Is Alibaba buying influence with South China Morning Post purchase?

Is Alibaba buying influence with South China Morning Post purchase?

GRI looks at Alibaba’s move to buy the 112-year old Hong Kong English-language daily, and what it means for Hong Kong’s media and Alibaba’s future.

Christmas came early for China’s richest man this year. Earlier in December, Jack Ma splashed his cash and bought his first newspaper on his shopping list, South China Morning Post (SCMP), a century-old Hong Kong English-language daily for an estimated HK$2.06 billion (US$100 million). The surprise move by Alibaba (NYSE: BABA) prompted a series of questions from investors and commentators, and provided the markets with hints on where the internet giant is heading next.

SCMP: a brief history

SCMP is considered the most credible newspaper in Hong Kong with a circulation of 101,652 in the first half of 2015. In 2014, the SCMP Group – which includes Hong Kong editions of ElleEsquire and much of The Bangkok Post – recorded revenues of HK$1.241 million, an 8% increase from the previous year. However, there was also an 8% decline in net profit attributable to shareholders, which was due to losses in ‘associated companies.’ Since 2011, SCMP’s net profit has suffered a steady decline.

Under Robert Kuok, the Malaysian billionaire and SCMP’s owner prior to last week, it was once the most profitable newspaper in the world, earning HK$805million (over US$200 million today) in 1997. Before Kuok, the paper was owned by media mogul Rupert Murdoch between 1986 and 1993, held briefly by HSBC in the immediate post-war period, with Dow Jones holding a significant quantity of shares thereafter.

Ma’s move came as the newspaper industry dwindles worldwide. According to PricewaterhouseCooper (PwC), “average daily unit circulation print is forecast to rise at a 1.0% CAGR over the forecast period, from 552.7mn (USD) in 2014 to 580.7mn in 2019.” Although revenue losses will be ‘marginal’ from 2017 onwards, overall decline seems nevertheless inevitable.

Going digital: the business case

Despite doom and gloom in the industry, there remains huge potential for both SCMP and Alibaba. In its findings, PwC also found that a) China and India will be ‘the industry’s growth engine,’ and b) Mobile monetisation is “the next critical challenge” as “more than half of the world’s population will be mobile internet subscribers.” Alibaba’s digital leadership coupled with SCMP’s heritage in Chinese affairs is therefore best situated to exploit both these opportunities.

“Our vision is to expand the SCMP’s readership globally through digital distribution and easier access to content,” claimed Joe Tsai, Executive Vice Chairman of Alibaba. In a special letter to SCMP’s readers, Mr Tsai (who owns 3.2% of Alibaba) celebrated the ‘iconic status’ of SCMP; its credibility and reputation at home and abroad, and claimed that the newspaper’s future challenges “play to Alibaba’s strengths.”

The strategy is to move to ‘other forms of distribution’ aside from print and existing online platforms, to social media and mobile. Mr Tsai said Alibaba will help SCMP ‘expand distribution without borders.’ SCMP Group had already moved into fashion e-commerce prior to this acquisition, a business the new owners will likely contine to enhance.

Buying influence: the political case

Ma’s purchase has been compared to the acquisition of The Washington Post in 2013 by Jeff Bezos, founder of Amazon. Ma paid a little more than Bezos did two years, but as Michael Forsythe of The New York Times noted, “in neither case does the purchase create obvious business advantages for the buyer.” So what do they want? Influence.

Immediately after the ‘Umbrella Movement’ ended with a whimper, Jack Ma was quick to set up a HK$1 billion entrepreneurship fund, and quipped that while he welcomes occupiers to apply for the fund, they require ‘discipline’, and that they need to ‘believe in our country.’ The Alibaba chief also serves as the adviser in a pro-establishment think tank, founded by Tung Chee-Wah, former Chief Executive of Hong Kong.

Against this backdrop, Alibaba has assured readers and speculators that editorial independence will be preserved. Yet this contradicts almost completely with the company’s stated goal of creating an alternative to the ‘singular thesis’ on China by the western press: “what’s good for China is also good for Alibaba,” Mr Tsai told The NYT. In furtherance of Alibaba’s (and the Chinese government’s) interests, SCMP may potentially run into political opposition in Hong Kong, where anti-Mainland sentiments are growing, and press freedom has been shrinking and hence seriously scrutinized in recent years.

Risks for investors: What’s next for Alibaba?

Should Ma move Alibaba towards further media acquisitions, investors should watch carefully what the company is buying next. In the past, Ma’s investment strategy has attracted criticisms, for his wide ranged and sometimes random purchases, including 50% stake in a Chinese football team. Although Alibaba has acquired media companies in China before, SCMP is the most high profile media acquisition thus far. It is also the first English-language newspaper under Alibaba’s ownership.

However, if Alibaba acquires further Hong Kong news outlets, it would be perceived as an attempt to neutralise opposition in the Hong Kong press, as Ma’s entrepreneurship fund in the wake of the Occupy Movement has been viewed unfavourably in some quarters.

SCMP’s acquisition could also pave the way for overseas acquisitions of media outlets, with the same ambition of providing an alternative view on China in western media; though this might attract local political resistance that is much more vehement than in Hong Kong.

It is important to note; however, that the cost of influence could be huge, as returns do not always show on the balance sheets. Alibaba will need to find a way to convince investors of the impact of these future media acquisitions, should they move towards this direction.

Conclusion: optimistic in the short term

Overall, political risks remain low for investors in Hong Kong. Civil unrest on the scale of last year’s Occupy Movement seem unlikely in the near future, as opposition parties turn in on themselves. Political resistance is minimal at this stage – there were a handful of ‘Socialist Action’ protesters outside SCMP’s office last week. The SCMP readership should be cautiously receptive of the new owners.

But risks lie further ahead. The political case for acquisition is as strong, if not stronger, than the business case. Tsai’s letter to SCMP’s readers and subsequent interviews have confirmed that the portrayal of China in a more positive light is part of the rationale behind Alibaba’s acquisition. Failure to deliver on the promise to move SCMP onto digital platforms will not damage investor confidence, but lead to curious stakeholders questioning Alibaba’s motives, and whether SCMP should serve as an influential but barely profitable arm of Ma’s vast commercial empire.

Categories: Asia Pacific, Economics

About Author

Noah Sin

Noah Sin works in strategic communications for world leading government institutions, foundations and businesses. Previously a freelance journalist, Noah has written for The Independent, New Statesman magazine and more. Noah holds a MSc International Relations degree from the London School of Economics (LSE).