Alibaba – Bargain hunting.

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Patience pays off for Alibaba in the hunt for an app store.

 

  • Alibaba has announced that it has agreed to buy Wandoujia, one of the many Android app stores in China, which will fill a small but important hole in its ecosystem offering.
  • It looks like Alibaba will be paying around $200m to acquire Wandoujia which is a far cry from both the valuation ($1bn) at which it raised money in 2014 and the $1.5bn that Alibaba offered to buy it subsequent to the fund raising.
  • This strongly implies that while Wandoujia remains one of the larger app stores, it has really been struggling build a business around selling apps.
  • This comes as no surprise as the app store scene in China is extremely fragmented with the top 9 players needed to cover 90% of the market.
  • Wandoujia’s position has weakened materially in the last two years as RFM research indicates that it is now no. 8 in the market with just 3% share.
  • Tencent’s app store leads the market with 20% share, followed by Qihoo on 16%, Xiaomi on 15% and Baidu on 13%.
  • Until this acquisition, Alibaba had no position in the distribution of apps and services unlike its two main rivals in the Chinese market.
  • In developed markets, the app store is arguably the most valuable asset that an ecosystem can have as it is the core of Apple’s differentiation and Google method to control Android.
  • However, in China the situation is radically different as users do not tend to live in one ecosystem or another as almost everyone uses services from all of the big contenders.
  • This sets the scene for the next stage of competition where each of the ecosystems tries to entice users to spend more time with them at the expense of its rivals.
  • Here, RFM research indicates that controlling the software and in some cases, the hardware will be important.
  • Wandoujia is another piece of that puzzle and now I can see Wandoujia being the default app store on YunOS devices (see here)of which Alibaba hopes to ship 100m this year.
  • Of all the three BATmen (Baidu, Alibaba and Tencent), Alibaba is the furthest along the road in terms of developing a vertically integrated system by which it can deliver its Digital Life services to users.
  • Baidu and Tencent are far behind when it comes to vertical integration but I think Baidu has a better understanding of the ecosystem while Tencent has by far the strongest position in Digital Life.
  • Consequently, Although Alibaba is making the right moves to control its ecosystem, the content of such and the way it is delivered still needs a lot of work.
  • Despite being ahead in this area, I remain concerned that the market is over optimistic in terms of what it thinks e-commerce will deliver in China this year which is the main reason why I am cautious on Alibaba’s shares.
  • I continue to think that both Alibaba and Google look overvalued.
  • Baidu alongside Microsoft and Samsung remain my top picks for the immediate term but I am also keeping a close eye on both Apple and Tencent.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.