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Friday, September 19, 2014

Alibaba IPO takes investors on magic carpet ride

Alibaba Group Holding Ltd., which operates the largest overall e-commerce presence in the world, debuted on the New York Stock Exchange on Sept. 19, 2014, with an over two-hour delay in its initial public offering caused by a repeated upward revision of the stock's price per share. With Alibaba's shares now trading at well over 30 percent higher than initially set, a strong new competitor has emerged with designs on disrupting the U.S. e-commerce marketplace.

Alibaba was initially priced at $68, but excitement for China's e-commerce giant resulted in the share price opening at $92.70. Once trading finally got under way, almost at noon eastern standard time, shares soared to $99.70 before settling back to around $90 in early afternoon trading. More than 100 million shares of Alibaba were reportedly traded in the first 20 minutes of trading, and the IPO raised $21.8 billion, surpassing Visa Inc.'s IPO of $17.8 billion in 2008 and Facebook Inc.'s $16 billion raised in 2012.

Alibaba, founded by high-profile entrepreneur Jack Ma, has been characterized as China's equivalent of Amazon.com Inc., eBay Inc. and eBay-owned PayPal Inc., all rolled into one, with a touch of Google Inc. thrown in. Alibaba operates several e-commerce businesses in China, including Alibaba.com, Taobao Marketplace and Tmall.com (formerly Taobao Mall). Alibaba also runs its own search engine, eTao, and a PayPal-like online payment service, Alipay.

Unlike Amazon, which buys goods from suppliers and resells them to consumers, Alibaba operates more like a middleman, connecting consumers to retailers in the spirit of eBay, but without functioning as an auctioneer. Taobao is considered Alibaba's largest e-commerce site, with approximately 760 million product listings from about seven million sellers. But retailers don't pay to sell on Taobao, rather they pay Alibaba for advertising and Google-like search engine optimized rankings.

Taobao is primarily for small merchants, while Tmall showcases larger businesses, like Apple Inc. and The Gap Inc., which opened Tmall storefronts in 2014. Unlike Taobao, Tmall charges retailers transaction fees. It has been reported that, in 2012, the combined transaction volume of Taobao and Tmall surpassed 1 trillion yuan (about $163 billion), more than Amazon and eBay combined.

The final piece of Alibaba's puzzle is Alipay, which has become the dominant third-party online payment provider in China. Alipay operates as an escrow service; consumer funds are held and only remitted to sellers once consumers receive, and are satisfied with, the goods that they paid for. Through Alipay, Alibaba also provides interest-bearing savings accounts for its users.

China's payments 'dragon'

In a September 2014 webinar, Alipay: The Chinese Dragon Beyond The Great Wall, Mercator Advisory Group lifted the veil on the so-called PayPal of China. Tristan Hugo-Webb, Associate Director of Mercator Advisory Group's International Advisory Service, said Alipay is what binds all of Alibaba's businesses together and is critical to Alibaba's ambition of becoming "the center of the online universe."

Alipay is no longer part of Alibaba Group, but is a separate entity still controlled by Jack Ma. The financial services firm was founded in 2004. By 2007, Alipay was processing an average of 800,000 transactions a day, with a daily transaction volume of $20 million, according to Hugo-Webb; by 2010, Alipay's daily numbers had risen to 40 million transactions and a transaction volume of $102 million. On Nov. 11, 2013, China's equivalent of Valentine's Day (referred to as Singles' Day), Alipay set a record by processing 171 million payments in a 24-hour period, Hugo-Webb said.

Hugo-Webb compared Alipay to its natural rival in the U.S. market, PayPal. The eBay subsidiary is considered the most popular online payment method in the United States, with 62 percent of online consumers having a PayPal account, Hugo-Webb noted. But PayPal averages only 8.8 million payments processed per day.

With China's total population of 1.35 billion, Alipay has a larger potential customer base to draw from than the 314 million for PayPal in the United States. However, Alipay only represents 50 percent of China's market, Hugo-Webb said. It is also rapidly expanding into the mobile realm; by February 2014, Alipay was processing 18 million mobile payments per day, Hugo-Webb added.

He noted that Alipay is aggressive in funding consumers' mobile wallets. When users open the wallets, Alipay automatically conducts a funds transfer from linked accounts to wallets so that money is always available to wallet users, Hugo-Webb said.

Alibaba's U.S. prospects

The size and scope of Alibaba makes it a fearsome competitor to U.S. e-commerce firms like Amazon and PayPal. Additionally, the excitement over its IPO shows that investors are confident Alibaba will be successful in its bid to penetrate the highly competitive U.S. marketplace. However, Alibaba may have difficulty gaining traction and market share because of inherent growth constraints placed on it by an already mature market.

Ken Wisnefski, Chief Executive Officer at digital marketing agency WebiMax, said, "Their margins are already high. They are amazing. But is there much more opportunity for upside from them? They are not going to be able to control that type of margin in the United States. There's already a large player here in Amazon."

Alibaba will find it hard to chip away at Amazon's dominance, Wisnefski added, with Amazon's customer loyalty beginning to rival the loyalty enjoyed by Apple Inc. "The brand loyalty with Amazon is something that is going to make it difficult for Alibaba to really be able to penetrate that space," he said.

Additionally, Alibaba could run into problems attracting U.S. merchants to its online sellers' marketplace. Wisnefski likened Alibaba's challenge to how U.S. retailers use search engine competitors to Google. "When you look at even advertising, we've got a lot of clients that do a lot of work on the Google paid services," he said. "It doesn't exclude them from doing work on the Bing and Yahoo! networks. But they don't allocate as much of the budget towards it. It's not as much of a focus."

Given the maturity of the U.S. online marketplace, with well-established players not likely to be deposed any time soon, Alibaba may be content to play a smaller role. "There's a lot of money to be had here playing second fiddle," Wisnefski said. "I could see that being a strategy." end of article

Editor's Note:

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