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

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)

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

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.”

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

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)

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?

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

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?

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

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