(Bloomberg) -- Alibaba (NYSE:BABA) Group Holding Ltd. bought NetEase (NASDAQ:NTES) Inc.’s Kaola e-commerce platform for about $2 billion and invested in its music streaming service, forging a rare partnership between two of China’s largest internet giants.
The deal hands Alibaba (NYSE:BABA) the biggest Chinese online marketplace for foreign brands after its own Tmall Import and Export. Kaola will now operate independently but with a new chief executive officer, Alvin Liu, appointed from Tmall. Separately, Alibaba and Jack Ma’s Yunfeng Capital will pour $700 million into NetEase (NASDAQ:NTES) Cloud Music, the companies said in a statement. NetEase will remain the controlling shareholder of its music app.
Both companies compete against social media titan Tencent Holdings Ltd. across several fronts. For Alibaba (NYSE:BABA), the emergence of Tencent-backed rivals like Pinduoduo Inc. is testing its longstanding dominance of Chinese online retail. While NetEase (NASDAQ:NTES) has long been the closest rival to Tencent in gaming, it has also expanded into music streaming -- another area where Tencent leads. Alibaba has its own music app Xiami.
What Bloomberg Intelligence says
Alibaba’s $2 billion acquisition of Kaola, NetEase’s cross-border e-commerce platform, will make it the go-to channel for Chinese consumers seeking high-quality foreign products.
-- Vey-Sern Ling and Tiffany Tam, analysts-- Click here for the research
For NetEase (NASDAQ:NTES), selling its low-margin Kaola platform would allow the company to focus on its bread-and-butter gaming business.
The Kaola deal will make Alibaba (NYSE:BABA) the “go-to” venue for consumers seeking imported goods, Bloomberg Intelligence analysts Vey-Sern Ling and Tiffany Tam wrote in a note Friday. Together, Alibaba and Kaola controlled almost 60% of all transactions on China-based platforms for foreign brands in the second quarter, according to research firm Analysys.
NetEase (NASDAQ:NTES) Music most recently raised $600 million in November when Baidu Inc (NASDAQ:BIDU)., General Atlantic and Boyu Capital participated. Its latest capital injection comes after China’s antitrust authority launched a probe into its much larger rival, Tencent Music Entertainment Group, over its content relicensing practices.
Read more: Tencent Music Dives as Watchdog Probes Its Record-Label Ties (1)
Under government pressure, Tencent Music and NetEase (NASDAQ:NTES) Music last year agreed to relicense more than 99% of their music catalogs to each other. “What really matters is the 1% exclusive content,” said Shawn Yang, a Shenzhen-based analyst with Blue Lotus. “Now that NetEase has new funding that can be used to buy copyrights, it will definitely be a threat to TME.”