The Wall Street Journal reports,"Alibaba's filing for a U.S. initial public offering boasts rapid growth and rising margins, but it raises concerns around its ability to make money off mobile traffic. This is no idle matter: Companies that can't show their business migrating well from desktops to mobile devices have justifiably fallen out of investor favor, as more people access the Internet through smartphones and tablets.
Alibaba says mobile accounted for 19.7% of total transactions on its e-commerce platforms in the fourth quarter of last year, up from 7.4% in the same period a year earlier. But that is only one piece of the puzzle.
For Amazon and eBay , mobile has been a blessing as it allows more users to shop for longer, driving volumes higher, says Bernstein analyst Carlos Kirjner . But companies that rely on advertising have faced greater challenges due to the limited real estate on smartphone screens.
Alibaba is a mix of the two models. Tmall, its newer, higher-end shopping platform charges merchants a percentage of total sales. For this business, increased mobile adoption should be a clear positive.
But Taobao, the site where small business and private individuals go to sell their wares, is free to use. It sells advertising space to merchants, and charges them for more prominent placement on the marketplace website. Room for both is more limited on smartphone screens, says Mr. Kirjner.
So understanding how much revenue comes from Tmall and how much from Taobao is crucial for investors to judge the outlook on mobile monetization. Unfortunately, Alibaba neglected to share this crucial information with investors.
Alibaba does say it expects monetization rates to be lower on mobile as compared with PCs. But the company seems unconcerned, explicitly stating that it has no plans for now to focus on maximizing mobile monetization. Throughout the prospectus Alibaba is at pains to stress a lack of focus on short-term profits, probably enabled by a corporate structure giving insiders control over most of the board.
Investors may not be so sanguine. Concern over mobile monetization was one factor that drove down Facebook shares after they listed in 2012. The stock rebounded sharply once Facebook was able to show traction in mobile.
In China, mobile is likely to be even more important as many new Internet users skip desktops and rely mainly on smartphones. The number of mobile Internet users in China rose 19% last year to 500 million, nearly twice as fast as overall Internet users, according to according to state research center CNNIC.
Mobile is also where Alibaba will encounter the fiercest competition, notably from archrival Tencent. This diversified Internet giant has the advantage in mobile thanks to WeChat , a massively popular messaging app that is native to smartphones.
Tencent is now using WeChat to direct potential shoppers to JD.com, a smaller Chinese e-commerce company, also preparing for a U.S. listing, in which it holds a 15% stake. It is also integrating its payment platform Tenpay, which competes with Alibaba-linked Alipay, into WeChat.
Alibaba isn't sitting on its hands. It has amassed a 66% stake in UCWeb, a popular mobile Web browser, and recently struck a deal to take full control of mapping service AutoNavi. Alibaba says it will likely make more acquisitions in this area. Yet these investments, plus intense competition in the mobile space, may start to eat away at Alibaba's sky-high operating margins, which were north of 50% in the fourth quarter.
Given the importance of mobile, investors may forgive Alibaba for some heavy spending. But the experience of Facebook and others indicates Alibaba will need to show before long that it is translating eyeballs on smartphones into real money".
Source: WSJ, article by Aaron Back
