Business news junkies were in heaven last week with the continuing coverage of Alibaba’s IPO. A search on those two words delivered, on Saturday at least, 129k articles on the topic, and easily that many more on things like Founder and Chairman Jack Ma’s likely net worth after the IPO (~$15 billion if not more), what he hates about business (business plans – says he never had one and never will), his philosophy on building a business (start with no money – it makes you appreciate value and make tough choices) and more salaciously, what Alibaba is likely do with the billions of dollars raised thru the IPO (most people think buy Yahoo – which after it divests itself of Alibaba could be bought for Jack Ma’s pocket change).
What wasn’t covered much was the implication to payments, and in particular, the players that play in the payments sandbox today. I think that’s the sleeper story of the year, and has probably the biggest impact of all to the world in which each of you operates today.
To understand what I mean, let’s start by taking a look at the Alibaba ecosystem, the one that the S1 says that Alibaba’s investments will “expand, complement and strengthen.” Oh, and IPO notwithstanding, Alibaba’s investment slush fund today has $7.9 billion cash on hand and just about $5 billion in free cash flow. To put this in context, that’s about $1.5 billion less than Google’s and maybe a smidge more than eBay’s (which is roughly $1 billion a quarter). And that’s after its multi-billion spending spree of the last several months.
Everyone knows Alibaba for, well, Alibaba, specifically Alibaba.com, the online marketplace that, like eBay, matches buyers and sellers and enables secure payment between parties. But the buyers and sellers that Alibaba.com enables are businesses that want to trade with each other. Alibaba is reported to be the largest online B2B trading platform for small business in the world, enabling trading across 240 countries and regions. Alibaba also operates something called 1688.com which enables domestic Chinese buyers and sellers to trade together and AliExpress.com which enables smaller businesses to trade at wholesale prices. 1688.com is said to drive $30 million a day in volume.
The consumer commerce faces of Alibaba are Taobao and Tmall. Taobao was founded in 2003 and enables consumers to sell stuff to each other just like eBay does. Tmall was established in 2008 and offers Chinese consumers the chance to buy from a variety of global brands that wish to list their products for sale in the mall. Global brands want to do that for the obvious reason – to reach the emerging middle and wealthy class Chinese consumers with lots of money to spend and a desire to buy designer brands. Setting up a physical shop in China is onerous (you actually have to invest in an existing business there) and comes with the government having to approve the transaction which could cost tons of money and take years, with no guarantee that approval will be granted. Alibaba’s investment in and plans for ShopRunner now give global brands a slick and potentially far more powerful way to do that. (For the scoop, check out the piece I wrote last year on ShopRunner which then speculated on their reasons for the investment, and had that prediction proved out last week when the company revealed its plans.)
Like eBay, Alibaba recognized that it needed a payment method to enable transactions between buyers and sellers who didn’t know each other. Chinese consumers were used to paying cash in stores and paying with plastic—with debit or credit—was a pimple dot of a payment method – they still are; that’s changed recently in major cities but nowhere like the US. Alipay became an online payment method that allowed Chinese consumers to link a Chinese bank account to their AliPay bank account and buy online.
To inspire trust and ignite its marketplace, Alipay had to enable buyers to inspect goods before having their accounts debited for the merchandise. The Chinese consumer, in particular, was used to paying for online purchases via Cash on Delivery so that they could reject items that weren’t as advertised. AliPay has an escrow component associated with it so that consumers could inspect merchandise before agreeing to take ownership of it and pay for it. And in the little known fact category, to further prove that Alibaba was a trustworthy marketplace, in the beginning, Jack Ma and his team bought one of every single item advertised on Alibaba to show how much they trusted the sellers, hoping that would help inspire other buyers to buy too.
It must have really helped.
In 2013, 231 million customers bought more than $248 billion of merchandise across all of Alibaba’s eCommerce enterprises which, as has been pointed out numerous times, is more than what was sold on eBay and Amazon combined. Alipay, which is a common payment method off Alibaba too, posted payments volume of $519 billion that year. Alibaba’s S1 also stated that it drove 76 percent of mobile commerce volume in China in 2013.
