Alibaba has fascinated American investors for some time – little wonder, since this Chinese internet company was responsible for the largest IPO of all time last year. Then, the question was: what exactly is Alibaba? Now, there’s a new question. Why is it buying American internet companies?
Alibaba is China’s biggest online commerce company and is, so far, a chiefly domestic business. Its core operations run through three sites: Taobao, China’s biggest shopping site; Tmall, which specialises in online sales of branded goods and focuses on China’s middle class; and Alibaba.com, which connects Chinese exporters with other companies worldwide. It also owns alipay.com, which is like a Chinese version of Paypal, and has large stakes in Sina Weibo (China’s closest equivalent of Twitter) and Youku Tudou (China’s YouTube). So it is, one way or another, China’s Amazon, eBay, and pretty much everything else internet-related.
The stake in Snapchat is relatively modest given the size of both businesses. Alibaba is believed to have put in $200 million, which is nothing for Alibaba (its annual revenues are around $11 billion) and not that much for Snapchat either (since, according to the Financial Times, the price paid for the stake effectively values Snapchat at $15 billion). Also, it’s not the first non-Chinese purchase by Alibaba, nor even the first American one; the company is believed to have put $250 million into Lyft, which is a ride-sharing company, and $215 million into the chat app Tango. But Snapchat, though modest in terms of its revenues, is probably the most high profile non-Chinese name Alibaba has bought into so far.
So what should we read into this? China is going to remain not just core but utterly dominant in Alibaba’s revenues for the foreseeable future, but the Snapchat deal – combined with other US investments – does suggest a long term belief that the company can expand into American social media and internet-hosted commerce. It also represents a certain boldness, a confidence in a business that so far is chiefly famous not for what’s there but what isn’t: the fact that photos on the social messaging app are gone forever within 10 seconds. It’s true that there’s more to the company than that, and that it does generate money from ads, but clearly this is a purchase based on potential rather than proven commercial prowess.
Well, not just potential; also reach. The research group Cowen believes Snapchat has 170 million users, compared to 288 million monthly active users at Twitter (according to Twitter itself). And, given that in China Alibaba has thrived partly by cross-selling – by getting a Taobao consumer to use Tmall or Sina Weibo, for example – might this be a long term hope for these fledgling US investments, as a platform from which to build broader businesses?
It may be that these are just financial plays, smart investments in businesses that Alibaba understands. And it’s not as if the US is short of social media and e-commerce businesses. But one imagines senior staff at eBay, Amazon, Facebook and the rest look at Alibaba’s capitalisation, revenues, pace of growth and – now – sense of international expansion with a little trepidation.
by Chris Wright