The US IPO of China’s e-retail giant Alibaba ‘ set to be the largest in history – is likely to avoid the fate that saw Facebook lose half its stock price in its first four months as a publicly traded company. A key reason for that crash was the US company’s self-confessed lack of confidence about its mobile monetization strategy. By contrast, Alibaba has a strong mobile presence, with plans to expand its offerings in that area, and a clear idea of how to turn all that into revenue.
This is partly because, as Amazon knows, mobile access can drive increased shopping, whereas it has the opposite effect on Facebook’s main revenue stream, advertising. Alibaba’s current model of high-volume low-margin transactions could be poised on the edge of a global expansion, taking the fight to eBay and Amazon in markets where margins are far higher than in China.
Alibaba is expected to raise around $20bn dollars with its IPO, making it the largest US public offering ever. The company decided to file in the US after its board member voting policies were rejected by the Hong Kong Exchange.
The comparisons with Facebook are unavoidable. The social networking giant filed for public offering with almost no mobile revenue and saw its stock price plunge. It now generates 59% of its ad revenue from mobile and has clawed back some of its share price. The saga reflects the importance of mobile broadband in bringing unconnected users online, and China differs from Facebook’s core markets as mobile devices are far more prevalent for internet usage, and consequent online shopping purchases.
That means that the mobile business model Alibaba will bring with it is already on show in China. In June, it plans to offer a 3G service as an MVNO of all three state-owned operators (China just recently opened the market to virtual operators and compelled the network owners to support a certain number). As an MVNO, Alibaba will sell its mobile packages through its Taobao and Tmall sites, with transactions handled by its electronic payments affiliate spin-off Alipay.
But Alibaba is not simply selling minutes and data, it is ‘ again like Amazon- building a complete services and shopping platform which will drive more compulsive digital purchasing. It has plans to push the Alibaba Mobile Operating System (AMOS) onto handsets as the basis of that platform. It has been paying five Chinese manufacturers a fee of $1.92 per year for each handset sold running its OS and is also trying to attract app developers with a fund and revenue-sharing incentives. These tactics are reported to have led to sales of one million handsets in a year, though hard figures since are hard to come by.
AMOS, also called Yun OS and Aliyun, is built on the Android codebase and developed by Alibaba subsidiary AliCloud. It was released in July 2011, with the first device to run it being the K-Touch W700. It aims to integrate cloud functionality with the handset, providing users with 100GB of storage to use for their files.
The company’s Taobao app has been the most popular m-commerce app in China since August 2012. China has upwards of 500m mobile users, and Alibaba claims in its IPO filing that ‘our mobile apps are top-of-mind commerce apps among Chinese consumers, and we believe that our leading market position in mobile commerce reflects the strong brands of our China retail marketplaces. We intend to build upon our strength in mobile commerce to develop a broader spectrum of consumer offerings.’
It also claims that its Chinese retail marketplaces have a gross merchandise volume of $248bn from 231m active buyers, with $37bn (19.7%) attributable to mobile sales. It says it holds 76.2% of all mobile retail value, with 136m monthly active users. The online retail sector currently accounts for only 7.9% of Chinese total consumption, so there is still a lot of headroom for expansion.
The big question is how far it will look outside China for that expansion. The company is strongly embedded in its homeland’s technology market, with its mobile and cloud offerings funded from the success of its retail divisions. But a US filing could herald a move into new regional markets using the IPO as a PR stage to attract new customers.
Any expansion in North America and Europe would see it compete directly with eBay and Amazon in the retail market. Alibaba’s ability to succeed even with low profit margins is even greater than Amazon’s and could see it viciously undercut the incumbents, pricing them out of their home markets. It could also bring its aggressive acquisition strategy to western markets ‘ it has spent almost $4bn in the past three months alone. The IPO looks likely to value the whole company at around $200bn ‘ more than enough to begin buying up western businesses to add to the sprawling Alibaba empire.
Alibaba clearly plans to expand its mobile reach, but it also recognizes the challenges, and how critical good mobile services will be to its success or failure in future. In a filing, the company warned investors that ‘user behavior on mobile devices is rapidly evolving, and if we fail to successfully adapt to these changes, our market position may suffer. If we are unable to attract significant numbers of new mobile buyers and increase levels of mobile engagement, our ability to maintain or grow our business would be adversely affected.’
Alibaba posted nine-month revenues of $26.5bn for the period to December 31 2013, with net income of $2.9bn. Yahoo plans to sell a 9% stake in the Chinese firm, out of the 22.6% it currently holds, which could create a windfall of up to $15bn to help pursue its own mobile expansion, Japanese telco Softbank also holds a 34.4% stake in the business.
The F-1 IPO registration document spans more than 2,300 pages, but omits and obfuscates many key details including a company market value, an IPO price, a stock symbol or even the precise stock exchange where the shares will trade ‘ a choice of New York or Nasdaq that hasn’t yet been finalized. The lack of minutiae may be linked to the disclosure restrictions mandated by Chinese law. The company also said it was not bound by US securities regulation to provide detailed financial statements after the IPO ‘ a lack of transparency that may worry potential investors.
The filing also outlined Alibaba’s deployed technology. It claims to employ 7,000 engineers to build and maintain its systems, which include the Aspara cloud computing platform. Aspara is a general purpose distributed platform that can bundle up to 5,000 servers into a cluster with 100 petabyte storage capacity and 100,000 CPU cores. Alibaba calls the system elastic computing, and says it provides a flexible and scalable service to customers.
This platform forms the backbone of Alibaba’s other offerings, which include a data science division that handles the Alimama deep learning and analytics for accurate marketing and promotions. The data mining and transaction analysis are used to monitor the Alibaba market places and also assess the risks in its SME loan business.
The AliCDN is claimed to be the largest CDN in China, and the company also believes that its OceanBase database management system is the largest transaction processing platform in the world. It is challenging Microsoft’s Azure and Amazon Web Services in the Chinese markets, but this could soon become a global fight rather than a national one.