China technology: King content

Youku Tudou recently announced a deal with Paramount Pictures that will see movie franchises such as Shrek, Star Trek and Mission: Impossible made available to the Chinese online video platform's subscription services. Alibaba Group had already gone one step further. Its Ali Pictures affiliate was a direct investor in the most recent Mission: Impossible release and as part of the deal received certain rights to publish the movie digitally and theatrically in China.

If Alibaba gets its way and takes full ownership of Youku Tudou, the company can sign content deals with the likes of Paramount across multiple distribution channels, reducing cost-per-user and giving it a reach that might stretch beyond that of any domestic peer. The proposed acquisition would allow Chengwei Ventures and GGV Capital to fully exit their positions in Youku Tudou, but it is of significance to a broader swath of investors - indeed to almost anyone active in technology, media and telecom.

It pays in China to keep an eye on the machinations of the large internet companies, as one ambitious act of organic or inorganic expansion can redefine the investment opportunities in and around a market segment. Alibaba's move for Youku Tudou may even prompt countermoves by Tencent Holdings and Wanda Group, which also look to content as a means of monetizing users and bringing in advertisers.

Alibaba has stressed that it wants to leverage rising demand for entertainment content and services, with online digital revenue in China expected to grow from $4 billion in 2014 to $14 billion by 2018. The company has launched Tmall Box Office, a subscription service along the lines of Netflix, and created Ali Pictures, which has production and distribution agreements with a string of local TV stations.

Youku Tudou seems to be a good fit. The company has 500 million unique monthly users, an increasing proportion of whom access its services via mobile devices, but the business has yet to turn a profit. While revenue rose 121% between 2012 and 2014, content costs increased 153% and bandwidth costs jumped by 75%. Subscription revenue is rising, but is this happening fast enough?

Asked by an analyst to share his expectations for Alibaba's entertainment business three years from now - assuming the Youku Tudou deal goes through - Joe Tsai, vice chairman of Alibaba, described a multi-screen strategy: Users will see shorter, more user-generated content on their mobile and computer screens, whereas in the lounge the big screen TV will feature premium-produced content.

This vision will not just pay for itself through lower-cost-per-user content and access to a wider user base. Business customers that rely on the Alibaba ecosystem to spread word of their brands can benefit from better-targeted marketing solutions thanks to a deeper understanding of users achieved through the integration of entertainment and e-commerce data.

The companies have already tried mapping user activity on Taobao against that on Youku Tudou, and tested a shop-while-you-watch platform through which viewers can buy products they see in shows. There is also interest in giving advertisers access to Youku Tudou's professionally-generated content channels where video bloggers build up followings for their output on topics such as food or sport.

The unifying element is youth: Alibaba wants to engage with a young consumer base that is increasingly reliant on mobile devices yet increasingly resistant to traditional forms of advertising and content consumption. It remains to be seen which of the internet giants can do this most effectively and whether there is space for multiple players covering the entire media value chain from content generation to distribution to payment.

Alibaba, Tencent and Wanda have their own strategies but they won't have it all their own way - rivals are trying to carve out their own dominions within or alongside the ecosystems being developed. While LeTV has gone from streaming to licensing and production to smart devices, others have a narrower focus, creating production ventures that could ultimately supply content to the big platforms.

Suning Commerce is perhaps the most interesting of all. The predominantly offline electronics retailer teamed up with Hony Capital to buy a majority stake in PPTV, presumably out of a desire to combine content and e-commerce. It has since received a strategic investment from Alibaba. Broader consolidation is likely - although predominantly among the smaller players - as the industry figures out how to make more money.

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• Alibaba Group
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