Alibaba just agreed to buy Youku in a $4.4b deal. Here’s why

What was the last expensive thing you splurged on? If you’re Alibaba, you don’t have to think back far: the company announced Friday that it has gone through with its plans to buy Youku-Tudou at a valuation of about US$4.4 billion. The merger was approved unanimously by Youku’s board, and although the deal isn’t totally done yet – it’s complicated by the fact that Youku is a publicly-listed company – when completed it will see one of China’s biggest streaming video companies allied with its biggest ecommerce firm. Youku-Tudou CEO and co-founder Victor Koo will stay on as chairman and CEO of Youku.

The deal isn’t actually completed yet because although it has been approved by Youku’s board, the company’s public shareholders also need to sign off. This should be little more than a formality; the deal needs a two-thirds vote to pass and Alibaba, through its prior investment and agreements with other partners, already controls more than 60 percent of the voting power of Youku’s shares. But Ts must be crossed and Is must be dotted, so the deal likely won’t be completely official until 2016.

We now know that both Alibaba and Youku definitely want to go through with it, though. Why?

What Alibaba gets

The upside for Alibaba here is pretty clear. The company has been trying to get into entertainment for years through everything from its Alibaba Pictures film arm to its Netflix-style streaming service TBO. But, recent Tom Cruise movies notwithstanding, the company hasn’t made a ton of headway.

Youku-Tudou, on the other hand, is basically everything Alibaba is looking for. The company is the result of an earlier merger between two of China’s earliest streaming giants (Youku and Tudou), so it brings with it established brands and a strong user base. It also brings a lot of video technology.

In this golden age of internet television, though, the strongest thing Youku brings to the table might be its core competence at producing original programming. In fact, Youku beat even Netflix to this punch by years; its first original series to make a splash was 2010’s Hip-Hop Office Quartet. Netflix didn’t launch its first original series, House of Cards, until 2013. Youku even has a history of starmaking – it was a Youku original short film that launched the filmmaking duo Chopstick Brothers to fame.

(So yes, you have Youku to blame if you’ve ever had this song, produced by the Chopstick Brothers as a promo for their first big-screen feature film, stuck in your head).

Alibaba wants all this because the company sees video as an important part of ecommerce, both as a marketing tool and as the product itself – people buy all kinds of digital content online already and that trend is sure to continue. With Chinese viewers increasingly moving away from broadcast TV and towards getting their entertainment from the web, Alibaba’s purchase of Youku gives it another way into homes all across China: through TV screens.

What Youku gets

First and foremost, of course, Youku and its shareholders get a giant bucket of cash. CEO and co-founder Victor Koo, for example, had a net worth of over a billion following Youku’s 2010 listing, but a lot of that was likely in shares of the company. Now, Alibaba will own those shares, and Koo (and all the other Youku shareholders) will get to pocket the cash.