How Does Alibaba Make Money?

Sep 9, 2013

How Does Alibaba Make Money?

By Juro Osawa

To get a glimpse of how Alibaba Group Holding Ltd.’s e-commerce sites work, meet Steven Wong. Mr. Wong, a 39-year-old entrepreneur who lives in Hong Kong, is a regular shopper on Taobao, China’s largest online marketplace run by Alibaba. His most recent purchase was a black T-shirt that said “New York” in white letters, which cost a little over $3. The transaction took place between Mr. Wong and the merchant who sold the T-shirt on Taobao, which serves as a platform where sellers and shoppers find each other.Taobao, which doesn’t charge transaction fees, makes money mainly through advertising purchased by merchants who use the site. That can generate a lot of revenue because there are about 7 million merchants –- mostly small businesses — using Taobao. Many merchants spend money on ads to make their products more visible, since there are more than 800 million items on Taobao.

Mr. Wong is also a co-founder of eyeglass retailer Lemon Optics, which operates seven brick-and-mortar shops in Shanghai. In June, the company opened a shop on Alibaba’s Tmall, a website that hosts storefronts for many brands like Nike Inc. and Gap Inc.

While almost anyone can become a seller on Taobao with little upfront cost, Tmall is a more exclusive site. Brands and authorized distributors pay deposits to open storefronts after going through a stringent verification process.

Lemon Optics, which sells glasses from Ray-Ban and other brands, had to pay Tmall a deposit of about $25,000 to open its store, and the site charges a commission on each transaction.

Still, Mr. Wong says the traffic Tmall generates is worth the cost. In July, Lemon Optics’ Tmall store sold about 1,000 pairs of glasses, double the monthly sales at each of its seven brick-and-mortar stores.

Last year, Taobao and Tmall together surpassed $160 billion in transactions and accounted for the majority of the company’s revenue.

Alibaba was founded in 1999 when Jack Ma, a former teacher, started Alibaba.com, a trading site that connects Chinese suppliers with domestic and overseas buyers, out of his apartment in his hometown of Hangzhou in eastern China. Over the past decade, the business has expanded rapidly with Taobao and Tmall.

Alibaba’s profit for the quarter ended in March more than tripled to $669 million, while revenue rose 71% to $1.38 billion. So far, the business model seems to be working.

So what’s next for Alibaba?

One big challenge is how to adapt its business as more Chinese consumers use mobile devices.

As Alibaba tries to lure smartphone users, it faces competition from other Chinese Internet giants such as Tencent Holdings Ltd.TCEHY +1.88%, which is also trying to beef up its mobile and online commerce capabilities.

Tencent’s WeChat smartphone messaging app has 236 million active users. Last month, it added electronic payment features to the app, a step toward turning the communication tool into an e-commerce platform.

Forrester Research analyst Bryan Wang says Tencent has a lot of potential because WeChat is a “very sticky” platform – many people use it all day long to communicate with their friends and family members. If the company can successfully integrate other services into WeChat, it could evolve into a major e-commerce competitor, Mr. Wang says.

Alibaba, meanwhile, has been trying to adapt by investing in an array of online services that are popular among smartphone users. It has bought stakes in Sina Corp.’s Twitter-likeWeibo microblog business and mobile mapping software firm AutoNavi Holdings Ltd. Last month, UCWeb Inc., which operates a smartphone Web browser and app store in China, said Alibaba’s Mr. Ma will take a seat on its board.

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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