Alibaba’s Lost Password

In the Arabian Nights stories, Alibaba knew the password to get into the bandit’s secret cave. Hong Kong based Alibaba.com, China’s leading B2B e-commerce company, seems to have misplaced the password since its IPO, and can no longer extract the treasures.

Alibaba announced their Q4 2007 results this week. Their annual revenues increased by 58.6% to RMB 2,163 million (~ $303 million) and EPS rose by 358% to HKD 20.41 (~ $2.65) for the year.

Revenue from international marketplace contributed 72% of total revenue and grew by 56% for the year. China marketplace contributed the balance 28% of total revenue and grew by 65% for the year.

Alibaba makes its money from subscription fees for online storefronts, priority placement of products and other trade related services. Fees for such services range from $2,000 to $10,000 annually. But, they also offer a host of basic services for free and that is where the problem creeps in.

With a registered user base of about 27.6 million users, only about 1% of their users have moved to a fee based service mode. Their 305,500 paid subscribers might be 40% higher compared to the number a year ago, but is still a very tiny portion of their total user base.

Their effort to migrate from free services to paid services is not going to be easy given their competitor base of Google China and Baidu which continue to offer free services.

Alibaba’s focus on expanding their international market base is visible with their recent addition of a Japanese web site, creation of European offices and opportunity exploration activities in other countries, such as India and Taiwan. However, none of these efforts play to their strengths per se. For the same reason that Google, Yahoo, and eBay have been struggling to gain foothold in China, Alibaba will struggle to gain traction internationally: language and culture.

They are also getting into strategic partnerships. Recently they entered into parternships with banks such as China Construction Bank Corporation and Commercial Bank of
China which have helped provide loans worth 160 million yen to its SME customer base.

According to Analysys International, a British research firm, Alibaba owns 69% of the Chinese B2B market followed by Global Sources which has only an 8.4% market share. Considering the market base of China’s internet user population of 170 million with an annual growth rate of over 23%, Alibaba does have a huge pie in its pocket. Except, the pie isn’t being monetized very well quite yet.

The market, therefore, is not too confident. The stock has been trading at an all time low of HK$12 which is even lower than its IPO offer price of HK$13.50. Alibaba had a spectacular IPO last November. It opened at HK$30, against its offer price of HK$13.50, and closed at HK$39.50, an over 190% gain.