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Alibaba Building Youku to Be the Netflix of China

Natalie Walters, The Motley Fool

Alibaba (NYSE: BABA) is already the top online retailer in China -- but that isn't enough. The company is also quietly working on becoming the top video streaming platform in China, or the Netflix (NASDAQ: NFLX) of its country. 

The Chinese e-commerce giant completed its purchase of the video streaming platform Youku back in 2016. In the past few years, Alibaba has been upping its spend on original content to increase Youku's monthly active users, similar to Netflix's own high-content-spend growth strategy. However, Youku is still lagging behind similar platforms from competitors Tencent and Baidu.

Two men speak to each other in a promotional poster for Youku’s online detective series "Day and Night."

A poster for Youku's hit detective series Day and Night. Image source: Alibaba.

Alibaba's Youku platform battles top competitors

For the December quarter, Alibaba said Youku's average daily subscribers increased by 64% over the past year. However, the company has been noticeably quiet when it comes to releasing a specific figure for its monthly viewers. That might be because it doesn't want investors knowing how far it lags behind Tencent Video and Baidu's iQiyi platform.

Tencent Video currently claims the top spot in China's video streaming market and is expected to keep it for the foreseeable future, eMarketer estimates. Out of all the digital-video viewers in China, eMarketer estimated 24% would subscribe to Tencent in 2018, while 23% would subscribe to iQiyi and 22% would subscribe to Youku. However, the research firm believes that Youku could overtake iQiyi by the end of 2019.

While Alibaba hasn't released specific viewing figures for Youku, the platform was estimated to have 374 million monthly active users as of December 2017, according to Quest mobile figures. That's already well past Netflix's 140 million global subscribers.

Youku's revenue is grouped into Alibaba's digital media and entertainment division, which saw 20% year-over-year growth in revenue, to $944 million. The company listed Youku subscriptions as one of the top three reasons for this segment's increase in revenue over the past year.

Like Netflix, Alibaba hikes up original content spend

Netflix has been criticized by some for its high content spend. The company last estimated it would spend $8 billion on content in 2018 but has been quiet about a specific content budget going into the New Year. Some estimates say the top U.S. video streaming platform could spend up to $15 billion on content in 2019.

Netflix is constantly defending its strategy of going into debt to fund its content spend because it believes high-quality programs are the best way to grow its subscriber base. The company continues to assure investors that, eventually, it will have enough subscribers that its balance sheet will even out. But that's not a guarantee, which is why some investors are wary of it.

Alibaba and its competitors are going a similar route -- perhaps after observing Netflix. eMarketer believes Youku's content spend increased more than its competitors in 2018. That's partly because Youku paid for the rights to stream the FIFA World Cup.

In its December quarter earnings report, Alibaba noted that it had increased its original content spend for Youku. The company's spending on content is one of the three reasons the company said its cost of revenue as a percentage of total revenue increased by 10 percentage points, to 50%, for the past quarter.

Like Netflix, Alibaba said it's working to shift its library more toward original content. Netflix has learned that owning its own content gives its brand more power, saves money on licensing costs over time, and solves the issue of partners pulling content from its platform.

Next up for Youku is increased collaboration with Alibaba's movie and TV production company Alibaba Pictures, the company said. Alibaba Pictures had a solid 2018. The studio co-produced and financed the comedy-drama Dying to Survive, which ended up becoming the third highest-grossing film in Chinese cinema history and won the Film of the Year award at the annual Hainan International Film Festival.

With a partner like that, Youku may be able to surpass iQiyi in subscribers this year; then only Tencent Video will be ahead of it.

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Natalie Walters has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.