Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's analyst conference call. At this time, all participants are in listen only mode. After management's prepared remarks, there will be a question-and-answer session. I would now like to turn the call over to Jane Penner, Head of Investor Relations of Alibaba Group. Please go ahead.
Good evening and good morning. Welcome to the call, and thank you for joining us on such short notice. Joining me on the call today are Joe Tsai, Alibaba Group's Executive Vice Chairman, and Maggie Wu, Chief Financial Officer. Our management team will share thoughts on the announcement today. They have prepared remarks on the proposed transaction. Then we'll take your questions. This call will last for approximately 30 minutes. A webcast of the call, as well as the press release, will be available on our investor relations website. Now, let me quickly cover the safe harbor. Today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are based upon information available to us as of today's meeting. Our actual results may differ materially due to a number of factors and risks. Please refer to our filings with the SEC for a detailed discussion of these risks. Except as required by law, we assume no obligation to update any forward-looking statements we may make here today. Also, there will be no comments on Alibaba Group's results of operations. Now I'd like to turn the call over to Joe Tsai.
Thank you, Jane. Good morning, or good evening, depending on where you are. Today, we are pleased to announce that Alibaba has made a non-binding proposal to Youku's board of directors to acquire all the outstanding shares of Youku that we do not already own at a price of $26.60 per ADS for cash consideration. Alibaba has been a shareholder of Youku since May 2014. The more time we have spent with their management, the more we have come to appreciate both their leadership position in the market and the potential to add value to the participants in our ecosystem through closer integration. Our proposal was included in the press release we issued earlier today. We believe the all-cash consideration we are offering is both full and fair and creates immediate and substantial value for the Youku shareholders.
More importantly, we believe the combination will strengthen Youku's market position and will lead to improved financial and operational performance in the face of an increasingly challenging industry environment. Alibaba is uniquely positioned in the China market to help accelerate Youku's growth, and we believe together we can build China's leading digital entertainment company. Under our proposal, Youku would continue to be led by its founder and CEO, Victor Koo. Since our initial investment in May 2014, we have worked closely with Victor and will continue to support him and his leadership team to drive the business after the consummation of the proposed transaction. Before we cover the strategic rationale for this proposed transaction, I want to set the context with a comment on Alibaba's overall strategy and how we think about the industry.
As we originally highlighted in our IPO prospectus, digital entertainment is core to our strategy of promoting consumption of goods and services. The difference between digital content consumption and online shopping is that virtual goods and services do not require logistics. As we have said before, Alibaba's growth is leveraged to gaining the wallet share of consumers. Beyond material goods, the increasingly sophisticated Chinese consumer will demand entertainment content and services. While digital penetration in entertainment is currently low, it is rising quickly as younger generations are consuming content primarily in mobile, desktop with digital TV formats, on the go and on demand. That's why we see significant growth potential in digital entertainment. China's online digital revenue is expected to grow from $4 billion in 2014 to $14 billion by 2018, representing a compounded annual growth rate of 39%.
In the past year, you have seen us take a number of initiatives to build out our offering to address this market, ranging from the launch of Tmall Box Office and the acquisition of the strategic shareholding in Alibaba Pictures. Our vision is to distribute content to a broad set of users through any device they may be using, whether it is a mobile phone, desktop computer, an internet-enabled set-top box, or a smart TV. Youku fits this vision perfectly. Youku is the leading mobile and online video company in China, with over 500 million monthly unique users. Its video platform enables users to search, view and share high quality video content across mobile and desktop screens. As we have witnessed in our own e-commerce business, the shift towards mobile usage and consumption is very rapid. What excites us about Youku is its clear leadership position in mobile video.
Youku's users spent 2 billion hours in total on its mobile platforms in August, and the per user time spent on mobile is highest among its peers. We believe there are three major strategic benefits from outright ownership of Youku. First, we would enhance the distribution of our entertainment content offerings through multiple screens. Multi-screen means convenient and seamless access to digital entertainment on mobile phones, desktop computers and TVs. The addition of Youku would enable us to reach more viewers through mobile and desktop screens in addition to our own OTT TV strategy. By identifying common unique users on Alibaba and Youku platforms and integrating their user accounts, we will be able to package and deliver content seamlessly to users through multiple devices. Youku will also enable us to develop a uniform content acquisition strategy across different distribution channels.
