Alibaba's Taobao (A) – Key Vocabulary

Background & Context

• Alibaba Group (Hangzhou-based, early 2008)
  • Portfolio: Alibaba.com (international B2B), Alibaba.com.cn (domestic B2B), Taobao (B2C/C2C), Yahoo! China (portal), Alipay (payments), Alimama (online-ad marketplace)
  • By 2008 captured ≈ 50\% of China’s B2B e-commerce
  • Key strategic issue in case: How to monetize Taobao after defeating eBay

Alibaba B2B Platform Evolution

• Founded December 1998 by Jack Ma & friends to help Chinese SMEs reach buyers
  • China counted > 40\text{ million} SMEs; faced fragmented markets & trust deficits
• Early site: simple bulletin board; 10 years later > 32\text{ million} registered users
• Pricing
  • Posting trade leads = free
  • ≈ 1\% of firms buy premium subscriptions (storefronts)
  • International storefront fee: 50{,}000\text{ RMB} / year (≈ US\$7{,}300)
  • China storefront fee: 2{,}800\text{ RMB} / year
  • Other revenue: promotional placements (up to 120{,}000\text{ RMB} / year), banner ads, paid keywords
• Financials 2007
  • Revenue: 2{,}162{,}757\text{ RMB}
    • Intl. marketplace: 1{,}547{,}695\text{ RMB}
    • China marketplace: 615{,}062\text{ RMB}
  • Operating profit: 804{,}345\text{ RMB} (tripled YoY)
  • Premium intl. subs generated ≈ 70\% revenue
• IPO Nov 2007 (Hong Kong): sold 19.25\% of equity, raised US\$1.7\text{ billion}; P/E spiked to ≈ 320
• Organizational model: Each business unit has own president, CFO, board; encouraged to compete even if goals diverge (e.g., Alipay serving Amazon-owned Joyo.com)

Birth of Taobao ("Hunting for Treasures")

• April 2003: secret project, 7 workers in Jack Ma’s old apartment
• Motivation: pre-empt eBay’s power-seller spill-over into B2B; “blurred line” between individuals & small firms in China

Marketplace Design Choices vs eBay

• Localised look & feel
  • Chinese shoppers prefer busy, colorful, “noisy” pages; Taobao built gender-segmented tabs & department-store-like navigation
  • Employees use kung-fu novel nicknames, informal culture
• Trust-building mechanisms
  1. Real-ID registration: national ID & bank account
  2. Dual reputation scores (seller & buyer separate) – eBay had single score
  • Data: only 14\% Taobao sellers had zero negatives in 6-month window vs ≈ 50\% on eBay, indicating stricter ratings
  1. Alipay escrow (launched 2004)
  • Workflow: buyer deposits \rightarrow Alipay notifies seller \rightarrow goods shipped \rightarrow buyer confirms \rightarrow funds released
  • > 80\% Taobao GMV uses Alipay; service is free to members
  • Reduced “item not received” complaints nearly to zero compared with eBay China
  1. Embedded IM (Wangwang)
  • Enables live haggling, feedback, suggestions
  • “Communication problems” only 8\% of negative feedback vs eBay’s 20\%
• Pricing policy: Free listings & transactions
  • Rationale: new market, high scam fear among consumers, incentive for merchants to test online
  • Jack Ma publicly challenged eBay to drop fees; Meg Whitman retorted “Free is not a business model.”

Competitive Landscape (mid-2000s)

• eBay EachNet
  • Entered via US\$30\text{ million} stake 2002; final 67\% buyout 2003
  • Charged sellers listing fees up to 3\text{ RMB} & transaction fee \le 2\%
  • Added PayPal China (2005) & partnership with Global Sources to help power sellers
  • Previous expansion successes: Germany, U.K., Australia, Canada; failure in Japan taught localization lessons
• Paipai (Tencent)
  • Launched by Tencent (operator of QQ, 170\text{ million} active accounts)
  • Seamless QQ integration; free service; Tencent revenue 2005: 3.8\text{ billion RMB}, profit 1.6\text{ billion RMB}
• Other small players ≈ 5\% share combined by 2006

