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What Is Alibaba Getting in Qutoutiao Deal?

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Revenue rose 426% at Qutoutiao

Alibaba (BABA) is extending a loan of $171 million to Chinese news aggregator Qutoutiao (QTT). Alibaba has the option to convert that loan into Qutoutiao stock, which would result in it owning a 4.0% stake in the business. Tencent (TCEHY) is also an investor in Qutoutiao and owns a stake of 7.7% in the business, according to a report from Caixin Global.

Qutoutiao operates a newsfeed that pulls news articles and videos from a variety of sources. Its revenue rose 426% to $193 million in the fourth quarter, which ended in December.

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Alibaba playing long game

By putting its money in Qutoutiao, Alibaba is certainly playing a long game considering that the business is actually bleeding cash. Qutoutiao suffered a loss of $57.9 million in the December quarter with the loss ballooning from $8.0 million a year earlier. Alibaba posted a $4.8 billion profit for the December quarter.

Although Qutoutiao is currently deep in the red, there is more than one way a relationship with it could benefit Alibaba. First, Qutoutiao’s news service is popular with people in China’s smaller cities. In their pursuit of new growth opportunities, China’s leading e-commerce companies Alibaba and JD.com (JD) are looking to expand in the country’s smaller cities and rural areas that are less saturated. With this in mind, Alibaba could leverage its relationship with Qutoutiao to accelerate its penetration in China’s lower-tier cities.

Alibaba getting another advertising stream

Qutoutiao is an advertising company, and advertising sales contributed more than 94% of its revenue in the December quarter. Therefore, owning a stake in Qutoutiao gives Alibaba another handle on China’s booming digital advertising market. Spending on digital advertisements in China is forecast to jump 7.0% this year to $102.3 billion, according to Dentsu Aegis Network estimates. Baidu (BIDU), one of Qutoutiao’s rivals in aggregating news, earned 78% of revenue from advertising in the December quarter.

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