Alibaba – The first moves

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Alibaba and Meizu set the scene for Chinese ecosystems.

• Alibaba has agreed to invest $590m in Meizu, a small Chinese manufacturer of smartphones.
• Alibaba has stated that it will have a minority stake but given the size and probable lack of profitability, I believe that it will own very close to half of the company.
• In Q4 14A Meizu shipped 1.5m smartphones of which 1.0m were shipped inside the China (Counterpoint).
• This represents market share of just 0.4% making it very unlikely that Meizu is showing any profits or generating any cash.
• Consequently, a valuation of $1.2bn (49.9% stake for Alibaba) for Meizu would appear to be pretty generous.
• Even though Alibaba will only have a minority stake, I think that it will have effective control of this company.
• This is exactly what it will need to put its full weight behind Meizu as its beachhead into developing its ecosystem.
• This combined with the fact that Meizu announced that it would be making devices running YunOS in October, makes it very clear how Alibaba now intends to address the mobile ecosystem.
• YunOS is essentially the Android Open Source Package but instead of the Google ecosystem on top, it will carry Alibaba’s.
• RFM research strongly indicates that the smartphone is the single most important piece of hardware that determines ecosystem choice by the user.
• Other hardware such as tablets, consoles, TVs and so on enrich the various aspects of Digital Life but it is the smartphone that is by far the most important.
• Consequently, for any ecosystem to gain traction, it needs to have a strong presence on a mobile device.
• This is why Alibaba has purchased a stake in Meizu.
• Having Alibaba as a shareholder, Meizu will now have the financial clout to invest more heavily in making decent devices running YunOS.
• I suspect that Meizu devices will end up being predominantly based on YunOS and heavily optimised to run Alibaba Digital Life services.
• This is where the big question mark is.
• Alibaba is a superb e-commerce offering but can it create Digital Life services that will delight users?
• Alibaba clearly thinks that it can and has taken the first step by recognising the necessity of having a full Digital Life offering on a mobile device.
• Whether the users like it remains to be seen but Alibaba has set the scene for the other two Internet giants in China to make their move.
• In the middle of this is Huawei which has a strong position in China but no real ecosystem to speak of.
• Consequently, I would not be surprised to see it tie up with Baidu or Tencent in a similar type of arrangement.
• I still see these three large ecosystem dominating the Chinese landscape which will put pressure on Xiaomi which has market share but not same level of resources to invest heavily in a full ecosystem.