In addition to the initial investment, SINA Corp (NASDAQ:SINA) is giving Alibaba the option to increase its stake in Weibo to 30% within a limited time on a mutually agreed valuation. Sina is also expanding its e-commerce partnership with Alibaba by finding ways to merge SINA Corp (NASDAQ:SINA)’s social networking capabilities with Alibaba’s e-commerce platforms.
How will this new partnership between the two giants of Chinese cyberspace influence other major players, such as Baidu.com, Inc. (ADR) (NASDAQ:BIDU), Tencent Holdings and Yahoo! Inc. (NASDAQ:YHOO)?
Targeting Tencent
Alibaba’s $586 million investment in Weibo values the social networking site at $3.26 billion, far more than the $600 million to $2.5 billion that analysts had previously estimated. Weibo currently has an active user base of 500 million, which has grown rapidly since its inception in 2009, and benefited greatly from the lack of competition from Twitter or Facebook Inc (NASDAQ:FB), which are both banned in China.
Despite Weibo’s success, it has been overshadowed by rival Tencent Holdings, which has dominated the mobile and desktop messaging markets with two apps – WeChat and Tencent QQ. WeChat, which has an active user base of 200 million, is a text and voice messaging application for smartphones. Tencent QQ is the country’s most popular instant messaging application on desktop platforms, with more than 670 million users.
30% of Weibo’s total fourth quarter revenue was generated by smartphone advertisements, which was boosted by an 82% year-on-year increase in daily active users. 75% of the site’s users were accessing the site from a mobile device. However, SINA Corp (NASDAQ:SINA) CEO Charles Chao acknowledged that mobile users were spending more time on WeChat and Tencent QQ, which could throttle its ability to monetize its explosive mobile growth.
Therefore, a partnership with Alibaba’s Taobao (“China’s eBay”), which controls 90% of China’s consumer-to-consumer e-commerce market, could increase shopper dependence on Weibo’s messaging and social networking features, taking a bite out of Tencent’s market share.
Alibaba and Weibo intend to connect their accounts, exchange data and offer shared online payment systems, creating a seamless integration between the two sites. Taobao and Weibo already have an estimated shared user base of 40%, which will make the transition fairly easy.
Alibaba will also advertise more heavily on Weibo to capitalize on its booming social network. The alliance is expected to generate $380 million in advertising and social e-commerce revenues for Weibo over the next three years.
Bye bye, Baidu
SINA Corp (NASDAQ:SINA)’s partnership with Alibaba isn’t its first major partnership with a big industry peer. Last year, Sina allied with search giant Baidu to integrate the latter’s search capabilities into its mobile website. In exchange, Baidu added Weibo to its cloud-based initiative.
Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has been struggling to transfer its dominance on desktop platforms, where it enjoys a 79% market share, to mobile platforms. China’s mobile market is a rapidly growing one, rising from 700,000 users in 2008 to 400 million at the end of 2012. In mobile advertising, Baidu only controls a third of the market, while Tencent and Easou have been catching up quickly, with respective market shares of 23% and 22%. Less than 10% of Baidu’s total revenue came from mobile ads in 2012. During the first quarter, Baidu was able to grow its mobile users 25% sequentially to 100 million, but its footprint is still tiny compared to the user numbers from Sina and Tencent.
Shares of Baidu.com, Inc. (ADR) (NASDAQ:BIDU) were recently crushed after the company reported yet another quarter of slowing top and bottom-line growth, exacerbated by contracting margins. Intensifying competition from Qihoo 360, which now has a rapidly growing market share of 12.5%, is squeezing its desktop growth, while Sina, Tencent and Alibaba are affecting its ability to properly monetize the mobile market.
Therefore, the new alliance between SINA Corp (NASDAQ:SINA) and Alibaba, which runs much deeper than Baidu’s previous deal with Sina, could cause major problems for Baidu. Although Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s search engine powers Weibo’s network, it will be directing search results to Alibaba-sponsored sites – which means that advertising revenue will be fed to Sina and Alibaba instead.
There had been persistent rumors of Baidu being interested in acquiring Sina, which has a market cap of $3.6 billion, since it could solve a lot of its mobile woes in one fell swoop. However, with Alibaba’s recent investment in Weibo, the price of a takeover just went up. In addition, Alibaba will likely block any takeover attempt from Baidu.
Indirect benefits for Yahoo
Yahoo!, which owns a 24% stake in Alibaba, will benefit from the Weibo deal. Through Alibaba, Yahoo! Inc. (NASDAQ:YHOO) will own an indirect 4.3% stake in Sina. This could actually strengthen Yahoo’s foothold in China, where other western companies such as Google Inc (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT) have clumsily fumbled.
Google Inc (NASDAQ:GOOG), which was booted from the country after its widely publicized dispute with the Chinese government, has only held on to the market with its Hong Kong portal website and a monetization partnership with Qihoo 360. Meanwhile, Microsoft Corporation (NASDAQ:MSFT) partnered with Baidu to provide English search results within China.
Last quarter, Yahoo! Inc. (NASDAQ:YHOO)’s profit from its two major Asian investments, Alibaba and Yahoo! Japan, came in at $217.5 million – topping the company’s core business profit of $186 million.
However, Yahoo! shareholders should be aware that Alibaba CEO Jack Ma intends on buying back Yahoo!’s stake, and has already purchased back half of Yahoo!’s stake last year for $7.6 billion. When the partnership was originally struck in 2005, Yahoo! owned a 40% stake in Alibaba.
Alibaba is also reportedly preparing to give its Yahoo! China brand back to Yahoo! Inc. (NASDAQ:YHOO), which further winds down the partnership between the two companies. This means that although Yahoo! investors might reap some short-term benefits from the deal with SINA Corp (NASDAQ:SINA), those gains might not last as Alibaba finally buys back the rest of its shares and goes public in its rumored upcoming IPO.
The Foolish bottom line
Alibaba and SINA Corp (NASDAQ:SINA)’s partnership is an industry-shaking move that will have long-term ramifications across the sector.
These two companies will easily reap major long-term benefits as their sites are more tightly integrated with each other. Simply imagine if Amazon partnered with Facebook Inc (NASDAQ:FB), or if eBay Inc (NASDAQ:EBAY) allied with Twitter, and you’ll have an idea of how formidable Alibaba and Sina can be together, as they solidify their control over China’s rapidly growing e-commerce market.
The article Are These Two Chinese Cyberspace Giants About to Crush the Industry? originally appeared on Fool.com and is written by Leo Sun.
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