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Why is Alibaba investing in Snapchat?

Mar 12, 2015

Alibaba Group Holdings (baba) is spending big to gain a foothold in the U.S.

Its latest planned investment, a reported $200 million in the disappearing message service Snapchat, follows a string of major bets aimed at boosting Alibaba's reputation in the U.S., where a record-setting IPO mixed with high-profile startup investments could pave the wave for real business opportunities. Last week, for example, Alibaba said it was opening cloud computing services in Silicon Valley.

There’s no talk of Snapchat coming to China, where its service is banned by the government. Instead, Snapchat is the most recent American startup Alibaba has supported in its bid to become a player in the West. Alibaba’s investments began in the summer of 2013 when it spent $170 million for a stake in sports ecommerce site Fanatics and continued after it invested $206 million in shopping service Shoprunner, $280 million in social messenger Tango, $250 million in ride sharing service Lyft and $120 million in game developer Kabam.

Easy come, easy go: Alibaba and Tencent have both spent freely in the U.S. Source: CB Insights 

The Snapchat deal also represents the latest in an arms race between Alibaba and Tencent Holdings Ltd (tcehy), China’s two strongest tech giants, who are vying for power. Alibaba spent more than $9 billion last year on acquisitions and investments, according to a Credit Suisse tally, compared to Tencent’s $5.5 billion. The figures reflect the frantic pace in which China’s tech giants are spending— what one analyst told me this week amounted to a “feeding frenzy.”

(So far, the market hasn't thought much of Alibaba's use of the money it gave the company last year. Its shares have lost a third of their value since peaking in November, and are currently only just above the all-time low of $80.39 that they hit last week.)

Snapchat is one of the hottest startups in the world. It says its young users, mostly teenagers, view 700 million ephemeral “snaps” a day. What’s rare about Alibaba’s Snapchat investment, should it move forward, is that Tencent is already backing the L.A.-based company. In mid-2013, Tencent reportedly was part of a $60 million fundraising round that valued Snapchat at $800 million. Since then, however, emails released during the Sony hack last year indicate that Tencent has cooled on the company. In one email, a Snapchat board member says Tencent’s venture capital team passed on a 2014 fundraising round because it thought Snapchat’s valuation had grown too high.

Alibaba doesn’t appear to be concerned with Snapchat’s skyrocketing valuation. An Alibaba spokesman didn’t return a request for comment. A Snapchat spokeswoman also didn’t return a request.

This wouldn’t be the first time Tencent and Alibaba have invested together: the Chinese taxi hailing apps, Alibaba-backed Kuaidi Dache and Tencent-backed Didi Dache, announced they were merging last month. And in 2013, Tencent and Alibaba jointly invested with China’s Ping An Insurance to create an online insurance seller.

From now on, Alibaba will probably be mentioned in new stories about Snapchat, which should burnish the Chinese e-commerce giant’s growing reputation in the West. Whether it will bring any concrete benefit to shareholders, however, may be a different question.

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