Given that content costs can be amortized over a much larger user base, we expect to lower content cost per user significantly. Second, this would enhance our ability to offer marketing solutions for brand advertisers. Youku would provide Alimama with a strong position in the video advertising market, given its leadership, market share, and strong user engagement as measured by time spent. We believe that the video advertising market is poised for robust growth in the future. Advertising dollar spend has been moving from traditional TV to the internet. Online video advertising spend in China is expected to grow at a compound annual growth rate of 31% from 2015 to 2018, which is the fastest growth rate among all forms of internet advertising.
Third, marrying user data from media and entertainment with our e-commerce data would strengthen our ability to develop better targeted products and services, as well as targeted marketing. The integration of entertainment and e-commerce data sets would add a new dimension to our user profiles and help us accelerate the understanding of our users. In addition, the access to mobile viewership data could enable us to promote similar content via subscription-based offerings on our OTT TV platform. Participants in our ecosystem, such as merchants and brand advertisers, would benefit from data integration. A deeper understanding of our users would enhance our ability to develop better targeted marketing solutions. Next, I would now like to turn it over to Maggie, who will discuss the financial details of the proposed transaction.
Thank you, Joe. Hello, everyone. First, I would like to put the size of our potential commitment in perspective. Alibaba currently owns approximately 18.3% of the outstanding shares of Youku. If the transaction were consummated, we expect that the additional cash required to purchase all of the share capital that we do not already own would be approximately $4.6 billion. We note that Youku has $1.1 billion in net cash on its balance sheet as of June 30, 2015. We estimate that our net cash outlay would be reduced to approximately $3.5 billion. The potential impact of this transaction, in short, is about growth in users and growth in revenues. We expect the proposed transaction to extend the market opportunity and the long-term growth potential of Alibaba.
Youku has over 500 million monthly unique visitors in the quarter ended June 30, 2015, and the multi-screen monthly user time spent in June grew 50% year-on-year. Youku generated $681 million in revenues in 2014 and $443 million for the first half of 2015, representing a year-on-year growth rate of 53%. Consensus analyst revenue forecast for the full calendar year 2015 is $1 billion. It should be noted that our proposal is non-binding and our reaching a definitive agreement with the company is subject to negotiation and due diligence. If a definitive agreement is entered into, closing of the transaction would be subject to Youku's shareholder approval and the process of privatizing a U.S. public company.
Because of the time it would take to complete the proposed transaction, we do not expect the transaction would materially impact our financials in the fiscal year ending March 2016. Youku is in the early stage of rapid growth. Although it has not reached profitability, we do not expect the consolidation of Youku to materially impact our earnings per share. Similarly, we do not expect this transaction to fundamentally change Alibaba's overall margin structure. At this point, I think we're ready to take a few questions.
Thank you. Ladies and gentlemen, the question and answer session of this call will start in a moment. To give more people the opportunity to ask questions, please keep yourself to no more than two questions at a time. If you wish to ask a question, please press *1 on a telephone and wait for your name to be announced. To cancel your request, please press the pound or hash key. The first question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead.
Hi. Good morning and good evening. Thank you for taking my questions. I have two questions. The first one is about the timing of this deal. What has changed in the past year to trigger your intentions to own Youku as a wholly owned subsidiary if the deal will be approved? Secondly, you mentioned some of the synergy. Just wondering if you could give us a little bit more color on some of the financial factors or operating metrics that you would focus on going forward to measure the success of achieving these synergies. Thank you.
Okay. Hey, Eddie, I'll address your questions. First on timing. Since we made an investment in Youku in May of last year, we've worked with them in various parts of the business, working with them on the advertising side and also certain integration on data. For example, we try to map the ID of users shopping on Taobao with the ID of users that are viewing video on their Youku platforms and are able to see very good results when we build a better customer profile. Without owning the company entirely, a lot of these cooperations are just only partial. We're not able to get the entire data set. That's an example. For us, we would like a closer integration of our resources. Also the fact that we have now worked more closely with the team. We are impressed by Victor and his leadership team.
It's pretty natural that we make a proposal to acquire the whole company. On the issue of synergies, I think we will be looking at potential, for example, on the front of targeted marketing and better understanding of our user base through media data sets and e-commerce data sets to create better products and services. These are the areas that could potentially generate synergies for us.
Understood. Thank you.
Thank you. The next question comes from the line of Robert Lin from Morgan Stanley. Please go ahead.
Hi. Good morning. Good evening. Thanks for taking my questions. I guess, Joe, you've mentioned before about a lot of the synergies. I guess for Youku, probably the biggest cost is content as well as bandwidth and colocation. Can you kind of quantify on how, when we talk to the studios, how much we can save in terms of content costs, as well as on the potential transfer to a cloud service for the bandwidth costs, and how much that could help in this process? Second question would be more the users. As you said, we have mapped a lot of the data between the two companies. What's the overlap of the users between Youku and Alibaba? And essentially trying to figure out, is it incremental user or is it more overlapping users right now? Thank you.
