Summary of Key Points
To fully advance its "AI + Cloud" strategy, Alibaba has once again sold one of its businesses—this time, the profitable Lingxi Huyu (valued at over $1.5 billion). This move signifies that Alibaba is completely abandoning the "large ecosystem strategy" it has pursued for more than a decade, which aimed to have a wide range of diversified businesses, and is now focusing on a few core areas strongly related to AI. At the same time, Alibaba's investment in AI has entered a phase of significant capital expenditure (with plans to invest over $380 billion in the next five years), increasing its financial pressure. However, its AI initiatives are showing signs of growth. The entire internet industry is shifting from trying to do everything to focusing on AI, making Alibaba's story simpler but also more risk-intensive.
1. Why Sell a Profitable Gaming Company? How Determined Is Alibaba’s Strategic Shift?
Lingxi Huyu was no loss-making venture; it owned popular games such as "Romance of the Three Kingdoms: Strategy Edition" and "Ruyuan," with revenue expected to reach 3-4 billion yuan in 2025 and a net profit of 1.5-2 billion yuan, resulting in a net profit margin as high as 66% (much higher than many industries). Previous sales of businesses like Intime and Gaoxin Retail were due to their losses. However, the sale of Lingxi Huyu indicates that Alibaba's strategy has changed: any business that is not related to AI + Cloud, even if profitable, will be cut off.
The reason, according to internal communications at Alibaba, is strategic focus. With the intense competition in AI, the company wants to allocate all its funds, talent, and resources towards AI. Although Lingxi Huyu was profitable, it was not directly tied to AI, so selling it for cash can be used to invest in more promising AI-related businesses. It’s like owning a supermarket that also sells bubble tea; if you realize a new energy business is more promising, you would sell the bubble tea shop and invest all the money in that area.
2. Why Has the Once-Legendary "Large Ecosystem" Strategy Become Ineffective?
After winning in the mobile internet sector, Alibaba liked to diversify into various areas such as e-commerce, offline retail (Intime), local services, logistics, and gaming, building a large ecosystem with the goal of creating a closed loop of traffic and cross-business referrals (for example, using Taobao to drive traffic to Intime). Zhang Yong, former COO of Alibaba, described this as "galaxy evolution"—new businesses growing from the e-commerce hub.
However, this approach is no longer effective after 2024. Many non-core businesses (like Intime) not only failed to complement each other but also resulted in losses (losses of 9.3 billion yuan and 13.1 billion yuan respectively). Additionally, with the advent of the AI era, a "large and comprehensive" approach is less effective than a "smaller but more focused" one. AI requires substantial investment, and dispersing resources across multiple businesses is less efficient than concentrating on AI. Alibaba aims to transform from a business platform offering everything to a technology company centered around e-commerce, cloud services, and AI.
3. Is AI a "Money-Eating Black Hole"? The Financial Pressure Behind Alibaba’s $38 Billion Investment
Developing AI is not easy; it involves purchasing servers, building data centers, and conducting research and development, all of which are costly. Alibaba plans to invest at least $380 billion in the next three years (more than the total investment of the past decade), with the goal of expanding its data center capacity by tenfold.
This has a direct impact on Alibaba's finances: net profit is expected to decline by 19% in the fiscal year 2026, and capital expenditure has increased by 46%. Free cash flow, which was a net inflow of 73.8 billion yuan last year, has turned into a net outflow of 46.6 billion yuan this year (free cash flow refers to the money available for discretionary use; a negative figure indicates a shortage of funds). Alibaba CEO Jack Ma even stated that profit margins are secondary to expanding AI capabilities.
4. Alibaba’s Story Has Simplified, but Risks Have Increased
Alibaba now has only three core businesses: Taobao (an entry point for AI-powered consumer experiences, such as smart recommendations and AI-assisted shopping), Alibaba Cloud (AI-based cloud services providing computing power to companies), and Qianwen (AI-powered office tools, such as intelligent document management and meeting solutions). With a streamlined business focus, Alibaba’s mission is clear: all efforts are directed towards AI. However, this also means greater risks:
Previously, Alibaba could use ecosystem synergy to justify losses in certain businesses. But now, if its AI initiatives fail, there are no other businesses to cushion the impact. The capital market will evaluate Alibaba based on different criteria, focusing on AI revenue growth and profit margins, rather than the number of businesses it owns.
5. The New Trend in the Internet Industry: From "Large and Comprehensive" to "Focus on AI"
Alibaba is not alone in this trend. ByteDance also sold its gaming business, Mutong Technology (for over $6 billion) and merged its Lark team into the AI department. Internet companies are all simplifying their operations by selling non-AI-related businesses and concentrating resources on AI.
The reason is that AI represents the key to the next era. Those who lead in AI will control the future. The "large ecosystem" strategy of the mobile internet era is outdated. In the AI era, precision and focus are essential; instead of spreading resources across multiple businesses, it’s better to invest all efforts into one AI-related area and bet on the future.
For consumers, this means that internet products will become more AI-driven (e.g., smarter product recommendations on Taobao, more efficient office software). However, it also means that more companies may sell off non-core businesses as part of this industry transformation driven by the AI competition.
Discussion Topic: Which Business Do You Think Will Help Alibaba Secure a Place in the AI Era?
(Taobao’s AI-powered consumer services, Alibaba Cloud’s AI-based cloud solutions, Qianwen’s AI office tools, or something else?)
(Feel free to share your thoughts in the comments!)