This is almost a deal that solidify the pattern of the video industry.

At 11:00 am on April 29th, Victor Koo, CEO of Youku, Tudou Group just finished meeting with middle-level cadres, in the past nearly 24 hours, he did a lot of remedial work with Liu Dele, president of Youku, Tudou Group: after accepted share buying from Alibaba, before the news was released, he had to tell the buyer that he had contacted, including Tencent whose negotiation was said to be terminated long time ago.

Of course, after the news was released, Victor Koo received short message of congratulations from Yu Yongfu, Chairman and CEO of UC, who was also in the Ali department, and he also received short message from, Ali’s friendly merchant.

Although Victor Koo emphasize again and again, Youku got huge amount of capital on condition of keeping independent operation in the future; although this was an investment that solidified the pattern of the video field and made the dream of “culture entertainment platform” in the future of Youku clearer; although depending on the position of scarcity resource of Youku, Victor Koo was in the absolute strong position in the negotiation – by his B share stock rights still held 40% right of speech in Youku…but all of the above still could not prevent the outside world to use “member company of Ali department” to look at the flagship enterprise of the video industry.

In some extent, the fact that today Ali was chosen had decided future direction of Youku: culture entertainment platform.

On April 28th, Victor Koo and Ma Yun signed the final agreement, Youku Tudou group and Alibaba group declared to build strategic investment and cooperative partner relationship, to together build Internet culture entertainment ecosystem which combined the online and offline resources.

Alibaba and Yunfeng Fund paid 1.22 billion dollars to buy 721 million common A shares of Youku Tudou(every 18 shares of common A shares of Youku Tudou equals one share of ADS), Alibaba held 16.5% shares, Yunfeng Fund held 2% shares. Alibaba would appoint its CEO Lu Zhaoxi to join the board of Youku Tudou.

In Alibaba’s culture territory, Youku’s position was far more important than a content distribution channel and a advertisement showing platform.

Perhaps these days Ali’s capital operation was too crazy, some executive in the industry said, this is because Ma Yun had set up two targets: market value must be more that Tencent, and the share price of IPO must be higher than Tencent.

Since Youku were full-fledged under the protection of Ali, how much market value had added to Alibaba group?

Ma Yun’s culture distribution

One of the true messages was that Youku was very mighty in the negotiation.

It was reported that on the side of the Alibaba, it was Ma Yun and Cai Chongxin, executive vice president of the board of Alibaba group who negotiated in person, on the side of Youku Tudou Group, the negotiators were Victor Koo and Liu Dele. Victor Koo revealed in this deal, Alibaba did not make promise of “advertisement of 1 billion yuan for 3 years ” like it made for Sina Weibo last year, this was because Youku had its own mature profit mode, and there was no Ratchet Terms after the deal, there is no more arrangement like additional issue and option that could let Alibaba increase its share holding percentage in the future.

During the process of negotiation with Ma Yun, Victor Koo’s strongest capital was the scarcity of No. 1 in the marketplace.

In fact, if you want to see the importance of Youku to Ali, it has to be brought up from Alibaba’s culture strategy.

As Victor Koo described, from long ago, Ma Yun had decided that China would go into a consuming era, there were several fields that will had bright future, one of them was culture, including film, TV and entertainment etc.

It is because of this reason, Ma Yun invest in Huayi Brothers from the early stage, and became Culture China’s controlling shareholder last year.

Before Ma Yun invested 6.2 billion yuan, Culture China was a little known company. But Ma Yun valued the resource it held. There were three businesses under Culture China, each business had its bright spot. In the print media field, Culture China had Jinghua Times, whose circulation was No. 1 in Beijing; in the mobile new media field, Culture China has exclusive rights of British Premier League for three seasons. In the film and TV fields, it is more attractive, Culture China sighed A-list directors such as Stephen Zhou and Peter Chan, and movie stars like Chen Baoguo and Huang Bo etc.

Long before these activities, Ali did a lot in the upstream of the culture industry – investing in Huayi Brothers.

