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Behind Alibaba's Recent Misfortunes2021/01/13
Alibaba: From an E-commerce Platform to a Media Monopoly
Alibaba recently made headlines when the Shanghai Stock Exchange halted the IPO of their financial platform, Ant Group. The platform’s assets rival those of the world’s largest banks. This occurred after Jack Ma, co-founder of Alibaba dismissed Chinese banks as "pawnshops," giving loans to companies "that do not need money.” The international press was quick to side with Jack Ma and criticized the Chinese regulators as if they could not tolerate his ongoing success. It was the very same media who blamed the US government 12 years ago for not putting an end to the crazy loaning spree of Freddie Mac and Fannie Mae.
For those familiar with how the Chinese government operates, this didn’t come as a surprise. Unlike in Europe, where market regulations are made initially, China tends to let things develop, see where they go, and then set rules and restrictions.
Founded in 1999, Alibaba’s initial purpose was to “foster the development of an open, coordinated, prosperous e-commerce ecosystem.” It achieved this by mastering the complete e-commerce chain. Not only did Alibaba create its version of Amazon, but it added a combination of eBay, PayPal, Google, Facebook, and FedEx. The company was supposed to operate in favor of small companies and consumers. Acting as a matchmaker between small companies and individual investors, Ant Group empowered all the small industrious antlike companies. Meanwhile, Alibaba was providing a marketplace where, for a minimal investment, they could get in touch with consumers. On the other side, through Taobao and Tmall, Alibaba was also supposed to protect consumers’ interests.
Quickly Alibaba took advantage of its position as an interface between brands and consumers. It started collecting more and more data, helped by the capability of tracking the same consumers across the multiple digital platforms it owned: Alipay for payments and Taobao, Tmall, UCWeb, AliExpress, GaoDeMap.
Alibaba kept the consumer knowledge - which is the foundation of all profitable businesses - away from the brands, and it sold it back to them via its marketing technology platform Alimama. All this information integrating data from search results, recommendations, videos, finance, logistics, helped identify potential consumers to which only Alibaba had access.
Today, Alibaba is more interested in the media and marketing services it sells to brands than in the sales they make.
It pushes brands to buy media and participate in many marketing activities/campaigns that Alibaba organizes (Super Brand Day, Hey Box, category festivals, etc.) to boost their sales. By definition, these campaigns are always successful.
Alibaba is the judge and jury, primarily since it sells the media and measures its effectiveness without any third-party control.
Brands don’t have much choice. Should they choose not to play the game, they would disappear into a business black hole with hardly any sales possibility.
Alibaba has complete control. It’s in its interest that brands succeed, but only to a certain extent. Algorithms carefully manage successes that can only be expected if the brands make significant investments inside the platform. This is why the marketing activities available are all too standardized and rely heavily on discounts, allowing little room for brands to differentiate themselves from one another. Alibaba wants the competitive edge to appear by the level of investment the brand makes, not the creativity it displays. However, this is advantageous for big actors over the smaller ones. Small brands cannot compensate for less investment, even if they are more innovative.
Alibaba has evolved from an e-commerce ecosystem into a media service that produces its own content. It has taken advantage of the latest live streaming trend and offers its KOLs and live streamers’ services to brands. They even organize virtual fashion shows!
The last 11.11 was a perfect illustration of this strategic shift. In order to boost sales post Covid-19, during the peak short-term sales period, Alibaba extended it over several weeks. Did it increase sales altogether? Not really. However, by extending the sales period, it increased brand spending on media and marketing activities inside the platform.
One could argue that by limiting the control of Alibaba, the Chinese government is doing nothing more than breaking up a monopoly and refocusing the company towards its initial purpose, which is to serve consumers and small businesses. Another large Chinese company, Tencent, was recently fined for failing to acquire approval for an acquisition. The US government is embarking on a similar journey in trying to break the monopolies of Amazon, Google, and Facebook. But what this is also telling us, is that the days in which tech giants were allowed to do almost anything they wanted to boost the Chinese Internet Economy’s growth, are over.
Written by Sandrine Zerbib, Founder and Managing Partner at Full Jet