Alibaba Makes Internet Magic
Media and Technology
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You may not have heard of the Alibaba Group, but investors, competitors and business leadersaround the world are paying close attention. Formed 11 years ago by high school teacher JackMa, Alibaba.com is China's largest B2B Internet marketplace for small- and medium-sizedcompanies. Other holdings include Alipay, an online payment service similar to PayPal; AlibabaCloud Computing; and Taobao, a social networking and shopping site that Mr. Ma describes asa mash-up of Amazon, eBay and Facebook. But it's the flagship company, Alibaba.com, thathas been the incubator for his sometimes-unorthodox ideas on management and productdevelopment.
"We don't think about making money," Mr. Ma said in September during the Sir Gordon WuDistinguished Speakers Forum at Columbia Business School, sponsored by the Chazen Institutefor International Business. "We think about creating value for society, for the people, and forthe customer. And because we don't think about making money, we make money."
That might sound flippant coming from someone whose website raised $1.5 billion in 2007,making it the second largest Internet IPO in history (only Google's, at $1.67 billion, was larger).Today, market capitalization for Alibaba.com is nearly $10 billion, and Taobao has mushroomedinto China's largest retailer by some measures. That's all the more remarkable considering thatMr. Ma operates in a country with some of the most restrictive Internet censorship policies inthe world. Still, he has succeeded by adhering to one simple six-word tenet: customers first,employees second, shareholders third.
The Early Days
Dressed casually in canvas shoes and a white windbreaker, Mr. Ma recounted for the audiencehis childhood in Hangzhou, a major city in China's Yangtze River delta. He was, he said, a fan ofwu xia (martial arts) novels, and often got into fistfights as a young boy. He picked up Englishon his own by acting as a tour guide for foreign visitors in exchange for language lessons, butbecause he had difficulty with math, he twice failed his general college entrance exams. On thethird try, he was admitted to the languages program at the local university, after which hebegan a career teaching high school English.
But along the way, the entrepreneurial bug bit. He launched a translation service and washired by an American businessman, who was bankrolling construction of a local highway, totranslate negotiations with Chinese municipal authorities. Part of the deal-making called for himto travel to Las Vegas to meet some investors, and it was there, in 1995, that he first heardthe word "Internet." He then travelled on his own to Seattle to visit VPN, a small Internet serviceprovider with five employees. There he got his first look at the technology that would, within adecade, make him one of the most influential entrepreneurs in the world.
Fee or Free?
A key to his success, Mr. Ma said, was having a business model so simple that any customercould instantly understand it. Unlike eBay, which has a sliding scale of fees, plus commissionif the item sells, Alibaba.com charges nothing for up to 50 product listings. "Chinese SMEs[small and medium enterprises] want to sell their products abroad," he said. "We help themcreate revenue." But what about Alibaba's revenue? That comes largely from annualmembership fees that sellers pay to upgrade to "Gold Supplier" status, which gives themaccess to more buyers and an online storefront.
"A membership fee is something all SMEs understand," he said. "If you talk about transaction[charges], our P/E [price to earnings ratio] would go up, but customers wouldn't understandus. Our business model should be simple and easy enough for customers to understand."Taobao, meanwhile, has also steadfastly adhered to the "no transaction fee" philosophy, whichcaused it to leak money for several years. Recently, though, it began selling ad space on thesite. Revenues have been high enough to push Taobao into the black, Mr. Ma said.
For the first five years of Alibaba.com, Mr. Ma was the site's chief quality control officer. Everyfeature of the site was put to one test: if he couldn't figure out how to use on his own,without explanations or manuals, it didn't get implemented. "I'm not a high-tech guy," he said. "My wife bought me an iPad and I still don't know how to use it." The site's design isdeliberately no-frills: Clicking on the "categories" tab, for example, pulls up an easy-to-scanalphabetical list of items for sale, everything from fresh garlic to pipe fittings. New requestsfrom buyers are prominently displayed and constantly updated. And for buyers who cringeat the thought of racking up a phone bill, there's a list of Chinese suppliers with toll-freenumbers.
What's ahead for the Alibaba Group? Don't expect a foray into online gaming any time soon. "Idon't believe in online gaming," he said, noting that his son and his friends spend hours afterschool glued to a computer screen. "We could make a lot of money on gaming, but I just don'twant my kids to be focused online," he said. Instead, he said, the next big thing in China will beB2C commerce.
“The world is changing,” he said. “With so many consumers, they can say ‘I want my productstailor-made.’ This will fundamentally change the Internet.”