Outcome of the “Taobao vs eBay” Battle

• Market shares by GMV
  • 2002: eBay 85\%, Taobao 8\%
  • 2005: Taobao 65\%, eBay 36\%
  • 2007: Taobao 84\%, eBay (now TOM EachNet) 7\%, Paipai 9\%
• User satisfaction survey 2004: “very satisfied” Taobao 24.3\% vs eBay 10.9\%
• eBay closed standalone site Dec 2006; JV with TOM Online attempted comeback
• Taobao 2007 GMV: 43\text{ billion RMB} (≈ second-largest retailer in China)
  • Online shopping projected CAGR > 50\% next five years
• Geographic & category shifts (data 2006–2007)
  • Growth spreads to 2nd/3rd tier cities
  • Popular items shift from tech gadgets to everyday merchandise (clothes, cosmetics, home products)

Monetization Challenge & Zhao Cai Jin Bao (ZCJB)

• Pre-2006: near-zero revenue, deliberate focus on critical mass; Jack Ma quote: “We have no revenue model … Let people make money first.”
• May 2006 launch ZCJB: pay-for-performance keyword auction
  • Mechanism similar to Google AdWords but confined to Taobao search results
  • Search result page shows 20 items; ZCJB allocates top 10 slots via seller bids
  • Seller pays bid only if sale occurs (“per-conversion” pricing)
• Executive dilemma: Is ZCJB the correct long-term monetization path, balancing free core marketplace with paid visibility?

Quantitative Environment & Exhibits (selected)

• Internet penetration China
  • Users: grew from 59\text{ million} (2002)\rightarrow210\text{ million} (2007)
  • Penetration: 4.6\%\rightarrow16\% same period
• Growth of all online shopping sites
  • Registered users: 8.4\rightarrow55.0\text{ million} (2002–2007)
  • GMV: 1.3\rightarrow56.1\text{ billion RMB}
• Alibaba.com Vs Hang Seng Tech Index: IPO pop then decline; P/E ≈ 320 immediately post IPO

Strategic Insights & Connections

• Network Effects & Free Pricing
  • Eliminating direct fees accelerated two-sided network growth; funded via later advertising/visibility model similar to Google
• Localized UX & Guanxi‐Based Trust
  • Cultural tailoring (busy UI, instant chat, affective bonds) created affect-based trust complementing cognition-based mechanisms (Alipay escrow, dual reputations)
• Escrow Innovation: Alipay solved settlement risk in low-trust environment; key to unlocking scale (contrast to PayPal’s later-stage entry & fee structure)
• Organizational Autonomy: Separate business units foster agility but create coordination tensions (e.g., Alipay serving Taobao rivals)
• Pre-Emption Strategy: Jack Ma’s rapid Taobao launch mirrors Yahoo! Japan vs eBay; speed & free model disrupted global incumbent before it could localize
• Monetization Model Choice
  • ZCJB blends Google PPC with eBay placement fees; pay-per-transaction aligns with seller ROI, preserving “free” perception for majority users
  • Future questions: price ceilings? fraud within ad clicks? balance between organic relevance & paid prominence?

Ethical & Practical Considerations

• Free-to-play then charge: risk of stakeholder backlash once fees introduced; requires transparent value creation
• Data Security & Privacy: mandatory ID registration boosts trust but raises privacy concerns in authoritarian context
• Competition vs Internal Synergy: Allowing Alipay to serve competitors might maximize group profit but erode Taobao’s moat

Possible Exam Connections

• Compare with two-sided markets theory (e.g., Rochet & Tirole) → platform subsidies, cross-side network effects
• Contrast Alibaba’s IPO with dot-com valuation patterns & subsequent correction
• Relate trust mechanisms to Guanxi & institutional voids literature (Khanna/Palepu)
• Evaluate monetization timing vs Amazon’s "get big fast" strategy