Key Points:
- China's Alibaba Group agreed to acquire South China Morning Post (SCMP), Hong Kong-based English-language newspaper, for USD266 million.
- While retaining the print edition, Alibaba plans to strengthen SCMP's digital operation by moving SCMP's business away from a subscription-only model to focus on advertising and distribution via mobile devices.
- Advertising is Alibaba's main source of revenue where it charges advertisers for cost per impression. In its last quarterly financial release in September 2015, Alibaba showed 60% of its China commerce retail revenue is from mobile transactions and mobile advertising revenue tripled.
Our Analysis:
IHS expects the acquisition to reinvigorate and drive SCMP's digital advertising revenue, especially from mobile. Alibaba is also expected to leverage SCMP content to pull more users to its e-commerce platform, especially those outside China.
In Hong Kong, growth of newspaper ad revenue has slowed since 2011 and magazine ad revenue fell 14% only in 2014. IHS forecasts a negative compound annual growth rate (CAGR) of 11% in Hong Kong's newspaper advertising in the next five years. Online ad revenue, nevertheless, will continue to grow until 2019 at a CAGR of 15%.
SCMP's business strategy has focused on digitalization and international audience since 2012 when it started to introduce a metered paywall, following a significant growth in traffic. In 2014, SCMP's publishing business reported a slight decrease in print ad revenue. However, overall revenue increased by 3%, driven by digital sales. Likewise, its magazine publishing operation experienced a 41% surge yet again through digital sales.
IHS believes that the paywall removal by Alibaba will lift SCMP's readership and digital advertising revenue. Furthermore, by connecting to the massive data library from Alibaba e-Commerce platforms, SCMP will able to help advertisers target consumers more precisely.
The ownership by Alibaba will further bolster SCMP's China news coverage, its key appeal to international audience. It has an extensive international presence. Only an estimated 30% of its readers are local and many are in Asia, Europe and Northern America.
Without the paywall, Alibaba will be able to exploit SCMP's contents to build an even larger user base, inside and outside China. Currently, Alibaba focuses on China but like any other companies, it has the ambition to expand beyond home. SCMP's international user base comes in handy for Alibaba.
Advertising dollars are at the heart of Alibaba's business model. It owns online advertising exchange Alimama and acquired shares of ad-tech company AdChina in early 2015. By investing in SCMP, the group intends to employ existing capabilities to aid diversify the marketing of small-medium sized businesses under the Alibaba's umbrella which are mostly digital-oriented.
With this investment, Alibaba Group further expands its influence in the media industry. In addition to its video streaming platform Tmall Box Office and production house Alibaba Pictures, it announced last month to pay USD4.2 billion in cash to acquire shares in online video giant Youku Tudou. SCMP's stake in Hong Kong online fashion retailer MyDress will also be a good addition to Alibaba's comprehensive e-commerce portfolio.
