Understanding Alibaba’s Snapchat Obsession

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Understanding Alibaba’s Snapchat Obsession

Raising funding isn’t just about “how much?” but rather “from whom?” Beyond just providing the capital necessary to keep a startup growing — or even, simply, to keep it alive — taking “smart money” can unlock relationships, open doors and more.

Snapchat is back in the news alongside Alibaba, which is investing $200 million as part of a new $500 million funding round.

This is not the first time that these two companies have been linked with a deal. Bloomberg last July reported that the two sides had met regarding a potential investment at a $10 billion valuation. Leaked emails from Sony — including those of Sony Entertainment CEO and Snapchat board member Michael Lynton — subsequently backed up that story, but no deal was done. Until now.

Alibaba missed the messaging-app race in China.

So why is Alibaba, the company that dominates online retail in China and held the largest U.S. IPO in history last year, so interested in an ephemeral messaging app? And what value can it provide for Snapchat?

There’s plenty of scope for speculation, but one notable point is that Alibaba missed the messaging-app race in China. That’s its single-greatest failure as a business. With money to burn, it is making another small bet (comparative to its wealth) on a messaging app — don’t forget that it invested $215 million in Tango last year.

Messaging Potential

Critical to understanding Alibaba’s interest in messaging is that rival Tencent’s WeChat app utterly dominates China to the point that it can be considered the de facto mobile intranet for the country.

Want to chat to a friend, or groups of friends? WeChat. Want to post photos of a trip so friends will see them without having to satisfy a Facebook-style algorithm? WeChat. Want to gift relatives money for the Chinese New Year tradition? WeChat. Adding new business contacts after networking? WeChat. Booking a taxi? WeChat. Ordering food? WeChat.

It goes on …

WeChat, which counts nearly 500 million active users worldwide, has won the race in China. Past tense. Alibaba missed the messaging-app phenomenon entirely. It has since tried to get into the picture via its own chat app, but that failed to make a dent on WeChat. Alibaba’s latest pursuit is enterprise messaging with its new Dingtalk service. It’s too early to tell how that will go, but it won’t be a WeChat. That’s a one of a kind.

WeChat may be the common interface for how most Chinese use the Internet, but it hasn’t impacted Alibaba’s dominant e-commerce business. Yet.

Tencent invested in Alibaba rival JD.com last year and integrated its services into WeChat to enable users to shop from inside a JD.com-powered section of the app. That feature was later opened to any retailer — a powerful concept in a country where WeChat is the single-most dominant app.

That may not be enough to topple Alibaba’s empire, but, with mobile the primary Internet platform for China, it ticks all the right boxes for success. And, of course, had it been Alibaba that owned WeChat, it would be a hugely strategic asset for the company and its monetization of mobile. Although Alibaba’s mobile shopping apps are already proving successful in their own right, messaging could open the field even wider.

With that context in mind, Alibaba is keen on messaging — to put it mildly. So keen that it invested in U.S.-based Tango last year at a $1 billion-plus valuation, despite the fact that the service doesn’t lead any single global market and struggles with rival WhatsApp, Line, WeChat and other popular apps for attention.

Snapchat, on the other hand, is a prominent player, and perhaps the hottest startup on the planet right now. It doesn’t provide user metrics, but the app is believed to have over 100 million active users, mainly in the U.S. That puts it near the top of the pile in the States, a part of the world where Alibaba barely exists.

E-Commerce Possibility

With Snapchat blocked in China and WeChat dominating the social network/messaging space, the most obvious collaboration is e-commerce.

Snapchat early rise to prominence may have ridden on its reputation as a “sexting” app, but it has evolved far beyond that today.

Had it been Alibaba that owned WeChat, it would be a hugely strategic asset for the company and its monetization of mobile.

The introduction of Discover has turned it into a media platform — and a legitimate one, too — with the likes of CNN, MTV and National Geographic providing content. Discover is only months old, but already early indicators suggest that it is generating attention among its youthful user base in the U.S., an audience that is prized by many, including retailers.

Snapchat previously took money from Tencent, a move that almost certainly helped Snapchat get savvy about messaging. CEO Evan Spiegel has been vocal in his admiration for the way that Asian messaging apps make money — via digital content, games, commerce, media and more. Those business models are likely to have shaped his thinking for Snapchat’s product roadmap and monetization plans, particularly as Tencent is an investor.

The first building block is already in place for Snapchat commerce: payments. The company launched its Snapcash service last year. Many speculated it would handle peer-to-peer payments using a Venmo-style model, but there’s certainly the potential to go way beyond that.

WeChat, Line (Japan) and Kakao Talk (Korea) have all introduced payment services in the last year, but it is WeChat (and Tencent) that has taken things the furthest. Beyond shopping inside custom-built stores inside its app, WeChat can be used to pay for bills and other utilities, and it has integrated China’s top taxi app.

Alibaba has taken a softly-softly approach to the U.S. It launched 11Main, an experimental e-commerce site, last year, but hasn’t made a big push yet. Clearly, Snapchat would be an interesting platform for any company looking to sell to America’s youth demographic, but it really isn’t clear how that could work for Alibaba.

But Bets Are Bets…

There is plenty of intrigue behind Alibaba’s investment. Beyond building an e-commerce empire, there’s no clear evidence that Alibaba can be a hugely valuable strategic investor at this point. Maybe it’s early days for the company, which has invested in Quixey, Tango and Lyft in the U.S., recently made its first investment in India, and has opened funds in Hong Kong and Taiwan.

Alibaba, for all its glory, has yet to really win in a business vertical outside of e-commerce and payments.

You’d imagine that Alibaba’s spread-bet approach to investing in messaging apps will disappoint the founders of Tango. It remains unclear how much attention that their service will get given the shiny new addition of a sexier rival in Alibaba’s portfolio.

Likewise, Snapchat seems likely to have rubbed existing investor Tencent the wrong way by introducing its arch-rival to the table. Tencent and Alibaba are involved in the merger of China’s top taxi-hailing apps, by virtue of respective investments in each one, but the duo are fierce rivals and often appear to make tactical investments aimed at countering each side’s business and holdings.

Tencent is, on paper at least, the smart money for a mobile messaging app since it operates the world’s most advanced and impressive chat app. Alibaba, for all its glory, has yet to really win in a business vertical outside of e-commerce and payments (via its Alipay affiliate) — efforts in mobile, cloud, messaging and banking are in embryonic stages or have stagnated.

The simple answer to all of this could just be that Alibaba is using its money to bet on the tech industry’s hottest players. That’s one theory put forward by a source close to Alibaba. You’d like to think that $200 million investments are more tactical in nature than just mere games of risk, but sometimes there’s a thin line between the two.

So, smart money?