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Alibaba buys $1.2B stake in Youku to bolster its video portfolio ahead of its IPO

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Chinese internet giant Alibaba has bought a $1.22 billion stake in the Chinese video service Youku Todou. (S YUKO) The investment was made in conjunction with Yunfeng Capital, a private equity fund that is led by Alibaba’s founder Jack Ma, and it will result in a combined stake of 18.5 percent.

The investment comes just days ahead of Alibaba’s expected U.S. IPO, which some expect could be even bigger than Facebook’s (S FB) record-breaking public offering two years ago. Recent analyst estimates peg Alibaba’s value between $150 billion and $200 billion.

By buying a stake in Youku, Alibaba is filling a void in its consumer web business, and is more directly taking on Chinese competitors like Tencent and Baidu, (S BIDU) both of which have their own video offerings.

But the investment is also a testament to the changing video landscape in China. While video services initially in the country were initially able to reach hundreds of millions of viewers on a budget, they’re increasingly investing in premium and original content, which comes with ever-increasing price tags. It’s expected that Youku Todou will invest a significant amount of the new money in content, while also trying to take further steps into the living room.

Youku launched in 2003 as a kind of Chinese YouTube, (S GOOG) but the service has long been working on becoming something more akin to China’s Netflix.