Early in 2006, Ma Yun invested in Huayi Brothers(Called Zhejiang Huayi at that time), in 2008, when Huayi made stock reform, Ma Yun had become the biggest shareholder besides Wang Zhongjun and Wang Zhonglei brothers who were the actual controller of the company.

According to the Q1 financial report of 2014 of Huayi Brothers, at present Ma Yun still hold 4% shares in Huayi Brothers.When he held the highest percentage of shares, he held 13.78% shares of Huayi Brothers. With the 4% shares, Ma Yun was still Huayi’s fourth biggest share holder.

Through investment, Ali got speaking right in the two of China’s biggest content producer, in the culture field, Ma Yun had already got the “State of Divinity”.

As for Ma Yun’s strategy in culture, besides the upstream which produced content, he also distribute in the channel of the downstream. In the early April of this year, together with Shi Yuzhu, Mu Yun increased 20% shares of Wasu Media. Wasu had lots of cable TV users in the East China, Ma Yun’s this act might be looking for output channels for his contents. It was said that, Ma Yun had also considered investing in Mango TV and PPTV, he was trying to break the boundary of upstream and downstream.

Youku’s Closed Loop

The layout of content output made by Ma Yun for the upstream cultural industry consists of the three screens of mobiles, PCs and TVs, instead of a single channel. Previously, Ma tried to get cooperation from PPTV, but failed. Recently, he has successively won cooperation from two significant channels, Wasu and Youku.

On April, 8, just 20 days before buying shares from Youku, Wasu Media announced in Shenzhen Stock Exchange that Ma Yun and Shi Yuzhu had bought 287 million shares of non-public offering stocks from the company with RMB 6.536 billion, accounting for 20% of the total stocks finanlly issued by the company.

On April 28, more news was released that Alipay and Wasu Media were going to conduct cooperation on paying Internet TV with Alipay, allowing TV users to make payment for on-demand online video, games, education and other contents with the “Alipay Wallet” code scanning service of mobile devices. This function will be gradually applied by millions of Internet TVs served by Wasu, in this way, Alibaba has formed an entire closed loop in E-business and content output of smart TV terminals.

In fact, Alibaba even tried to cooperate with Hunan TV. If Wasu is treated as a preferable platform for Alibaba to establish its position in the screen of TV terminals, then Yunku is the best choice in the field of Internet. According to the disclosure of Gu Yongqiang, the APP flow of Youku in mobile devices has already exceeded that of network terminals. As we know, it’s the mobile terminal that will become the future personal data center.

As for Youku, it has already established a stable position in the upstream and downstream of the entire cultural field.

Liu Dele, president of NYSE:YOKU, says to the journalist of The Economic Observer that the content in YOKU is structured in the form of a complete pyramid, consisting of self-generated content, PGC, UGC and outsourced content. Although it’s not the most expensive content that plays a decisive role, self-generated content and PGC will have a more important role in the future.

In regard of self-generated content, Liu says frankly, “In the past, TV stations relied on purchasing copyrighted programs. Later, they turned to self-generated content, which gained the highest revenue, such as Hunan TV and Jiangsu TV. There is no reason for us to give up the chance to become a cultural entertainment company based on production of self-generated content with high quality and influence.”

However, it would be too narrow-minded to take Youku merely as an output channel and ad exchange for upstream cultural content. After choosing to be a member of Alibaba System, Youku will inevitably grow into a center clustered with “brand marketers and audience” as well as “merchants and customers” in the future.

It might be possible that, in the near future, the costumes of the leading actors and actresses in the self-produced dramas of Youku will be sponsored by Taobao sellers. While watching Youku, audience can be linked to a Taobao shop to buy the same handbag as held by the actress, and pay for it through Alipay, thus forming a perfect closed loop for e-business.

