Take a Gamble

Alibaba Unit's Chance to Lift Its Game

A joint venture with Paytm could also propel mobile payments in India.
Photographer: Dhiraj Singh/Bloomberg
ALIBABA GROUP HOLDING-SP ADR
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At Closing, April 23th
175.57 USD
AGTECH HOLDINGS LTD
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At Closing, April 24th
0.90 HKD

An announcement by two of Asia's most important internet firms late Monday could be instrumental in propelling the take up of mobile payments in India. It may also help turn around an ailing company.

AGTech Holdings Ltd. will form a joint venture with India's Paytm Group to develop mobile games and other entertainment products, the Hong Kong-based company said in an exchange filing.

If AGTech isn't a familiar name, you're not alone. Despite being listed in Hong Kong, the developer of gambling and lottery systems is overshadowed by its majority owners, Alibaba Group Holding Ltd. and Ant Financial. 1

By the numbers, this is a small deal: AGTech is investing $7.2 million and Paytm $8.8 million, giving the Indian entity a 55 percent stake.

The potential for both parties, however, is huge.

With 225 million users, Paytm already has a significant foothold in the country's electronics-payments business. Last year's sudden demonetization and introduction of the Aadhaar national-identity system caused the type of shocks that have played into its hands.

But Paytm could do with more help. Just 23 percent of Indians had made a purchase via their mobile phones at the end of last year, trailing Vietnam and Indonesia.

Room to Grow

India lags other countries in the uptake of mobile purchases

Source: WeAreSocial Global Web Index, Statista

Note: Data tracks proportion of population who made at least one mobile purchase during the past month in 4Q2016.

Games offer the perfect way to usher in mobile payments by helping shape behavior. Once users make their first game or in-app purchase, further transactions are likely to follow. And if other markets are any guide, games will be a huge category on their own, so for Alibaba, having a strong local-payments provider on board from the start is an advantage.

It's interesting to note that AGTech's specialty isn't games but gaming -- as in gambling machines and systems. And it's not very good at it: AGTech hasn't posted an operating profit in the past 13 years. A net profit last year came from the revaluation of some convertible bonds.

Bad Bet

Alibaba-backed gambling-machine maker AGTech seems to have trouble making money

Source: Bloomberg

Perhaps this is a chance for AGTech to actually start making money. Mobile games aren't a huge leap from virtual poker, after all. 

The terms of the joint venture also include a three-year lock up and non-compete clause, which may help explain why AGTech was Alibaba's chosen vehicle instead of either Alibaba itself or Ant Financial, which owns 30 percent of Paytm Group. In theory, Alibaba and Ant are therefore free to pursue games opportunities elsewhere in India.

The other upside is that after missing the boat on games at home, Jack Ma now has the chance to learn from Tencent Holdings Ltd.'s phenomenal user growth in China. It would make sense for this new Indian venture to morph from games into social media, the same way that Tencent did with QQ and then WeChat.

If that's Ma's ultimate end game, then this transaction looks like a better bet.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Full name: Ant Small & Micro Financial Services Group Co.

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

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net

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