Rob, this is Maggie.
Yeah.
I'll try to address your question on the content synergy. You're right that their major costs are content and colocation bandwidth as well as staff costs. It's still early for us to quantify the synergy could be generated. What I can share with you is that we do see synergy from the cost side, the content and the colocation bandwidth. For the content, let me elaborate a little bit. We also purchase content. Youku does that too, and our other subsidiaries or investee companies in this ecosystem also have content purchase. If we could have the integrated plan to do the purchase, obviously there are bargaining power and could give us better price. That's number one. Number two is the total cost per user could be calmed down because here is a bigger user base by including Youku into the family.
Alibaba Cloud could help improve reliability of the technology, this infrastructure as well as help them have the cost saving. Youku is actually after our investment last year, already have a plan and now they are moving to our cloud platform. We'll update you later when we get further analysis and information on those things.
Rob, when it comes to overlapping users, monthly uniques at Youku is over 500 million. That's a very substantial user base. We're very excited that they're a leader in the market when it comes to mobile users and usage time spent. We think that the Youku user base, obviously there's some overlaps, but brings an overall sort of incrementally new dimension in that a lot of young users use Youku, especially on mobile. We think that is incremental.
Okay, very great. Thank you.
Thank you. The next question comes from the line of Carlos Kirjner from Bernstein. Please go ahead.
Hi, thank you. I have two questions, one on the overall entertainment strategy and one on the synergies. On the overall strategy, Joe, I think you mentioned that Youku could become the leading entertainment company in China. You talked about multiple screens. Can you spend some time telling us how you think the service looks like in three years, and how does it relate to all your other video entertainment strategy, including your current OTT strategy? How does it hang all together? Do they all carry long form and short form? Do they all have the same revenue model? How should the investor think about all these different initiatives, and what's the story behind them? On the synergies, what's so great about Taobao and Tmall is that when people go there, they go there to shop, and I suspect not to consume video entertainment.
Probably the converse is also true. When people go to Youku, they want entertainment and probably not shopping. In view of that, how exactly does the acquisition help drive incremental user growth for Youku? Thank you.
On a three-year horizon, the multi-screen strategy will take on different shapes, in the sense that users coming to different screens will see different packages, and the content can be sliced in different ways. You can imagine that on a mobile screen, there will be shorter content. There will be more user-generated content on the mobile and PC screens. When you come into the living room, there could be content that is more premium-produced content. One thing about Youku is they are also starting to make investments in a category called professionally generated content with channels being produced. Basically, these are artists or performers that are, in a way, not huge stars, but they create their own unique content in talk shows and shows focused on food, for example, or on sports and things like that. That's very interesting to us.
The consumption of that kind of content could be very popular and over time could generate advertising revenue in those channels. That's your first question. The second question about cross synergies in terms of user growth, we actually have already tested on the Youku platform a watch or a shop-while-you-watch format, where users can view merchandise that are showcased in the shows that they watch, then they can purchase that merchandise at the same time. There are also merchants that are on our platform that have created marketing formats and video that are displayed on the Youku platform. We think there are actually some cross synergies that are pretty interesting.
Okay, thank you.
Thank you. The next question comes from the line of Alan Hellawell from Deutsche Bank. Please go ahead.
Great. Thank you very much. Two questions. Maybe a smaller architectural or technical question. I was just wondering, I thought that Youku ad slots are already accessible through the Tanx system. If we're talking about synergizing, sharing data, offering targeting, and even offering a Taobao or Tmall merchant access to video inventory on Youku, is it not the case that we're already there? If we are, can you talk about, once again, maybe some incremental steps that would address that synergy we talked about? Also, my second much bigger picture question, as Joe mentioned, the transaction is indeed a further defining step with regard to Alibaba's provisioning of digital content. I know there have been questions about content cost synergies, could this in fact be more of a catalyst for a more ambitious content acquisition program? Thank you.
Yeah, Alan, I'll answer your first question. Yes, Youku already are part of a top affiliates program with Tanx. If you talk about incremental synergy coming out in the future, I think it's more going to come from the data utilization. In the past, after our investment in Youku last year, where we started the unifying [audio distortion] six years, but to fully integrate the data and get all of this consumer behavior data is not there yet. Eventually, if this transaction goes through, then we could further integrate those data and put them into use and get an even more targeted marketing and other use.
Thank you.
