The deal underscores the growing rivalry beetween China's two Internet giants - Alibaba and Tencent Holdings Ltd - as they attack each other turf.
Alibaba's Youku Tudou investment is the third major media acquisition by the company and its founder in less than two months and brings Alibaba's deal making spree to nearly $4.0 billion in the past six months.
"Alibaba and Tencent are clearly not wanting to run the risk of the other company buying something useful," said Duncan Clark, chairman of Beijing-based tech advisory BDA.
Alibaba and Yunfeng Capital are paying $30.50 per American Depositary Receipt of Youku, or a 26.3 percent premium over the last traded price, Youku Tudou said in a statement on Monday.
The two companies will jointly own a 18.5 percent stake in Youku, whose online video services resembles Google Inc's YouTube. Alibaba CEO Jonathan Lu will join Tudou's board.
"Alibaba's investment will strengthen Youku Tudou as China's largest online video platform and further differentiate our services and user experience," Victor Koo, chairman and chief executive officer of Youku Tudou said in a statement.
Alibaba is preparing for a U.S. initial public offering, which could raise more than $15 billion, Reuters previoulsy reported.
Chinese private equity firm Yunfeng Capital was co-founded by Alibaba's Ma and is raising up to $1 billion in its second fund, Reuters previously reported.
"If Alibaba can try to find traffic in the media world that's driving all the eyeballs and make a consumer play that's desirable," Clark added.
"For Alibaba anything to boost their consumer facing non e-commerce business is useful, though I don't know whether they can make money or not," said Clark. "As with YouTube, it never made Google much money but it did help them boost traffic," he added.
Last month, Tencent and online retailer JD.com agreed to combine their ecommerce operations to take on dominant rival Alibaba, a move that also took an aim at Alibaba's weakness in mobile busines.
That deal gave JD.com a headline slot on Tencent's WeChat app that dominates China's smartphones, an entry into eBay-style consumer-to-consumer shopping and a backer with the muscle to help it make the most of a logistics infrastructure that Alibaba lacks..
In March, Alibaba agreed to fork out $804 million to take a 60 percent stake in ChinaVision Media Group Ltd, a Hong Kong-listed film and television producer and distributor.
Earlier this month, Ma and co-founder Simon Xie agreed to take a 20 percent stake in online media company Wasu Media Holding Co., a cable and TV company which also manufactures Internet TV set-top boxes, for 6.54 billion yuan. The investment was made via Hangzhou Yunxi Investment Partnership Enterprise using a loan from Alibaba.
ChinaVision and Wasu Media each said they would seek to explore future opportunities with Alibaba, in online entertainment and integrated television respectively.
Morgan Stanley is advising Alibaba, while Goldman Sachs is Youku's financial advisor.