March 9, 2017 3:00 pm JST
Jeffrey Towson

Alibaba Pictures is the company to watch in Chinese entertainment

Strategy uses collision of entertainment, technology to disrupt the market

Two years into Alibaba Group Holding's push into entertainment, its movie arm has a growing pipeline of produced and acquired content. Alibaba Pictures is regularly doing domestic and Hollywood deals for film production, financing and distribution. And it is making unconventional moves in cinema software, online videos, ticketing apps and film crowdfunding.

Putting it together, the game plan for Alibaba Pictures is becoming clear and it is impressive, despite the company's recent warning that it may post a net loss of up to 1 billion yuan ($144 million) for 2016. Not only is the company laying the groundwork to be a major player in traditional entertainment, it is also using the collision of entertainment and technology to fundamentally disrupt its industry. It is creating a unique and powerful direct connection between production and Chinese consumers. The company is putting in motion a faster and far more sweeping version of what Netflix and Amazon.com have been doing to Hollywood.

In traditional film distribution, Alibaba Pictures has at first glance been making fairly standard deals, both cross-border and domestically. It has about 190 people in its distribution division and it manages or owns over 5,000 theaters in China. That makes the company No. 2 in box-office market share and gives it significant influence in the market, especially in regard to the timing of film releases.

Alibaba Pictures' cinemas naturally show a mix of the company's own films and ones from other domestic and foreign studios. Cofinancing and equity partnerships can play a role in this, as seen in the company's investment in Paramount Pictures' last "Mission Impossible" movie. Such partnerships are important because getting to international levels of quality has proved to be more difficult for Chinese studios than expected.

Yet Alibaba Pictures is also making unconventional moves in distribution. With its Tao Piaopiao movie ticketing app, the company is subsidizing pre-release purchases. This gives it a two-week advance window to gauge interest in specific films and insight into what Chinese consumers actually want to see. The ticketing app in turn is linked to Alibaba Pictures' theater operations software, which is in use at some 70% of local cinemas for ticket sales, screen booking and other functions, further expanding the company's data gathering.

Add to this distribution channels controlled by Alibaba Group, such as the Youku Tudou video streaming sites, the growing Alibaba Cloud computing service and UCWeb, a popular internet browser for mobile phones. In this way, Alibaba can see what hundreds of millions of Chinese consumers are buying and watching in real time. Compare that to to a typical film studio, which spends 1-2 years making a movie based mostly on a gut feeling and then hopes it will do well if there is a large marketing budget behind it. Alibaba is attempting to create a new type of smart production that replaces "big bets" with "big data".

Alibaba's multiple platforms and their direct connections to Chinese consumers also give it a powerful marketing advantage. Using its parent's network, Alibaba Pictures can in theory market and promote video programs across leading streaming sites, the country's biggest e-commerce and retail sites, phone browsers and other channels.

The must-have partner

If Alibaba can use data analysis to solve the entertainment industry's perennial problem in predicting what films will Chinese consumers will like, it will become the "must have" partner for directors, producers, writers and both Hollywood and other Chinese studios. It will be uniquely positioned as a direct connection to Chinese consumers in entertainment, able to both know what they like and market directly to them. Consider again Netflix and Amazon, which are also utilizing their data on viewership in drive decisions on buying and developing content. Alibaba's is a larger and more powerful version of this approach, using direct connections with consumers whose tastes are rapidly changing to enable smart production and direct marketing.

Additionally, Alibaba Pictures is steadily improving its internal content and production capabilities and has recruited former talent agency staff. The company is building a development pipeline to support the goal of releasing 10 films a year and is buying rights to adapt characters and stories from video games, cartoons and other media. It also has deals with production companies giving it right of first refusal on new releases. It is on a long-term path to develop the capabilities required for creative excellence.

A final aspect to pay attention to is the linkages emerging between Alibaba's various businesses. Such linkages are a common feature of most of the world's successful entertainment companies. Theme parks and cable networks, for example, can provide stable cash flow to balance unpredictable revenues from new film releases. At the same time, the movies create a growing intellectual property library that can be leveraged over those same linked businesses. These linkages improve the economics of each business and can be difficult for competitors to replicate: You need movie characters to launch a theme park, but you need theme parks to fund the making of the movies.

Alibaba's diverse operations hold some similar advantages for Alibaba Pictures. For example, the film studio could coordinate between rights holders like Marvel Entertainment and Walt Disney and top vendors on Alibaba's Tmall and Taobao shopping platforms. The company can bring together product designers and other specialists to drive sales of film-related consumer products. These sorts of linkages will be very difficult for other Chinese studios to replicate.

Ultimately, the Chinese movie industry is struggling to understand consumers who are changing especially rapidly in their tastes and where and how they consume entertainment. They are a notoriously fickle group. Alibaba Pictures' growing connections with this group and its hold on data about their habits offers an excellent chance to address their unpredictability and to capture a uniquely powerful position in the country's entertainment industry.

Jeffrey Towson is a professor of investment at Peking University's Guanghua School of Management and co-author of "The One Hour China Book."

Asia300

Alibaba Group Holding Ltd.

China

Market(Ticker): NYS(BABA)
Sector:
Industry:
Retail Trade
Internet Retail
Market cap(USD): 444,662.21M
Shares: 2,529.36M

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