After Yahoo deal, challenges abound for Alibaba

After Yahoo deal, challenges abound for Alibaba
  • Alibaba Group could command a Facebook-rivalling valuation of $100 billion when it comes to list its shares.
China's Alibaba Group could command a Facebook-rivalling valuation of $100 billion when it comes to list its shares, possibly by 2015 - but its more immediate challenge is to hang on to top spot in the country's $36 billion e-commerce market.

Founded and led by Internet entrepreneur Jack Ma, Alibaba faces increasingly tough competition in its e-commerce stronghold from well-funded rivals 360buy, which is backed by Digital Sky Technologies, Dangdang Inc and Inc. Tencent Holdings, China's leading online games and social networking firm, has also said it will build up its e-commerce business by creating a separate unit.

"All the big Internet players have gotten into each other's spaces with this idea that you can create a hermetically-sealed world where users never have to leave your platform," said Mark Natkin, managing director of tech consultancy Marbridge Consulting.

Tencent's huge user base - it has 575 million active users on its Qzone social site, which is linked to the popular QQ instant messaging application - and record of expanding successfully into new ventures could challenge Alibaba, which needs to maintain its high growth rate for a successful future listing. Alibaba Group revenue grew at a compound annual rate of 72 percent in 2008-2010.

"Competition is going to get more intense with Tencent entering the market," said JPMorgan analyst Dick Wei.

Core focus

This week, Alibaba ended more than two years of often fractious negotiations with Yahoo Inc to buy back much of a stake held by the U.S. web giant and, crucially, reduce the voting power of foreign stakeholders including Yahoo and Japan's Softbank Corp - allowing Ma to focus on growing his business.

"With the Yahoo share disposal and the plans laid out for it, Alibaba's management team can focus more on the core business itself," said JPMorgan's Wei.

As part of the deal with Yahoo, incentives for Alibaba to list its shares end by December 2015. The company has said there is no timetable for a listing. Alibaba is planning to take its Hong Kong-listed unit private.

Bankers said Alibaba's strong earnings growth - EBITDA is close to $1 billion - values the group at $30-$35 billion and is likely to at least treble in the next 3-4 years. By contrast, Baidu Inc, China's Google equivalent, is currently valued at $42 billion.

Under fire

The challenge to Alibaba's market leadership is likely to be in the mid- to long-term, but will be no less intense, and could be costly.

Ma said last year that Alibaba, which doesn't currently own delivery infrastructure, will invest up to $4.5 billion to ramp up its logistics.

Its Taobao Marketplace, which dominates China's vast consumer-to-consumer e-commerce market, similar to eBay, has seen its market share slip to around 70 percent from 80 percent in 2008, according to data from Analysys International. Its Taobao Mall has about 50 percent share in the business-to-consumer market.

360buy, China's largest online retailer, has said it wouldn't consider a public listing before next year, but a cash infusion would give it a boost in the e-commerce space where spending on marketing is high and brutal price wars are common.

Taobao, Alibaba's crown jewel and virtual cash machine, accounted for almost two-thirds of $2.8 billion group revenue in 2011. But it has come under fire over fake items sold on its platform, and was last year placed on the United States Trade Representative's (USTR) notorious markets blacklist for offering a wide range of goods that infringed copyrights.

"They need to go public as a group, but they also need to separate the asset that is having questionable intellectual property issues," said Eric Wen of Mirae Asset Securities in Hong Kong.

"Taobao inherently has many issues, such as people selling fake goods," said a banking source, who declined to be named due to the sensitivity of the matter. "This is something Jack Ma has to clean up before the group lists."

Alibaba has petitioned the USTR over its blacklisting, stressing its efforts to work with intellectual property rights holders to combat piracy.

Last July, Chinese police arrested 36 people in connection with operating fraud on, prompting an internal memo from Ma and top executive resignations.

© Thomson Reuters 2012

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