BABA & Music

On September 19th, the Alibaba Group had its Initial Public Offering, the largest in history, on the New York Stock Exchange. Alibaba quickly became the world’s ninth most valuable tech firm. The $21.7 Billion deal was over $5.5 Billion more than Facebook raised at it’s IPO only two years ago. It was a massive success, with shares rising 47% in the first ten minutes of trading, and closing up 38% at the end of the day.

The e-commerce giant has now secured plenty of funding to expand its business into new areas. Alibaba already had a large stake in many successful companies spanning a wide array of industries, including online video, maps, department stores, social media, transport, logistics, gaming, education, pharmaceuticals, data, and even professional sports. Most acquisitions were made in 2014 before the IPO, and investments of between  $20 Million and $1.2 followed.  The music industry is arguably a prime candidate for the next big Alibaba purchase.

Moving into the music industry would create more value for the company. Music is an integral component in advertising campaigns, as well as in the branding of many of the entertainment and lifestyle products Alibaba already owns. With music, the company could have easy access to both back catalogs, as well as the top up-and-coming artists in the many global markets it operates in.

Investing in music also creates value for Alibaba’s existing entertainment holdings. In fact, two of the company’s three largest holdings, Youku Tudou (online video), and the ChinaVision Media Group (Television and Motion Picture), are entertainment businesses, and have a combined value of more than $2 Billion.  Since it has to pay many of the costs associated with entertainment production already, music ownership could lead to savings in the licensing of content while providing new sources of revenue—not least by combining different entertainment media.

For example, an artist signed to an Alibaba owned record label would have their music videos produced, and hosted by Youku Tudou. The music could then easily be placed in a movie or television show produced by ChinaVision, or used in the new Lyft commercial. By doing this, Alibaba would be able combine the roles of a well-connected publisher and a label. Talent would ultimately benefit.

Buying into music also gives Alibaba the ability to both create some differentiation with Amazon and better compete with it.  Alibaba is a software platform that connects buyers and sellers while Amazon sells mostly from its own inventories. Alibaba does not have the overhead costs that Amazon pays to sell recorded music and it may be better prepared to take on the streaming revolution than the American giant is (we have covered Amazon’s streaming efforts in the last two issues of the MBJ).

For this reason, it is not farfetched to imagine Alibaba buying into a streaming service in the near future.  Apple bought Beats Music and Google attempted a move with Spotify but was put off by its steep asking price in July. Although Alibaba is not quite in the same league as either, a good inroad into music streaming would further the company’s goals of increasing its mobile presence and revenues, one of the main reasons behind its recent IPO.

Apple is the big rival here.  The most effective way to compete with Apple would be to buy an already established service. Rdio is one and it has an existing paid user base that Alibaba could buy at a bargain price.  It is small though and to get traction on Rdio would require time and much more investment.

For Alibaba, it would make more sense to use its cash to buy a large stake in Spotify. With an estimated valuation of about $4 Billion it would cost Alibaba less than ten percent of its IPO capital to purchase a controlling interest. As demonstrated by Google’s failed bid, Spotify is indeed open to the idea of being bought outright³.  Spotify’s ten million paying subscribers and thirty million free users would be good for advertising fees, where Alibaba’s main revenue comes from, and for more mobile engagement. Purchasing Spotify would also give Alibaba an inside look into the most popular music in foreign markets.  Spotify’s market analytics, including The Echo Nest platform, seem tailor made to achieve some of its IPO goals.

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It has been suggested here that a move by Alibaba into music could be both lucrative for the company, and potentially beneficial for the industry. By buying a forward thinking company like Spotify, Alibaba could add to its brand and grow its mobile base worldwide. The highly diversified nature of Alibaba’s corporate structure also means that its bet on music could be hedged against losses elsewhere, giving it some flexibility to float the service until it reaches profitability, while deriving value from it.

There are currently few companies that can stand recorded music on its head again, and musicians should pay close attention to Alibaba’s developments over the next couple of years. A Chinese company that uses a Middle-Eastern name and is funded globally could yet become an important a player. It is truly a story out of One Thousand and One Nights. ‘Open Sesame!’

By John Lahr

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