How Does Alibaba & Amazon Make Money?

Amazon is a cross between Ebay and Wal-Mart. Alibaba is a cross between Ebay and Google.

But I’m not talking about the auction Ebay when they had just started, more like the Ebay buy-it-now. And just for fun they’ve chosen to throw a Rackspace and a PayPal in too!

Alphabet soup

You know when you start with a glossary this isn’t going to be easy, but hopefully it will be insightful.

B2C = Business to consumer. This is how Amazon started. They sold their own merchandise to regular Joe’s in need of the latest Harry Potter or a two pin plug.

C2C = Consumer to consumer. This is how Ebay started. Ebay is now mostly B2C, even if the small “businesses” there try to avoid the tax man like root canal at the dentist. Its where you go to sell your second hand iPhone.

B2B = Business to business. This is how Alibaba started, facilitating transactions between wholesalers.

1P = First party selling. This is selling merchandise you own. This is the original Amazon, and the current Wal-Mart.

3P = Third party selling. This is the marketplace. You kinda know why they say 3P instead of marketplace, but that doesn’t mean it makes any sense.

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If you are selling something you didn’t make, but you currently own, you’re not really trying to make your money on the profit. Remember the profits on this type of retail are cents on the dollar. Wal-Mart’s operating margins are 3%, or 3 cents on every dollar.

What you are trying to do is make money on your turns. You are trying to sell the same product multiple times.

It’s called turns because you’re turning your assets multiple times. Those assets being your store or your website.

You’re not quite trying to sell the same thing again and again. I went to a show recently where a comedian joked that he worked at a company that made honey. The supermarket sold it at a loss to get customers in the door. So his job was to go in and buy the honey to sell it back to them.

If only life were so easy.

Established marketplace’s are that easy. Once you’ve arrived, you can take a cut of other people buying and selling. This cut is about 3% at Ebay and about 2.5% at Alibaba.

Margins are higher when you do this, because you’re not a retailer and you don’t have to pay for stuff. Ebay’s operating margins are 13% and Alibaba’s are 30%.

B2C versus C2C versus B2B

Which of these are best? The fact is the differences in financial models in this area are more related to the product than the definition of the buyer and the seller.

Maybe I’m selling paper clips. If I sell them to a consumer, I sell twenty. If I’m selling to a business I’m selling twenty thousand. Perhaps the profits are different, but not as different as between selling software versus selling a toaster.

One area that we see variation is in philosophy. Amazon is B2C and for all intents and purposes treats its merchants quite harshly, whether they are a tiny seller of picture frames, or big publishers. Amazon believes the end users are its customers and treats them like kings.

Alibaba with its background in B2B believes its core customers are its merchants. Their focus is on making its merchants more effective and better sellers.

So where does the Google bit come in?

90% of Americans have internet access. Almost all of them use online search. Probably two thirds buy things online in a year. Almost all of these people have an Amazon account, but crazily some of you don’t use it and prefer Target or Best Buy! Ultimately Amazon isn’t the first place you go to search for a purchase. You probably searched on Google first.

50% of Chinese people have internet access. Almost all of them use Baidu. Half of these internet users buy things online. But it appears that every single one of them have an Alibaba account and have bought something in the last year.

Lots of Chinese people will search on Alibaba for what they want first. They effectively have to, since Alibaba blocked Baidu from indexing its site in 2008. This means Alibaba owns the traffic coming to it can capture advertising value. They can act like Google and make more money on the adverts next to the listings than on the listings themselves.

In fact, although Alibaba does charge a fee on sales on Tmall, on the larger Taobao it charges no fees and makes its money solely through advertising and payment processing. This is incredibly attractive to merchants, even though habit likely means they pass most of their mark up straight to Alibaba.

The ROIs just look so good on adverts! Whereas when you stare at fees, the ROIs are zero and all you can think about is how to dodge them.

I don’t want to overcook this point, Alibaba’s take rate is still lower than Ebay’s, but it is definitely the case that in certain product lines Alibaba’s take rate is much higher, for example on perfume.

Both Amazon and Alibaba use pools of profitability like these to invest in the rest of their business. This is probably the key difference vis a vis Ebay. Ebay got caught thinking about profits and the medium term. Amazon and Alibaba have only ever thought about the long term.

If you want more info on the actual numbers and business divisions on Alibaba, I’ve found this blog to be pretty good.

Winner winner, chicken dinner!

These comparisons always beg for somebody to be crowned a winner. Alibaba has a $170bn market cap and Amazon has a $280bn market cap. They are both winners and they have barely started competing. It would take a revolution for Amazon or Alibaba to be toppled from its number one position in the United States and China respectively.

Bears on Alibaba often cite the dubious nature of the company’s statistics. Can they really have almost every eCommerce user in China? Can the average spend on Alibaba really be half China’s GDP per person?

As I was trawling the internet for statistics on the topic, I discovered that most of the data on the United States was fairly out of date. Other than Amazon disclosing 270m users globally, everything else seems to be a business secret and very hush hush. Pew Internet’s numbers dated back to 2012/13.

When it comes to Alibaba, the statistics were fresher. However that didn’t stop people comparing September 2015 results with Chinese internet statistics disclosed by CNNIC regarding 2014.

There are a bunch of reasons why not to like Alibaba, but the idea that Chinese people aren’t on there buying probably isn’t one of them.

YouTube is bringing in billions yet not making any money. Crazy huh?

Otherwise maybe you’d like to find out why the stock market should be your first employee.

Yuen Lo

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