Understanding Alibaba's Business Model (BABA)

Chinese e-commerce giant Alibaba (BABA) boasts a wide variety of eye-popping statistics. The company accounts for a reported 58% of all online retail sales in China. As of 2018, the company has 576 million active users, larger than the entire population of the United States. Alibaba recorded $25.4 billion worth of orders on November 11, 2017, the Chinese equivalent of Black Friday called "Singles Day" or "11.11." This year's Singles Day falls on Sunday, November 11, 2018, and Alibaba is expected to sell $35 billion or more in goods, despite a slowing Chinese economy and the country's ongoing trade war with the United States.

While many people understand that Alibaba is an online retailer similar to Amazon (AMZN) or eBay (EBAY), the company's business model is surprisingly different from the leading e-commerce businesses in the United States. Whereas Amazon is housed under one roof, Alibaba is divided into three core businesses: Alibaba, Taobao, and Tmall. All three of these e-commerce websites serve to connect various types of buyers and sellers, allowing Alibaba to act as a middleman in China's emerging e-commerce industry.

Alibaba.com was launched in 1999 in Hangzhou by Jack Ma, a former English teacher, along with a group of 17 friends. It is a business-to-business trading platform, connecting manufacturers from countries such as China, India, Pakistan, the United States, and Thailand with international buyers.

Merchants can list their products for free on Alibaba.com, but also have the option to pay for a range of benefits such as greater exposure on the site and unlimited product listings.

In Chinese, Taobao means “search for treasure.” Taobao.com has grown to become China's largest shopping website and is ranked the ninth most popular website in the world by Alexa.com. Launched in 2003, Taobao lists hundreds of millions of products and services from millions of sellers. Taobao doesn't charge transaction fees and the site is free to join for merchants, a policy which helped the site gain its enormous user base in China. 

While Alibaba.com is business-to-business, Taobao is business-to-consumer or consumer-to-consumer focused, enabling small businesses and individuals to open online stores. 

To help shoppers choose among the vast number of merchants, the site has a unique rating system that reflects how many transactions each seller has successfully completed. Buyers can directly ask merchants questions through Alibaba Group's messenger software. Merchants have the option to buy advertising and other services to help them stand out on the website and boost sales. Advertisers can choose between pay-for-performance and display marketing. These ads are the primary means through which Alibaba makes money from Taobao. 

Tmall.com, which launched in 2008, offers a wide selection of branded products oriented towards China's growing middle class. While Taobao caters more to small merchants and individuals as sellers, Tmall is focused on larger companies, including multinational brands such as Nike (NKE) and Apple (AAPL). 

It was Tmall that pioneered “Singles Day” in 2009 as an annual promotional event to reward users with discounts. Tmall charges merchants a deposit, an annual fee, and a commission fee on transactions. In this way, it bears some resemblance to eBay and Amazon, which also collect transaction fees from third-party merchants. Sellers on Tmall have access to analytic tools showing the number of visitors, page views, and customer ratings, which serve to help guide their business decisions.

In 2014, Alibaba launched the US shopping website 11Main.com. 11 Main hosts thousands of merchants selling products in a variety of categories. The site charges merchants a percentage of sales and goes up against eBay, Amazon, and Etsy (ETSY) on their own territory.

Unlike Amazon, Alibaba Group holds no inventory and owns no warehouses. Rather, Alibaba has created software platforms that facilitate the exchange of goods and services. While Alibaba's revenues are less than Amazon's, it has higher operating margins and profit margins. The reason for this is largely that Amazon has to manage the expensive and complex logistics of developing and maintaining a network of warehouses to ship products directly to shoppers. In short, software is easier to scale than warehouses.

One of the most interesting elements of Alibaba's business strategy lies in its relationship with Baidu, which operates China's leading search engine. Alibaba actually blocks Baidu's spider from indexing both Taobao and Tmall, meaning that pages from these websites do not appear in Baidu's search results. Consequently, shoppers must go directly to Taobao and Tmall in order to see what they have to offer. This, in turn, increases the value of search on Taobao and Tmall.

When a customer does a search on Taobao and Tmall, ads from merchants appear alongside search results. This aspect of Alibaba's business model is similar to Google (GOOGL), which makes a significant amount of its revenue through online advertising.  

In addition to its leading e-commerce portals Alibaba Group created an ecosystem of companies to compliment them:

Alipay

Alipay is an online third-party payment platform, launched in 2004 by Alibaba Group. It provides payments and escrow services for transactions on Alibaba Group platforms. Alibaba Group spun off Alipay in 2010. 

Alimama

Launched in November 2007, Alimama is an online marketing platform that provides sellers on Alibaba Group's marketplaces a range of marketing and advertising services. 

China Smart Logistics 

China Smart Logistics is a proprietary platform that provides real-time access to information for both buyers and sellers with a view to improving the efficiency of e-commerce package deliveries. 

Aliyun

Aliyun develops platforms for cloud computing and data management, ensuring that Alibaba's e-commerce portals can handle their massive traffic and transaction volumes.

Investments in Other Businesses

Alibaba Group has made major investments in Sina Weibo, a Chinese micro-blogging website similar to Twitter Inc. (TWTR), and Youku Tudou, China's answer to YouTube. Alibaba has also invested in a number of US startups, including video messaging application Snapchat and Lyft. In 2014 it even bought a 50 percent share of the Guangzhou Evergrande Football Club for $192 million.

Despite Alibaba's wide-ranging investments, its core business remains centered on e-commerce. Its business model has combined elements of many of the leading technology companies in the US rather than mirroring any one business in particular. After all, the diverse company describes its overall mission as “to make it easy to do business anywhere.”