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Alibaba hopes film studio will boost its online offerings

After weak quarterly earnings, e-commerce group seeks new revenue sources

HONG KONG -- Chinese e-commerce conglomerate Alibaba Group Holding is hoping to enrich its online offering by taking majority control of heavily loss-making Hong Kong film studio Alibaba Pictures just days after poaching the chairman of the movie house to run its video streaming division.

The move could see Alibaba attempt to replicate the Amazon Prime video-streaming service as it seeks to reboot growth for its cooling online retail business with new content, while facing down rising competition from rival Tencent Holdings.

Alibaba said on Dec. 10 it would invest HK$1.2 billion ($154 million) in Alibaba Pictures, taking its stake from 49% to 50.92%. Hangzhou-based Alibaba will also control the board as a result. The investment comes after Fan Luyuan, head of Alibaba Pictures, was appointed to run Alibaba's video streaming unit, Youku, after the latter's previous president came under investigation for corruption.

Alibaba Pictures was founded in 2014 to tap the rapidly expanding market in China, which earlier this year overtook the U.S. to rake in the highest box office revenue in the world. The studio was behind some of China's highest-grossing films this year, such as "Dying to Survive," one of just five Chinese movies to gross more than 3 billion yuan ($434 million), according to ticketing company Maoyan.

However, Alibaba Pictures has also turned out some spectacular flops -- including the big budget "Asura" based on Tibetan mythology which was pulled after just one weekend in cinemas.

Daniel Zhang, Alibaba CEO who will succeed founder Jack Ma as chairman next year, said the online retail group planned to seek greater cooperation with the film studio.

"We will continue to invest resources and take full advantage of our ecosystem to help Alibaba Pictures tap into the promising growth prospects of China's film industry," Zhang said in a statement.

There would also be "greater integration and synergies between Alibaba Pictures and related business in Alibaba Group," Zhang said. Alibaba, with a sprawling business empire that includes retail, financial services, entertainment, and cloud computing, also operates an online literary business Alibaba Literature.

The proposed share purchase comes at a time when e-commerce, Alibaba's core business, has lost some steam. The New York-listed company registered lackluster earnings in the July to September period and cut its full-year forecast, as China's slowing economy takes its toll on online retail sales.

Revenue from its entertainment business, however, surged 320% year-over-year during the same period, contributing 3.6 billion yuan, or 10.5%, to its total revenue.

"China's entertainment sector, particularly its film industry, has enjoyed an explosive growth in the past five years," said Yolanda Jiang, an analyst with Shanghai-based consultancy iResearch. "Alibaba and Tencent Holdings have been racing head-to-head to gain access to high-quality movies...[The investment in Alibaba Pictures] has reflected that growing desire."

During the last six months ended September 30, Alibaba Pictures narrowed its net loss by 64.1% to 154 million yuan. Meanwhile, its revenue grew 29.4% year-on-year to reach 1.5 billion yuan.

Besides diversifying its revenue source, the synergies between online videos, movies and e-commerce may also help Alibaba replicate the success that Amazon has had with film streaming services, said Harry Yuen, an associate director of Oceanwide Securities in Hong Kong. 

As China's online retail market matured, value-added services such as free online movies could help Alibaba turn random shoppers into paid members, a business model that had already been tested by Amazon. "The ultimate purpose is to enhance [Alibaba's] e-commerce platform," Yuen said.

Other Chinese internet companies have also stepped up their investment in the entertainment business. Tencent Pictures, the film production arm of Tencent, recently revealed it had 43 films and television projects in the making., Alibaba's main e-commerce competitor, rolled out a joint membership program in May with Nasdaq-listed Chinese video streaming site IQIYI to boost its user base, attracting one million users in the first week.

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