Alibaba’s Commanding Mobile Commerce Lead

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It’s not easy being the world’s largest commerce platform. And, now a publicly traded one, too. If the Street isn’t mad at you, the regulators are. Alibaba had the misfortune of having both groups at odds with them over the last couple of months, even though its mobile commerce story is tremendously impressive.

Reporting on a quarter that missed analysts revenue estimates, Alibaba Executive Vice Chairman Joseph Tsai managed to fend off criticism that included government accusations of counterfeit scandals and bribery while still providing an optimistic look into the company’s progress — which included immense mobile commerce growth.

On the eve of reporting its fourth-quarters earnings yesterday (Jan. 29), the Chinese e-commerce giant said it got blindsided by accusations from the State Administration for Industry and Commerce (S.A.I.C.)  that Alibaba failed to stop the sale of fake goods, accepted bribery from merchants to gain higher rankings and sold counterfeit goods across its marketplaces. But instead of providing a blanket PR statement and blowing past the issues, Tsai tackled the accusations head on during the earnings call with analysts, calling the attacks unfair and unwarranted.

Stating firmly that Alibaba has always worked with regulators, spends its time and money into ensuring data technology and IP firms help catch counterfeit goods, Tsai said Alibaba has a “zero-tolerance policy” against such behavior — including measures in place to stop, flag down and block merchants who act outside the law. He said Alibaba would be adding 300 new employees to its team that searches Alibaba’s largest e-commerce site, Taobao, for fake goods. Calling the company one with strong values that bases its business decisions on the interest and integrity of the company, stakeholders, regulators and customers, Tsai attempted to discredit the government agency’s report, which he said Alibaba has filed a formal complaint with. In the White Paper, the S.A.I.C., said it had  encountered “the long-term existence of illegal problems regarding the management of transaction activity and other issues.”

“Our commitment to ethical and transparent behavior is why we are so deeply troubled by an SAIC report released on Jan. 23 that reported the published results of a product sample check in online commerce. As we said before, we believe this report was flawed, and was based on arbitrary methodology and we gave our views to the S.A.I.C.,” Tsai said. “Yesterday a so-called White Page was posted on the SAIC website that specifically identified Alibaba and referred to a meeting between Alibaba and the regulators in July of last year. We believe the small approach taken in the report and the tactic of releasing the so-called White Paper specifically targeting us was so unfair that we felt compelled to take the extraordinary step of preparing a formal complaint to the S.A.I.C. I want to make sure you know the facts behind the so-called White Paper.”

Jan. 29 was the first time Alibaba said it saw the White Paper that attacked Alibaba’s practices, Tsai said, and he used Thursday’s earnings call as the stage to clear the air. He claimed the White Page, which has since been removed from the S.A.I.C. website, does not accurately reflect Alibaba as a company. While Alibaba’s immense growth rate is what’s been gaining it so much international spotlight, it’s also what’s put it under the microscope of the government.

“Like all international companies across the globe, we from time to time meet with regulators in the normal course of business. The meeting last July was no different. And at this meeting we discussed working together to create a process to address key areas of consumer protection and orderly marketplace operations in online commerce,” Tsai said. “I want to make it absolutely clear that Alibaba has never requested the S.A.I.C. delay the publication of any report.”

Many analysts and industry leaders have called Tsai’s open criticism of the Chinese government an “unprecedented” move, particularly because of its reportedly good relationship with the government up until this recent controversy.

Moving away from the scuttle and toward what Thursday was most about for the company — fourth-quarter earnings — Alibaba posted a strong quarter overall but caught flack for missing revenue projections. Even as the rising Chinese e-commerce company posted a 40-percent increase in revenue to $4.22 billion, because it was slightly below analysts’ predictions of $4.5 billion, morning mainstream news headlines yesterday focused on the revenue miss. This dropped shares more than 10 percent in early morning trading. In terms of profit, Alibaba produced a net profit for the quarter of $2.1 billion, which was more than analysts’ expectations. But Alibaba executives stood by its earnings figures, focusing on the strong mobile gross merchandise growth (GMV) that’s helped add to its overall revenue and profit.

“We delivered a strong quarter with significant growth across our key operating metrics,” said Alibaba CEO Jonathan Lu. This included GMV that grew across its China retail marketplace by 49 percent from the year prior; its annual annual active buyers increased to 334 million in 2014, an increase of 45 percent, year on year. Mobile GMV now makes up 42 percent of total GMV transactions, and grew to 53 billion mobile transactions in the fourth quarter. That’s a 213-percent increase from the year prior. Alibaba hit $127 billion in China retail GMV for the quarter, and reached $370 billion in China retail GMV for the year. The company’s GMV growth across all its China retail marketplaces by 49 percent, year-over-year, which was driven by strength in both Taobao marketplace and Tmall.

