Alibaba Braces for Mobile Revolution

Alibaba Braces for Mobile Revolution

JURO OSAWA

As Alibaba Group Holding Ltd. gears up for one of the largest Internet IPOs, the Chinese e-commerce giant faces a major challenge: how to cash in on the mobile Internet. Alibaba’s two online marketplaces, Taobao and Tmall, together handle more total dollar transactions than any e-commerce platform includingAmazon.com Inc. AMZN +0.60% oreBay Inc. EBAY +1.69% But more than 90% of those transactions come from PCs. As Chinese consumers increasingly use mobile devices for all kinds of online activities, Alibaba is trying to figure out how to defend its No. 1 position in China’s rapidly growing e-commerce market.Chinese Internet giants Tencent Holdings Ltd. TCEHY -0.10% and BaiduInc. BIDU +2.02% are muscling in to strengthen their own e-commerce and mobile capabilities. These companies all realize that they can no longer specialize in one area, such as e-commerce, social networking or search, as they compete for the limited time and attention of smartphone users.

“In the future, there will be more competition from all areas of the Internet,” said Alibaba Chief Executive Jonathan Lu, who took the helm in May when Alibaba founderJack Ma stepped down as CEO to become executive chairman.

Unlike Amazon, Alibaba doesn’t sell products but makes money through advertising and other services it offers to millions of merchants using its marketplaces.

To better prepare for the rise of the mobile Internet, Alibaba has been trying to gain control over key mobile services and technologies—be it mapping, social media or operating systems—to lure smartphone users to its marketplaces. It has spent about $1 billion in the past several months to buy stakes in an array of services.

How quickly Alibaba adapts to the shift will be crucial in the next phase of its growth. The company is preparing for an IPO that could happen as early as this year and value the company at $70 billion or more.

The same mobile question plagued Facebook Inc. FB +3.02% after its 2012 IPO that valued it at $100 billion. Facebook and Alibaba both rely on advertising revenue, and they are both fighting for consumers’ attention on mobile devices. Facebook started late and investors pummeled its stock as a result, but the company has since built a mobile business that generated 41% of ad revenue in the latest quarter.

In China, the world’s largest smartphone market, the consumer shift is particularly rapid. Chinese consumers are more likely to use their mobile devices to shop online than their global peers, according to a survey released in May by PricewaterhouseCoopers. Smartphone shipments in China are expected to nearly double to 352 million units this year, according to research firm Canalys, more than double the 140 million projected in the U.S. Even in smaller cities and rural towns, cheap smartphones are enabling Chinese consumers without personal computers to go online for the first time.

Alibaba’s Taobao and Tmall sites both have smartphone applications, but only about 7% of transactions on those sites came from mobile devices last year. Tmall hosts storefronts for many big brands like Nike Inc. NKE -0.61% and Gap Inc., GPS -0.64%while Taobao, China’s largest online marketplace, lists more than 800 million items from some seven million merchants, mostly small businesses.

To draw more users to those marketplaces, Alibaba has formed alliances in social media and mapping, key battlegrounds for mobile-based services.

Last month, Taobao started integrating its service with Sina Corp.’s SINA -2.76%Twitter-like Weibo microblog, after Alibaba paid $586 million for an 18% stake in the business in April. Products that are listed on Taobao can now be purchased on Weibo—somewhat like buying eBay items on Twitter. “Weibo brings a new and large source of traffic into Tmall and Taobao, and that’s what the sellers need right now,” said Mr. Lu.

In May, Alibaba agreed to buy a 28% stake in Chinese mobile mapping firm AutoNavi Holdings Ltd. AMAP +0.77% Using AutoNavi’s data, Alibaba could, for example, offer location-based ads and product information to smartphone users.

Alibaba is also promoting its own smartphone operating system, giving subsidies to handset makers using the Alibaba Mobile OS and funding app development. That strategy has faced a setback, however. A year ago, Google GOOG +0.00% objected to the release of an Alibaba OS-based smartphone by Acer Inc. 2353.TW -1.00% —a member of the Google-led Open Handset Alliance—saying that the Taiwanese computer maker couldn’t work with a noncompatible version of Android. Alibaba rejected the view that its OS was an Android variant, but the Acer phone was never released.

To be sure, Any threat to Alibaba’s e-commerce dominance isn’t immediate. The company’s profit for the quarter ended in March more than tripled to $669 million, while revenue rose 71% to $1.38 billion. Tencent’s online commerce operations are still tiny by comparison. Alibaba also has expertise with running an e-commerce business, which involves many offline operations such as logistics, and its affiliate electronic-payment system, Alipay, plays an instrumental role for its shopping sites.

Even so, analysts say Tencent has potential to grow fast because its WeChat social messaging app has 236 million active users, many of which use it all day long to communicate with friends and family. If the company can successfully integrate other services into WeChat, it could evolve into a major e-commerce competitor. Tencent added electronic payment features to the app in August, a step toward turning the communication tool into an e-commerce platform.

Alibaba began fighting back last month when it started blocking sellers on Taobao and Tmall from subscribing to marketing and promotion apps linked with WeChat. Merchants on Alibaba’s sites had been using such apps to send promotional WeChat messages to shoppers. Alibaba said it decided to do this because it received complaints from shoppers that they were getting too many spam messages.

Search company Baidu, meanwhile, struck two deals in August—one to buy 91 Wireless Websoft Ltd., which runs one of China’s largest mobile app stores, for $1.9 billion, and the other to take a 59% stake in popular Chinese group-buying site Nuomi for $160 million.

Alibaba’s Chief Strategy Officer Zeng Ming acknowledges both the competitive threats and the mobile opportunity.

“The fundamental assumption is that the mobile space could turn out to be 10 times bigger than the PC space,” he said, “and you have to compete very differently.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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