Analysis | Alibaba Shows How Tough It Is to Kick a Habit - The Washington Post

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Original source: The Washington Post
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Published: Aug 8th, 2022
Analysis | Alibaba Shows How Tough It Is to Kick a Habit - The Washington Post

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Despite billions of dollars and years of investment into cloud, logistics, and digital media and entertainment, the Chinese tech giant remains entirely reliant on its 20-year-old business model of e-commerce marketing and sales.
Advertisement Alibaba, which was founded in 1999, has always leaned heavily on two pillars of its e-commerce model.
Collectively, this sector has delivered more than 800 billion yuan in profit over the past seven years, according to Bloomberg Opinion calculations.
Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia.
Comment on this story Comment Gift Article Share Slowing growth and a rise in corporate spending have spurred global technology companies to boost revenue from non-consumer offerings.

Analysis | Alibaba Shows How Tough It Is to Kick a Habit - The Washington Post

Comment on this story Comment Gift Article Share Slowing growth and a rise in corporate spending have spurred global technology companies to boost revenue from non-consumer offerings. Apple Inc., Microsoft Corp., Amazon.com Inc. and Taiwan Semiconductor Manufacturing Co. are among those who’ve built solid business models around the rise in cloud services. Alibaba Group Holding Ltd. has failed to follow the trend, and looks unlikely to do so anytime soon. Despite billions of dollars and years of investment into cloud, logistics, and digital media and entertainment, the Chinese tech giant remains entirely reliant on its 20-year-old business model of e-commerce marketing and sales. While management is adept at extracting money from selling goods, it’s yet to work out how to reproduce that success in online services. Ever since listing in New York in 2014, Alibaba has consistently posted operating losses from its collection of non-commerce businesses. The only bright spot was a 598 million yuan ($89 million) profit from the cloud unit in the March quarter of this year. But that quickly evaporated in the June quarter when it slumped back to a 1.3 billion yuan loss. Alibaba, which was founded in 1999, has always leaned heavily on two pillars of its e-commerce model. The largest contributor has traditionally been marketing services — which it also calls customer management — where the company charges merchants on its platform a fee to elevate their products higher in search results, or to deliver ads to prospective shoppers. The company also takes a commission on sales, and more recently has entered into physical retail including groceries and hypermarkets. Collectively, this sector has delivered more than 800 billion yuan in profit over the past seven years, according to Bloomberg Opinion calculations. But the non-ecommerce business has been a drag, losing over $51 billion in the same period, with its local consumer services division — which includes online groceries and food deliveries — being the biggest contributor to that shortfall. The cloud division, which allows customers and consumers to store data on Alibaba’s servers, ought to be a money-maker. Instead, it posted an average operating loss margin of 15% since starting to report data from the 2016 fiscal year. Amazon, by contrast, made $18.5 billion in operating profit from its Amazon Web Services business last year alone, with a margin of 30%. Microsoft has also made a successful transition away from reliance on Windows and Offices products to garner $32 billion, or 39% of total income last year, from its intelligent cloud business with a margin of 43%. Even Apple, better known for selling iPhones, gets 23% of revenue from services including Apple Music, App Store and iCloud. That division posted the company’s strongest growth last quarter. It doesn’t provide a profit breakdown by unit. Even semiconductor giant TSMC last month told investors that it expects customers who provide cloud and other services to be the major driver of chip demand, showing that hardware makers are also finding ways to profit from non-consumer products. Cloud isn’t the only drag. Alibaba’s Cainiao logistics business helps deliver products to consumers and gives the company an advantage over competitors, but continues to lose money. Management may feel that such a loss is acceptable if it ensures the core business stays ahead of rivals JD.com and Pinduoduo Inc. If that’s the case, then investors will need to adjust their expectations accordingly. Shareholders will also have to get used to the notion that Alibaba’s move into entertainment may fail to be a money-maker, too. Unlike Netflix Inc., which has been profitable for at least 15 years, Alibaba’s content business, which includes streaming service Youku and production company Alibaba Pictures Group, continues to drag down earnings and shows no signs of being able to deliver consistent income. With China’s consumer economy heaving peaked, Alibaba is going to need to find new sources of earnings growth. History shows it hasn’t found one yet. More From Bloomberg Opinion: • Alibaba Has a Bigger Problem Than the Tech Crackdown: Tim Culpan • If You Think China Cares About Investors, Think Again: Shuli Ren • Whatever Happened to Common Prosperity?: Matthew Brooker This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. Previously, he was a technology reporter for Bloomberg News. More stories like this are available on bloomberg.com/opinion ©2022 Bloomberg L.P. GiftOutline Gift Article
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