On Amazon and Alibaba

Two e-commerce giants looking more and more alike

On The Bill Simmons podcast (!) last week, Stratechery’s Ben Thompson gave his oft-stated opinion that Amazon will dominate among Internet majors as a platform company that seeks to “literally take a skim off all economic activity.” Core to Amazon’s efforts is a shift to a third-party (3P) e-commerce platform versus the first-party (1P) online retail business that has prevailed for much of Amazon’s history. In essence, Amazon will no longer only buy, stock and sell goods directly, but will increasingly offer a platform and the requisite fulfillment services for third-party merchants. This decision has wide reaching consequences, including Amazon moving to directly own the logistics network (Prime Air, logistics hubs, etc.) underpinning fulfillment services. The desire to own infrastructure as the foundation to a platform business is not limited to physical networks but also to the infrastructure of the internet, and in that vein AWS has proven to be its own wildly lucrative platform upon which many tech unicorns are built. By owning the basic infrastructure, Amazon can further provide its Prime customers all sorts of value-added services whether free 2-day delivery (physical infrastructure) or free Prime Video (internet infrastructure), and importantly, provide these services in a profitable manner over time.

Inspired by Ben and his Amazon analysis, I wanted to apply the framework to what Alibaba has been doing in China for the past five years. Some points to consider:

  • E-commerce: Unlike Amazon, Alibaba’s Taobao has been from inception guided by a successful 3P strategy where businesses small and large sell to customers. Alibaba’s other platform, Tmall, is mostly for bigger brands that set up online storefronts. In fact, the downside of such success with 3P is that these platforms are also susceptible to counterfeits and knock-offs, which when combined with millions of “creative” Chinese merchants can cause a real headache. In recent years, Alibaba has actually grown its 1P business to exert more control in selected retail categories and to counteract its main rival JD.com, which is predominantly a 1P business but now seeking to grow its 3P platform. Today, ~80%+ of China e-commerce GMV is 3P and this is unlikely to meaningfully change as third party merchant quality and service continue to improve. 3P platforms have scaled incredibly quickly in China and benefit from high barriers of entry as platforms aggregate third party merchants — customers are inclined to visit the site with the widest product variety and as that happens, merchants can’t afford to not be on the platform. Alibaba’s GMV grew to a staggering $502 bn in the twelve months to June 2016, larger than the entirety of US e-commerce GMV at $395 bn in 2016. The power of Taobao has spawned a number of legends on the Chinese internet about entire Taobao merchant villages or individual Taobao merchants who gross hundreds of millions (RMB) in a single year. Clothing seen in a popular TV drama will frequently be available the next day on Taobao. There are millions of merchants (one number from 2013 suggests ~7 million) on the Taobao platform; it’s not an exaggeration to say that Alibaba is one of China’s largest employers
  • Physical networks: Another area where Alibaba has moved faster than Amazon is in securing ownership and access to physical infrastructure. To begin with, much of this infrastructure in China either did not exist or was incapable of handling the long-term demands of e-commerce; for Alibaba, becoming directly involved in infrastructure was a business imperative to support its 3P strategy. Alibaba’s Cainiao logistics initiative sports a $7.7 billion valuation on its own and has focused on logistics warehouses (Cainiao controls 1.7+ million sqm of warehouse space, making it top 5 by completed space in China) rather than building out its own UPS or FedEx. My guess is that the logic behind this is simple — in densely populated China, land is an expensive and limited asset, in particular the best land near urban centers. Cainiao is moving to secure a valuable asset while relying on the fragmented gaggle of Chinese third-party logistics companies for fulfillment services. In the US, the limited asset is fulfillment capability, which only UPS and FedEx can reliably provide at scale. To control fulfillment costs in this market duopoly, it makes sense for Amazon to have its own fulfillment capability and offload peak volumes to third parties. Amazon has also historically owned its warehouses as land is relatively plentiful and cheap in the US and there is high warehouse switching cost. Lastly, both Alibaba and Amazon are broadening their physical networks by expanding into cold storage and other asset classes with high capital requirements and barriers to entry. If the quality problem can be solved, groceries e-commerce could become 3P-driven like an online farmers’ market versus the online supermarket model offered today. By owning the unsexy building blocks of everyday life, Alibaba and Amazon further empower their platforms and deepen competitive moats
  • Internet infrastructure: While I was writing this post, TechCrunch posted this comprehensive piece by Ron Miller on Alibaba’s cloud computing efforts. The piece points out that Aliyun is the world’s sixth largest cloud services company by revenue with cloud services penetration still low among Chinese corporates. For both Amazon and Alibaba, owning internet infrastructure allows them to distribute entertainment and other useful services (photo storage, etc), binding their customers ever closer. Just as Amazon has been Netflix-style aggressive in creating original content, Jack Ma has been aggressive building an entire movie company, Alibaba Pictures. Alibaba also owns Youku Tudou, once the preeminent “China YouTube” equivalent but now entangled in fierce competition with iQiyi (Baidu) and Tencent Video in a race to create and own original online content. At the moment, Aliyun is not a cash cow (still net operating loss) like AWS but recent rapid growth and expansion into non-China markets suggest that the business is on its way to increasing its financial contribution to Alibaba.

Away from similarities, one area where Alibaba and Amazon noticeably differ is their presence in financial services — a topic I wrote about in my first post. Finance is perhaps the ultimate platform business, especially for reaping those lucrative transaction fees. For Alibaba, its payments business is the ever expanding web that connects its various platforms and enables it to trap further profit from all the economic activity generated inside and outside the Alibaba ecosystem. Alipay itself acts as an ecosystem extender, tying up merchants and stores that have no relationship with Alibaba otherwise. Alibaba likely has first dibs on the reams of consumer and merchant data gathered by Ant Financial; these invaluable insights can only serve to further entrench Alibaba’s businesses in the everyday lives of all Chinese. It is notable that Alibaba is already exporting this business model, investing large sums into India’s PayTm. Interestingly, Alibaba’s latest PayTm investment is in PayTm’s e-commerce subsidiary, a bet that control over the mobile wallet will ultimately lead to success in growing a leading e-commerce platform.

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