The initial public offering of shares in Alibaba on the New York Stock Exchange may raise more than $20 billion, making it one of the biggest IPOs on record, and value the Chinese e-commerce firm at $150 billion or more. But is it worth it?
There are certainly reasons to believe so. The firm dominates online shopping in China, which has passed America to become the world's biggest e-commerce market. In gross sales, Alibaba is bigger than eBay and Amazon combined. And unlike Amazon, Alibaba makes significant profits. Revenues shot up 46 percent in the second quarter, year-on-year, to top $2.5 billion; and profits almost trebled to $2 billion.
There were worries, as there had been about Facebook, that Alibaba might stumble in the transition from desktop computers to mobile devices. However, just as Facebook's switch to smartphones and tablets has gone better than feared, Alibaba has quickly mastered the mobile Internet, too. According to iResearch, a consulting firm, over four-fifths of all m-commerce in China now takes place on Alibaba's mobile platforms.
All this should be enough to ensure that investors pile into Alibaba's shares. After the champagne stops flowing, though, they should reflect on the fact that maintaining Alibaba's dominance in China is going to get harder.
One threat comes from Baidu, China's dominant Internet-search engine, which is making a big push into online-to-offline services, or O2O — the use of the Internet and mobile devices to promote sales in physical outlets. This week it announced a $10 million investment in a Finnish mapping company whose technology uses the Earth's magnetic field to map the insides of buildings precisely: Imagine it detecting that a shopper has reached the detergents aisle of a supermarket, and pinging her some coupons. Baidu also unveiled a simpler version of Google Glass, its U.S. counterpart's smart specs: BaiduEye, as it is called, could for instance identify the fancy pair of shoes that a wearer is looking at, navigate automatically to the e-commerce site with the best price for them and let him buy them by voice command.
Another threat to Alibaba comes from WeChat, a hugely popular messaging app owned by Tencent, another Internet giant. And a surprising new entrant has joined hands with both giants: Wang Jianlin, who last year was reported to be China's richest man, though he may lose that title to Alibaba's founder, Jack Ma, when it floats. Wang is known locally for his political astuteness, which has helped him build a property and retailing empire. He also made a splash overseas with his $800 million acquisition two years ago of AMC, a big U.S. cinema chain.
Dalian Wanda, his firm, has just launched an e-commerce joint venture with Tencent and Baidu. The idea is that customers will use Baidu's maps and Tencent's apps to find deals at Wanda's many hotels, shopping centers and cinemas. Hans Tung of GGV Capital, a venture capitalist who was an early backer of Xiaomi, is skeptical, arguing that brick-and-mortar retailers have typically made a hash of O2O efforts in China.
As the competition has intensified, Alibaba has gone on a spending spree, buying firms, or stakes in firms, in areas ranging from video to mapping, from logistics to sports. Not only should potential investors worry about the cost — $5 billion so far this year — but they might also wonder about the haste in which some deals are being done. In August, Alibaba disclosed suspected, accounting irregularities at a film-production outfit it had bought for more than $800 million.
Such concerns are unlikely to dampen the enthusiasm of investors. They will be fixated on the scale of the opportunity for Alibaba to keep growing as China's middle classes swell. This is a business with a first-mover advantage, and Alibaba's rivals, while growing fast, are still far behind it.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.