“Alibaba continues to be the unrivaled leader in mobile. For this quarter we achieved 265 million monthly active users on our mobile commerce apps, which is a net increase of 48 million active users compared to 217 monthly active users in the prior quarter. This is a sequential growth of 22 percent and a year-on-year growth of 95 percent,” Tsai said. “Alibaba leads the China mobile commerce market with 86 percent share of total mobile GMV, according to iResearch. And our Mobile Taobao App continues to be the No. 1 mobile commerce app, and in fact, one of the most popular mobile apps in all China. This strength in mobile commerce demonstrates our ability to attract mobile users with strong commercial intent on a scale that we believe is unrivaled by any of our peers in China globally.”

Still, the company faced criticism from analysts about its revenue growth rate.

“The revenue increase was much lower than people expected,” said You Na, an analyst at ICBC International Research Ltd. in Hong Kong. “As more merchants start advertising on its mobile apps, revenue growth could slow as ad space and the fees it charges will be lower than what they charge for on desktops.”

In case Alibaba didn’t make its stance on its mobile commitment before, it certainly did during its earnings call as it used the term mobile roughy 70 times. As mobile and commerce slowly become synonymous for how e-commerce transactions are conducted, Alibaba will likely continue to focus its growth and overall commerce success across its marketplaces by relying on mobile.

“We believe that the continued trend towards mobile provides us with a unique advantage to deliver a better consumer experience, as well as more value to merchants, because mobile users shop more frequently and we can serve them more targeted search results. We believe the increasing use of our mobile apps will field significant future growth in our China commerce retail business,” Tsai said.

Besides its strong mobile commerce sales on its Tmall and Taobao site, Alibaba has also been a leader in helping use mobile to bring commerce to emerging markets that otherwise wouldn’t have the same access. By extending Alibaba’s payments reach with Alipay in new villages, Alibaba is attempting to help grow its presence across rural China. Similar to its third-quarter report last October, Lu spoke about Alibaba’s vision to enable farmers in rural areas to serve their products in the urban markets. Because villagers often do not have Alipay or Internet, Lu said they have to rely on Western Union to pay through Alipay. Alibaba wants to change that and make it easier for consumers in rural China to have access to the Internet and in turn shop online and pay through Alipay. Alipay has 17.9 million active users overseas in more than 100 countries and is accepted by 2,000 merchants.

“And right now, we are starting to establish village offices to unify local residents, who are not our prospects on commerce,” Lu said. “Alibaba will establish operating centers managed by our staff to manage these village offices and in charge of making campaigns locally. Yes, so we are just beginning this rural strategy and we have already established village offices in some provinces.”

Alibaba and Mobile Commerce in 2014

In Alibaba’s Q3 earnings report last November, its executive team focused on painting the picture of Alibaba’s growth as an e-commerce platform that was focused on being mobile first, with a company platform and structure that was nothing like Amazon. And it’s continued to do that in 2015 and as it posted significant profit.

“Well, we’re not like Amazon … Amazon’s margin is hampered by the fact that they take on inventory and they have a large costs of goods sold item, so their gross margin starts [at] a very, very low margin. Somewhere in the low teens. And in our case, we operate in a marketplace model, where the revenue we generate, coming from commissions and also online marketing services, have inherently very high margins,” Tsai told CNBC last November.

Q3 was Alibaba’s first set of earnings since its record-breaking $25 billion Sept. 19 IPO may be enough to support that Alibaba is on the path to keeping its stronghold as an international leader in e-commerce sales. The number of consumers shopping on Alibaba’s online marketplace hit 307 million in the third quarter, which was an increase of 52 percent from last year’s 279 million. On its China retail marketplace, sales increased 49 percent to $380 billion and mobile active users on the mobile commerce apps hit 217 billion users. Revenue grew to $2.74 billion, a 53.7 percent increase in the quarter, and the company reported net income of $494 million. Alibaba’s mobile monetization rate also rose 1.87 percent in the September quarter from 1.49 percent the previous quarter, but this could continue to grow as Alibaba added 29 million mobile users just in the past three months.

The value of goods sold on Alibaba’s Marketplace exceeded $90 billion in its third quarter, which according to InternetRetailer, is more than the combined sales on Amazon and eBay sites worldwide. Just a month after its record-setting IPO, InternetRetailer referenced Alibaba as the “world’s most valuable e-commerce company.”

How will Alibaba fare in 2015 as it faces increased regulatory pressures?