A widely followed deal

Alibaba faces off against Tencent with Sina Weibo stake

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03 May 2013
Week in China

There’s a scene in the current hit film Beijing Meets Seattle when Tang Wei’s character asks to see the driving licence of the man picking her up at the airport. Disconcerted by the out-of-way route they are travelling, she snaps a picture of the permit on her smartphone and quickly reposts it online. “I just posted your driver’s licence onto my weibo. I have 50,000 followers so if you are a vampire or a serial killer, they can definitely find you,” she tells him.

The scene is a testament to the popularity of Sina Weibo, the microblog platform which boasts over 500 million registered users and which has become one of the most influential channels for public discourse in China, despite an ongoing struggle with the authorities on how it should be policed.

So perhaps it should come as little surprise that Alibaba, China’s largest e-commerce group, announced this week that it will buy an 18% stake in Sina’s weibo division for $586 million.

The deal, which includes an option to raise the stake to 30%, values the microblogging platform at nearly $3.3 billion. (The market capitalisation for the platform’s parent company, Sina Corp, was about $3.7 billion on Wednesday, which suggests a much smaller value for Sina’s portal business.)

Why would Alibaba, which is soon expected to go public, make such a dramatic move? Sina says the deal could generate $380 million in advertising and social commerce revenues for Weibo over the next three years and traffic will also be redirected to Alibaba’s e-commerce platforms like Taobao and Tmall. But industry observers see other motives, says 21CN Business Herald. One of the main priorities in the new tie-up is to fend off a common enemy: Tencent.

Tencent, which operates China’s most popular instant messaging system QQ, has been expanding aggressively among mobile phone users in the last two years. Its hugely popular mobile messaging application WeChat is now on track to reach 400 million users (see WiC188) and Tencent has said that it will add its own payment platform to the app. Analysts have suggested that Tencent could then become a much more direct competitor to Alibaba, the dominant force in Chinese e-commerce.

Tencent has done little to disguise its ambitions, even announcing its intention to invest $1 billion in its e-commerce offering. Although Alibaba’s Taobao and Tmall sites still dominate the sector, Tencent’s growth has been swift enough to be threatening. Its e-commerce revenue rose 49% to Rmb1.7 billion ($272.6 million) in the fourth quarter from the quarter before.

The tie-up is the groundbreaking marriage that Amazon and Twitter
never had

That poses a serious challenge for Alibaba. While the Hangzhou-based firm has beefed up its efforts to reach mobile phone users, it has yet to come up with a product like WeChat. Jack Ma, Alibaba’s chairman, admits it openly. “When it comes to innovation, Alibaba isn’t as good as Tencent; they have the powerful WeChat,” he told reporters back in March.

Enter Sina Weibo, which Alibaba may hope to use to slow down some of WeChat’s meteoric growth.

“If you look two or three years from now, Alibaba doesn’t have a very clear mobile strategy,” says Redtech Advisors analyst Michael Clendenin. “When you look at social and mobile, there are two channels out there, WeChat and Weibo. Alibaba doesn‘t want to be reliant on WeChat when Tencent is already pushing into e-commerce.”

There isn’t much detail available on the Sina-Alibaba tie-up. But it’s safe to assume that the two companies will want to mine the vast quantities of consumer data collected by both parties. That’s also going to give Alibaba a leg-up as it finds out more about what consumers are talking about, and where they are located.

To hear Sina Tech (part of the Sina portal) phrase it, the tie-up is the “groundbreaking marriage that Amazon and Twitter never had”.

Sina also benefits from linking with Alibaba. Investors have been asking how it is going to squeeze more money out of Weibo. Alibaba brings a track record of dealing with advertisers and monetising its various e-commerce offerings. Likewise with its financial clout, Alibaba also makes Sina less vulnerable to its larger competitor Tencent, whose deep pockets were a source of concern for Weibo’s management.

Lee Kai-fu, former head of Google China, responded to the news by saying that Tencent will be fine in the short run. But the prospects for Baidu – another of China’s internet giants – are much darker, Lee thought.

That makes sense. Baidu enjoys a near monopoly in searches on traditional desktops but is yet to establish the same grip on the mobile search market. Less than 10% of Baidu’s total revenue came from mobile ads in 2012. The search firm claims that mobile users grew 25% sequentially to 100 million in the first quarter of this year. But that’s still small compared with user numbers for Sina and Tencent.

According to Sohu Tech, Baidu had also been courting Weibo, thinking it could solve a lot of its mobile woes. But Sina has now chosen to go with Alibaba because its valuation for Weibo was higher and because it saw more strategic advantage in aligning with an e-commerce giant than a search firm.

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