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Breakingviews - Alibaba finds a new ally against an old foe

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HONG KONG (Reuters Breakingviews) - Alibaba has found a new ally against an old foe. The Chinese internet titan is buying part of video-games group NetEase's e-commerce business for $2 billion. Perhaps more significantly, the two are forging closer ties in music-streaming, where rival Tencent's dominance is under antitrust scrutiny.

Jack Ma's $466 billion empire is taking over Kaola, a site known for high-end, foreign goods ranging from Japanese skincare to baby formula from New Zealand. It's a fast-growing segment in China's otherwise cooling e-commerce sector. Together, Alibaba and Kaola will have a 50%-plus share of that market, according to data tracker iiMedia.

It's an unusual move for Alibaba. The company’s size and heft means it rarely courts local niche competitors. Friday’s deal, though, will see the e-commerce group, along with Ma's Yunfeng Capital, invest $700 million in NetEase's music-streaming arm. Known as Cloud Music, the Spotify-like service already boasts over 800 million users and counts search engine operator Baidu, as well as private equity heavyweights General Atlantic and Boyu Capital, as backers. It has still struggled to catch up with market-leader Tencent, which also competes head on with NetEase's core video-games business.

The timing is helpful. The country's antitrust watchdog is investigating Tencent Music Entertainment over exclusive licensing deals it struck with major record labels, media reported just last month. It's a controversial practice that has given the company’s dominant music apps a powerful advantage over rivals. A potential crackdown on these agreements, combined with Alibaba’s backing, could help level the playing field for NetEase, whose own market capitalisation is less than a tenth that of its nemesis.

That suggests further deals could follow. Alibaba operates its own music-streaming service, which could eventually be folded into Cloud Music. And NetEase's remaining e-commerce operations, a private-label brand, looks ripe for divestment too. This budding alliance, combined with a regulatory assault, spells more trouble for Tencent.  

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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