Okay, so Alibaba would be scary enough if that were all it did. But, to fully understand its potential as a global commerce game-changer, one has to fully appreciate its entire ecosystem. Over the last several years, Alibaba has made a bunch of strategic investments and acquisitions that completely surround the Chinese consumer, touching just about every aspect of their everyday lives.
Shopping isn’t just now about hanging out on existing Alibaba properties. Alibaba acquired a 35 percent stake of InTime Retail (for $692 million) which owns department and grocery stores across China. Tmall will have access to InTime’s merchandise and consumers will be able to pick up online orders in store or have them delivered 24 hours later. In fact, Ma says his goal is to operate the largest network of stores that can deliver merchandise to Chinese consumers in 24 hours.
Investments in logistics pay off that promise. Alibaba has joined forces with five delivery companies to create Cainiao Internet Technology and will invest $16 billion over 8 years to build out that logistics network. One of the likely beneficiaries of that is ShopRunner which will no doubt need logistics to streamline the timely delivery of merchandise from the US. Alibaba also made an investment in 1st dibs (antiques e-marketplace) and Lyft, the Uber competitor. This is interesting since Alibaba has been subsidizing Chinese taxi drivers and the riders in order to get consumers to establish and use mobile AliPay accounts (that just recently ended).
Banking and Investments are also areas in which Alibaba has made investments. With the support of the Chinese government, Alibaba has established an investment services platform called YuEBao by buying a controlling stake in Tianhong Asset Management Co, which runs China’s biggest money market fund. It claims 81M customers as of the end of February 2014, up from 43M at year end 2013. It claims that it adds 667k users every day. It also invested $532 M in Hundsun Technologies, China’s largest supplier of trading and financial services software, giving it access also to financial data generated by the firms that use it. The news recently has been about how the Chinese central bank has imposed restrictions on these financial activities—but that’s a “glass a little bit empty story”; the important point is that they’re being allowed to offer financial services in big way.
Lending is another service that Alibaba extends, mostly to businesses. Its financial services arm, Alibaba Small and Micro Financial Services Group, consists of two loan companies. The typical loan size is ~$6400 to those businesses operating on its ecommerce platform. Alibaba extends those loans based on information that it collects from transactions taking place on Taobao. It claims a non-performing loan ratio of 0.87 percent, lower than what commercial banks in the country claim (0.96 percent on average). While data about lending volume vary, the FT reported that it had extended $600m of loans by the end of 2012 and was expected to lend $2bn by the end of 2013. On regulatory restrictions, the same point as above, yes some new restrictions but there in this is a big way.
Search and Sharing are also areas in which Alibaba has invested aggressively. Over the last several years, it has acquired mapping firms, video call applications, messaging applications, made investments in China’s Twitter (Weibo), YouTube (Youku Tudou) and search engine for mobile app discovery. And, it has made several massive investments in content providers, ratcheting up its investment in ChinaVision to control ~71 percent of the company. ChinaVision calls itself an “integrated cultural corporation” with a focus on TV, film, print media and mobile. This investment follows its launch of the AliTV operating system in July of 2013 and mobile gaming platform this year.
So, when Yahoo CEO Marissa Mayer talks about Yahoo wanting to embed itself in the “daily habits” of consumers, she must have been studying the business strategies of her biggest contributor to revenue, Alibaba. (Of course Yahoo would have a loooong way to go to achieve that.)
But, that’s precisely what Alibaba has done in China and will obviously continue to do as it bolsters its cash reserves with proceeds from the IPO. Now, it’s able to do some of this because the government has allowed players like Alibaba (and its biggest internet rival, Tencent) to do things that companies in the US have never been allowed to do, like expand into financial services. But it appears clear that Alibaba’s focus is on surrounding the Chinese consumer with important services that touch just about aspect of their daily lives. And payment, as it turns out, is incredibly important to enabling and monetizing that in and outside of China – from shopping to buying games and digital content (like TV and movies and music) to accessing funding sources for making investments.
