August 1, 2014, 11:09 AM

Alibaba bids for mobile mindshare with $120 million investment in U.S. game developer

Kabam says the Alibaba tie-in will enable it to reach more gamers in China.

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Not waiting for an expected IPO windfall to go on a shopping spree, Chinese e-commerce giant Alibaba Group Holding Ltd. announced today the latest in a string of deals, investing $120 million in U.S. mobile game developer Kabam.

While Kabam is based in Silicon Valley, the deal is clearly aimed more at Alibaba’s fierce rivalry with Chinese mobile messaging and gaming giant Tencent than on expanding Alibaba’s presence in U.S. online retailing. The deal was announced in Shanghai at a digital entertainment trade show, ChinaJoy, and Kabam CEO Kevin Chou emphasized that he had his eyes on China with the Alibaba deal.

“Truly successful games companies have to be globally successful,” Chou said in a keynote address to the conference in which he announced the Alibaba investment. “This strategic collaboration with Alibaba provides Kabam the resources, infrastructure and distribution to help bring our current and future durable franchise games to China and elsewhere in Asia and make an immediate impact.”

Kabam opened an office in Beijing four years ago and developed there some of its successful games, including “The Hobbit: Kingdoms of Middle-Earth” and “Kingdoms of Camelot: Battle for the North,” each of which grossed more than $100 in revenue, the company says. Kabam says its 2013 revenue totaled more than $360 million, a 100% increase from 2012.

“Alibaba is committed to collaborating with great games companies like Kabam to deliver captivating digital entertainment offerings to our users,” Patrick Liu, president of Alibaba’s digital entertainment unit says. “The Kabam team has a track record of innovation and a strong entrepreneurial spirit, and this is exactly the type of company we want to support.”

This deal is an example of China's three Internet giants—Alibaba, Tencent and leading search engine giant Baidu—investing in each other's primary arenas, "not to rival and/or beat each other, per se, but rather to deny each other undisputed dominance in any one vertical," says Ernie Diaz, director of marketing for Beijing-based marketing agency Web Presence in China. "I don't think Alibaba has any serious plans to actually contend with Tencent in the gaming space, but rather to beef up its portfolio."

"Keep in mind," Diaz adds, "that these enormously profitable Chinese companies have a very limited range of options for parking and/or growing profits on the mainland, so naturally they're investing overseas, in areas they're familiar and synergistic with."

Alibaba’s investments in digital entertainment include a deal announced last month with U.S. studio Lions Gate Entertainment Inc., producer of such movie franchises as “Twilight” and “The Hunger Games,” to develop a service that would deliver streaming video to the TV sets of Chinese consumers. The Chinese e-commerce leader also has been aggressively targeting China’s 527 million smartphone users, according to the China Internet Network Information Center, of whom 190 million play mobile games, according to Beijing market research firm iResearch. Rival Tencent makes most of its revenue from serving games to users of its popular QQ and WeChat mobile messaging services. Alibaba has countered with investments in the Twitter-like Sina Weibo and in March led a $280 million funding round for mobile app messaging maker Tango, which, like Kabam, is based in California’s Silicon Valley.

Alibaba, which generated free cash flow of $5.2 billion in the 12 months ended March 31 and had $7.0 billion in cash at the end of that fiscal year, has also made major investments in e-commerce in the United States. The company led a $206 million funding round last year in ShopRunner, a shipping service for U.S. retailers that competes with Amazon.com Inc.’s Prime, and recently announced a deal with ShopRunner to make it easier for Chinese consumers to receive goods purchased from U.S. online retailers. Alibaba also participated last year in a $170 million funding round for e-retailer Fanatics Inc., No. 42 in the 2014 Internet Retailer Top 500. The Chinese company last fall opened an office in Silicon Valley to pursue more investments in U.S. technology firms.

Alibaba has announced plans to go public on the New York Stock Exchange and that IPO is expected to take place in the next few months and bring the Chinese e-commerce giant some $20 billion in additional capital.

Most of Alibaba’s revenue comes from its two giant online marketplaces in China, Taobao and Tmall, which handled $248 billion in retail purchases in 2013, and which Internet Retailer estimates accounted for more than 80% of Chinese e-retail spend. IResearch recently raised its estimate for 2013 online retail spending in China to $306 billion from $299 billion, based on data in Alibaba’s IPO.

While Alibaba is not yet a major e-commerce player in the United States, it launched its first U.S. online marketplace in June with 11Main.com, a portal that offers the wares of independent retailers. The company, which is legally based in the Cayman Islands, is likely to have plenty of cash to spend in the U.S. and other Western markets as it has said in its IPO filings that it does not intend to repatriate any of the IPO proceeds to China.

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