Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Alibaba Group Holding Ltd. wants to be big in entertainment. It's not alone. It seems everyone from fellow internet giant Tencent Holdings Ltd. to a Chinese property developer wants their name in lights.

They Giveth ...
Its entertainment and cloud businesses are starting to help Alibaba's top line
Source: Bloomberg, Alibaba

Just as for fellow internet companies Baidu Inc. and Tencent, entertainment isn't the main business at Alibaba, but all three hope to be significant players. More than 81 percent of the e-commerce company's sales last quarter came from matching buyers with sellers, what it calls "core commerce." While a huge figure, that's actually a 7 percentage point drop from a year earlier because digital media and entertainment doubled to 10 percent of revenue.

Management has said many times that it wants to boost its content business and that it's willing to spend the money to get there, even buying out Youku Tudou Inc. in 2016 to achieve that goal -- a move that accounted for the lion's share of the entertainment unit's tripling of revenue.

Unfortunately, in acquiring top-line growth it's also bought the bottom-line costs, with operating loss at the division equal to 27 percent of Alibaba's overall operating profit for the quarter. A similar story played out a day earlier when Tencent reported a revenue boost from digital content subscriptions but thinner margins because of video content investments.

... And They Taketh Away
Alibaba's new businesses remain a drag on the bottom line with operating losses barely budging despite revenue growth
Source: Alibaba, Bloomberg

Not helping Alibaba is the fact that it is yet to leverage any economies of scale from the cloud business it keeps talking about. Revenue from the division doubled in the March quarter from a year earlier, yet operating loss shrank only 17 percent.

To add to the drama, Baidu-backed iQiyi recently signed a deal to distribute content from Netflix Inc. in China, where titles like "House of Cards" are already popular.

This means we're now set up for the same kind of cutthroat battle the three companies fought over ride-hailing and home delivery. Investors who have tickets for this next gladiator bout had better take their seats and prepare to be entertained.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net