Most of the coverage of Alibaba and its IPO to date though has been about how most of its investments will be focused on expanding its presence in China – almost a “not to worry folks” message, assuming that Ma and company will be too busy duking it out with Tencent to worry much about anything outside of China for a while. The part about duking it out with Tencent is true since Pony (Ma) Huateng, Tencent Founder and CEO isn’t likely to give up his spot as China’s top billionaire easily. Tencent has also made dozens of investments in payments, financial services and content as well over the last several years. For those of you who are not familiar, Tencent is China’s largest internet company and is interested in payments and commerce too. They are approaching it in a very different way, leveraging its massively popular and almost ubiquitous messaging platform QQ on the desktop and WeChat on mobile as the cornerstone for igniting it. In China, as in the US, the battleground is all about mobile, an edge that today goes to Tencent and WeChat given its start as a mobile messaging platform and one of the reasons why Alibaba is making aggressive moves into that area.
But what people naively overlook is the endgame for Alibaba (and Tencent, as well). Both want to be global powerhouses and the Chinese government has a big incentive to support that ambition. There’s a reason that they have relaxed regulations and allowed Alibaba and Tencent to do things like branch out into investments and other banking services. It also why the government is so reticent to create competition in China for either of these two companies. One can debate whether non-Chinese companies have had trouble getting a foothold in China because they just haven’t been up to the task or whether the Chinese government places the thumb of balance in favor of domestic firms—in fact it is probably both. But the fact of the matter is that company after company after company that has tried to make a go of it in China has folded up its tent and moved on. Facebook’s WhatsApp probably won’t get much traction in China. But WeChat could easily get traction outside of China. And, that’s a huge delta in the potential market size.
Meanwhile Alibaba has been racking up AliPay accounts like mad. They say they have 550 million of them today, and more than 200 million mobile users. It’s also been reported that 618 million Chinese have access to the Internet today (2x the size of the US), which represents less than half of the Chinese population. That means that there are a lot of Chinese consumers waiting in the wings to create digital accounts that they can use to shop ‘til they drop.
Accounts, of course, that will, if Alibaba has its way, be used at places all over the world to buy stuff, bringing with it the incremental customers and spend that is music to a merchant’s ear.
Take ShopRunner, for instance. I’ll bet that emails have been buzzing since the WSJ article was published. What could be easier than putting your storefront on the ShopRunner digital mall that you gotta believe will accept AliPay at some point soon to get access to real honest-to-goodness incremental customers? And, that could at some point in time also extend online payment those merchants offline?
If I were a betting women, I’d bet that Alibaba will use some of its money to buy up the coolest e-marketplaces and multichannel retailers all over the world to create onramps for their AliPay customers to use their accounts so that commerce via Alipay can be extended all over the world. A Yahoo purchase gives Alibaba a big turnaround headache and possibly a management distraction that it doesn’t need. Frankly, I’m puzzled that so many pundits think that Alibaba really wants a portal anymore than it wants to buy daily newspapers. Buying e-tailers expands it commerce sandbox by offering a pretty big incentive of incremental customers to grease the skids and much more of a potential upside.
In addition to new customers and spend, Alibaba also brings a new business model to the global payments and commerce party. Alibaba makes its money today on advertising, 85 percent of its revenues are derived from advertising revenues. It charges no transaction fees. Although it has partnerships with Visa and MasterCard, few Chinese consumers attach those cards to their Alipay accounts. A business model that eschews transaction fees for a percentage of sales could certainly ignite the places where Alibaba wants to extend AliPay acceptance and completely disrupt the payments landscape by forcing down the cost of “traditional” acceptance in favor of a more “performance” based model.
As I said at the top, the implications to players in payments could be pretty interesting.
Alibaba, with AliPay, is able to basically export one very powerful asset to the rest of the world – billions of increasingly well-heeled Chinese consumers with digital accounts and money to spend. With control of that asset and the many investments that is making that asset base richer and more useful to many more “buyers,” it could soon introduce an entirely new digital commerce platform that will rival existing networks and emerging challengers.
While everyone in payments was focused on another player out West whose name begins with an “A” – Apple – no one has really paid much attention to the one player even farther West who has even greater ambitions to capture the global payments and commerce scene – Alibaba. And with Apple’s developer conference approaching in a few weeks and rumors flying about its payments plans, I think it’s safe to predict that the Summer of 2014 in payments could be (in the immortal words of Sly and the Family Stone) filled with a lot of “hot fun in the summertime!”