There is another advantage for choosing Alibaba, that is, expanding the scope of main ads in Youku: The existing more than 500 brand marketers will have a greater chance to get into more small and medium enterprises. Besides, Youku is engaged in development and research of a targeted advertising system, part of which has been put into debugging and which is expected to be launched officially in the coming days. It seems that the system is solely developed for Alibaba System as its bidding mode bears much resemblance with Taobao Tanx, both being ad exchanges aiming at the demand of small and medium enterprises. Up to now, Youku has made few attempts in exploring this field.

Of course, this field is by no means free from any negative impact.

One should be well prepared for the consequence brought by his choice. In the future, Gu Yongqiang will have the following tasks to deal with: first, to balance the relations between Tencent System and Alibaba System, and whether to reduce the investment on Jingdong or not after gaining the cooperation with advertiser giant Alibaba; second, to try to avoid being an ad display board for Taobao sellers as Sina Weibo is doing.

Liu also adds, Youku is working hard to diversify its business in the hope of not being crammed with e-business related ads.


Of course, the dominant effect resulting from the stake in Youku is the direct introduction of E- business advertising. But for Jack Ma, what is more important is a game of chess: culture industry. If Jack Ma finished arrangements with his own steps and logical thoughts, how would he play with the chess of “culture”? The issue has been placed on the desks of video industry executives since Jack Ma keeps an eye on the field of culture and media.

“I’m afraid that, in the future, Jack Ma will be likely to launch a bloody capital campaign in the cultural circle.” A senior professional manager of a video company under a listed firm says with concerns, what is different from before is that once capital enters the field of culture, it will loot the whole industry. “Any industry where capital intrudes into will change the way it operates. Internet companies, such as Alibaba, have made good use of capital to change an industry.” This video company executive says.

In the view of the executive, capital is very brutal – the base for Jack Ma to blow hot and cold is Alibaba’s powerful capital. The capital will lift the threshold of the industry, such as raising the price of a star, washing a number of small companies, and eliminating many potential competitors, once it enters an industry.

In the aspect of distribution channel, Alibaba has invested in Wasu and now invests in Youku. If it invests in the theater chain in the future, the distribution channels Alibaba controls are more likely to support the “Ali’s” content output and reduce the chances of competitors. Meanwhile, the upstream resources are goods needed by downstream channels (such as video sites). Alibaba controls the content, but virtually holds the pricing rights for the downstream channels.

Behind this series of seemingly uncomplicated capital operation is that Alibaba’s big hands are trying to control the brain of the culture industry and clench its throat.

“Huayi and Enlight Media have been learning to penetrate the industry with capital”, the executive says.

Of course, there will exist some small but good companies. It is reported that Alibaba has quietly invested in a number of small production companies, such as a small team of micro-film making. In the Internet industry, it is not easy for these small but good companies to operate, because pure content production is too easy to be copied and the distribution costs they face will be increasingly high, which is called “Moat” in the words of Warren Buffett.

When Jack Ma takes control of the advantage contents and monopolizes the production of the advantage contents, for example, he bought the Chinese Culture, and then he signed such directors and actors as Peter Chan, Stephen Chow, etc.. This is the reason why Jack Ma bought the Chinese Culture, even its production strength is not strong enough before, but it has an advantage in resources. Huayi Brothers has Li Bingbing, Su Youpeng, Lu Yi, Yao Chen, Sha Yi, Zhang Hanyu, Chen Chusheng, Zhao Chenhao, An Yixuan, Zhao Chenguang, Du Chun, Feng Shaofeng, Li Xiaolu , Wang Baoqiang, Xialiweite•Nayi and other A-list actors and singers.

Later, the high-quality content will become increasingly valuable and the platform has a transition from monopoly to openness. CCTV and five star-TVs no longer monopolize the industry. Now with more and more downstream channel platforms, the control of the high-quality content is increasingly important. By then, Jack Ma will remain the “Chain King” in the ecological chain.

Today, even the boss in the video industry Youku has made a choice in the BTA. This action will cause Sohu to choose to “further” integrate with Tencent? After all, in the previous merger process of Soso and Sogou, the communication channels between Tencent and Sohu have been very smooth and harmonious.

Source from: The Economic Observer

Translated by CCJK