Your second question about whether we're going to have a more aggressive content purchase. Again, it's still early to say. I think it takes a little bit of time once the transaction's been closed. Content is a very important area, so we're going to go into it, not only Youku, but also other assets we invested. Look at the whole content pool and then decide how much we want to invest.
Thank you.
Thank you. The next question comes from the line of Doug Anmuth from JPMorgan. Please go ahead.
Great. Thanks for taking the question. Joe, I just wanted to ask, kind of philosophically, how you think about the business model over time. It's been obviously more advertising based, and you talked about Alibaba there and some of the benefits, but how do you think we could see something shift more towards subscription-based over time here going forward? Do you see this as kind of multiple revenue sources? Secondly, maybe a little bit more for U.S. investors, can you give us a sense of how video is integrated into Tmall and Taobao now? What that could look like over the next few years? Thanks.
You're right that, I think right now almost 80% of Youku's revenue base is advertising, but for example, in the most recent quarter, they've seen very good increase in subscription formats. As you know, our Tmall Box Office also has a subscription-based service. I think it's really content specific. Certain types of content, long forms of content and premium content are more conducive to a subscription-based service. There's really not a heavy sort of philosophical component to it. It's really just content specific, we see that the market over time will have more subscription-based revenue over time. Okay. Your second question. I think your second question is how is video content integrated into the Tmall and Taobao platform, right? The platform where currently in the Alibaba ecosystem where you are viewing video content is through our OTT TV service.
We have both worked with manufacturers of set-top boxes and also smart TVs, to integrate our operating system into the hardware, so that we can basically have better control and influence over what kind of content goes on those devices. You're viewing the videos on TV platforms.
Okay. Thanks, Joe.
Thank you. Ladies and gentlemen, we'll be taking the final question for the call. The final question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead.
Thanks, Joe, Maggie. How does Youku content, which includes deals with Paramount, Disney, and Sony, integrate with the content you have at Alibaba Pictures where you've got Lionsgate, and I know there's a partnership with Paramount also. The second question I have is with regard to Youku in terms of the customer base it has. Is there a strategy that you can deploy quite quickly to leverage the 8 million SMEs you have nationwide? Because I think there is adequate inventory outside tier 1 China, or would you like to pursue a more aggressive stance on the subscription model? A very tiny technical question, what % of your mobile traffic is WiFi? What is on 4G? Thank you.
Yeah, Piyush. I think with a closer partnership with Youku, we're now able to look at content acquisition as a unified strategy. Previously, if you had two different content acquisition efforts, it actually is not ideal when it comes to negotiating with the content owners, because they, as you know, love to slice and dice the content into different screens and different formats. Having that unified strategy is very important. You mentioned, for example, Paramount and Mission: Impossible, The deal that Youku has is a licensing of the content. Where Alibaba Pictures fit in with respect to Mission: Impossible is that Alibaba Pictures actually invested in the movie, and then, in return, also has rights to publish it in China, both in the digital and also in actually theatrical releases. There's different angles with the same counterparty.
Overall, now with more tools in the toolbox and more assets in place, we can form a more unified strategy when we talk to these content owners. I didn't get your second question. You talked about 8 million-
Yeah, if I could just expand that question on content, Joe. What about the ability you have to produce self-generated content at Youku? Would you like to take that one step forward, given the skill sets we have at Alibaba Pictures? How much more aggressive would you like to be there?
Well, I think we are going to explore the area of working together in producing content. That's certainly a conversation that we're going to have. We haven't had very detailed conversations about that at this point.
Question was with regards to the inventory available on Youku, where, if I remember correctly, there's a lot of inventory available in tier 2, tier 4 China, while tier 1 China inventory is fairly highly utilized. Would there be a fit here with your very large SME customer base that would help you leverage that inventory quite quickly to translate to a very quick acceleration in revenues?
I think there's definitely potential synergies there. I think we have to be very careful to map out any kind of huge acceleration of revenue. Some of the inventory, you're talking about the inventory that has to be conducive to SME e-commerce as opposed to brand advertisers. I think we are going to take a closer look at how valuable that kind of inventory is to our e-commerce merchant base.
Thanks. If I may repeat my third question, that was with regards, you talked about how much time is being spent on your network. I think you said two billion minutes in the month of August. If you could split that between PC and mobiles, and then in the mobile realm, between Wi-Fi and 4G. Thank you.
We don't have a split between Wi-Fi and 4G, but I think, if I were to guess, a lot of that mobile consumption is on a Wi-Fi because of the cost concerns people have using 4G.
Thank you. With that, we'll conclude the presentation for today. Thank you, ladies and gentlemen, for your participation. You may all disconnect. Have a great day.