streaming service will enhance its smart home business, because it will allow the firm to collect more data on user behavior. The launch of the Tmall Box Office platform comes after the firm signed a digital distribution agreement (see Alibaba now a music store as it signs with BMG) with record label BMG to gain access to 2.5 million copyrighted recordings.
Although late to the industry, Alibaba should be able to build a strong market share in order to compete with the Tencent and Baidu backed platforms. However, investors in Youku Tudou and Sohu should be concerned. The once market leading Sohu Video has suffered (see Earnings Preview: How long will Sohu remain sustainable?) as financially stronger firms have entered the industry, and it simply cannot compete for the best content. Tmall Box Office is another nail in the coffin for the former tech leader in China. With the projected IPO of its Tencent backed search engine Sogou later this year, Sohu is seemingly selling off any successful business unit, and it is difficult to see the firm’s strategy going forward. I expect that a larger video-streaming firm will acquire Sohu Video in order to gain access to its content library.
Youku Tudou is in a difficult position, because it has grown on the back of Alibaba’s financial support. However, with the new Tmall Box Office platform, Youku Tudou needs to focus on reducing costs in order to reduce its reliance on Alibaba. The key to this is reducing content costs through user generated and partner generated content, instead of paying the exorbitant costs for syndicated content.
Management and risk description
The fiscal first quarter earnings release on August 12 will allow investors to learn more about the firm’s strategy for Tmall Box Office, and will likely coincide with the launch of the platform. I have therefore set the duration of this trade view to two months, and will reassess my Alibaba view after the earnings release.
Yesterday’s selloff in equities took its toll on Chinese technology companies, and the market largely ignored the news of the Tmall Box Office platform, as Alibaba fell 0.59% to $86.12. My overall view on Alibaba remains bullish, and the sell-off provides a good opportunity for investors to take a long position, or reduce their average cost.
Time horizon: Two months
— Edited by Robert Ryan
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