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(Bloomberg) – Alibaba Group Holding Ltd. bought NetEase Inc.'s Kaola electronic commerce platform for about $ 2 billion and invested in its music streaming service, forming a rare partnership between two of the biggest Chinese giants on the internet.
The agreement gives Alibaba the largest Chinese online market for foreign brands after its own Tmall Import and Export account. Kaola will now operate independently, but under the new CEO Alvin Liu, a veteran of Tmall. In addition, Yunfeng Capital, co-founder of Alibaba and the billionaire, will invest 700 million dollars in NetEase Cloud Music. NetEase remains the majority shareholder of its music application.
Alibaba and NetEase – both based in the prosperous city of Hangzhou – have long fought Tencent Holdings Ltd., a multi-faceted social media titan, but the landscape is changing. The emergence of Tencent-backed rivals, such as Pinduoduo Inc., is testing the group's dominance in retail. NetEase has long been a distant competitor of Tencent in games and streaming music, while Alibaba has its own Xiami music app. The sale of the low-margin Kaola platform now allows NetEase to focus on its gambling business.
"NetEase can further optimize its costs while Alibaba strengthens its leadership in cross-border e-commerce," Chong and Ken Chong, analysts at Jefferies, said Friday. "On the other hand, we believe that NetEase Cloud Music can take advantage of potential synergies with the Alibaba ecosystem."
Read more: Tencent Music dive while Watchdog explores its links with a label
The Kaola agreement creates a dominant bazaar for consumers looking for foreign labels and products. Alibaba and Kaola, which have operational losses, have controlled nearly 60 percent of all transactions on China-based platforms for foreign brands in the second quarter, according to analytics firm Analysys.
It also deepens an apparent alliance. NetEase founder William Ding and Alibaba CEO Daniel Zhang exchanged jokes during a long television interview broadcast in China last month. When asked about their rivalry, Ding joked, "Many of our employees could be husbands and wives."
What Bloomberg Intelligence says
Alibaba's acquisition of Kaola, NetEase's $ 2 billion cross-border e-commerce platform, will make it the preferred channel for Chinese consumers seeking high quality foreign products.
– Vey-Sern Ling and Tiffany Tam, analysts– Click here for the search
This investment will be welcome for NetEase, which, like Alibaba, is struggling with rising content costs.
NetEase Music recently raised $ 600 million in November when Baidu Inc., General Atlantic and Boyu Capital took part in a fundraiser. The latest capital injection came after the Chinese antitrust authorities opened an investigation into its much larger rival, the Tencent Music Entertainment group, over its licensing practices. Under pressure from the government, Tencent Music and NetEase Music agreed last year to redistribute over 99% of their music catalogs.
"What really matters is the 1% exclusive content," said Shawn Yang, an analyst at Blue Lotus in Shenzhen. "Now that NetEase has new funds that can be used to buy copyrights, it will certainly be a threat to TME."
(Updates with analyst comments in the fourth paragraph)
To contact the reporter about this story: Zheping Huang in Hong Kong at [email protected]
To contact the editors in charge of this story: Edwin Chan at [email protected], Colum Murphy
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