Jack Ma, Alibaba CEO, said: “E-commerce will become a ‘traditional business’”. The two small e-commerce companies become two technology giants today. In 21th, the e-commerce has completely changed the way people shop. With one click, your favorite clothes will deliver to your house. With the rapid development of the internet, the global e-commerce will usher in a higher development climax. Alibaba and Amazon, both as top global e-commerce companies, are changing our lives step by step. With a smart kindle, you can watch any books you want. With Alexa, you can turn off your lights by voice control. With Alipay, you don’t have to carry a wallet when you make a payment in China. In this article, the business and profit model of the two companies will be discussed. Including the comparison of the market shares, I hope you will have a clearer understanding of those two e-commerce giants.
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Maybe you would be unfamiliar with Alibaba, a company from China, but if you were a stock investor, you most likely heard of Alibaba’s stock (symbol: BABA), which was listed on the NYSE on September 2014. Alibaba, founded by Jack Ma in 1999, is the world’s biggest e-commerce platform. It is defined the biggest because Alibaba has a market share of 26.6% while Amazon with a share of 13% ranked second. It is undoubtedly that the population of China contributes a significant number to the market. On the other hand, Amazon, founded by Jeff Bezos in 1995, is the largest U.S retailer, just surpassed Wal-Mart, the previous biggest retailer, in 2015. Although two companies are winning the e-commerce market in their countries, Alibaba and Amazon don’t like people call them the e-commerce company. Amazon’s CTO said that “Amazon is a technology company. We just happen to do retail” Admittedly, they prefer the public to call their Internet & technology company. The biggest reason behind is both companies also offer cloud service. Amazon is the first company who create Amazon web service (AWS), a two-year lead than Google. In fact, many people don’t know that AWS is an important driver of Amazon’s profitability. At 2017Q1 (First Quarter), Amazon’s half of revenue was from AWS. Alibaba starts its cloud service late. However, due to China’ rapid market growth and demand, Alibaba is now the fastest-growing cloud company. They also have one thing in common: both stocks have an excellent performance with a consistent uptrend.
Alibaba and Amazon have very different business models. Alibaba has several branches. 1688.com focus on business to business trade, similar to online wholesale market; Taobao.com use business to consumer model, which the main buyer is individual, while the seller may be an individual or a retailer (think as eBay). Tmall.com is similar to Taobao.com, but the main seller is the brand retailer. The operating cost at Tmall.com might not be as lower as the cost at the physical store. The entry threshold is high because Tmall.com has absorbed high-quality sellers from Taobao to regulate its operations, so the product with the quality problem is reduced enormously, and after-sales services are improved, just like shopping in the physical store. Those are main services from Alibaba. Since its inception, Amazon has been building its own e-commerce infrastructure and warehouses, integrating its own platform. Prime membership is created, attracting many loyal subscribers with free and fast shipping. In addition, Amazon’s own product line is also more and more abundant, such as Kindle, Alexa, etc. As the biggest retailer in the U.S, they would only pick the supplier which satisfy their expectations. From the business model perspective, Alibaba is more like a service-oriented company, while Amazon focused on the retail industry.
Because of the different business models, they focus on, it also creates a very different profit model. Alibaba’s main profit comes from the service industry, not from retail or wholesale. Alibaba relies on e-commerce platforms such as Taobao.com, Alipay, and Tmall.com, attracting more than 500 million users and tens of millions of merchants, and then charging advertisements and service fees to merchants. The fact is that Alibaba makes the profit because it has created this huge platform. It provides various services to sellers and buyers. Amazon’s profit model is to rely on self-employed businesses to attract buyers, collecting membership fee, and reinvesting most of its revenue to the innovation of new products and service lines. Even though the financial reports indicate Amazon has not been profitable for consecutive years, Amazon is still investing and expanding as much as possible without leaving any surpluses and cash; Amazon’s ultimate goal should be Prime Membership, extending to every aspect of life, consumption, and technology. Hard work eventually pays off. Amazon ceases to lose and begin to turn out a profit in recent years. This model of Alibaba, compared with Amazon, does not need to invest much in the construction of logistics facilities, and it doesn’t need to build its own warehouse. Alibaba successfully builds its own business ecosystem, cooperating with millions and millions of sellers.
Future is also the key to the competition. For business people, they would pay attention to company’s market shares in their own countries. The statistics showed that in 2014, 80% of China’s online shopping market is dominated by Alibaba. However, since the internet development in China, other competitors are also growing up rapidly. Not hard to see, only 56.7% of China’ online shopping market belongs to Alibaba in 2017. Although Alibaba’s profit margins haven’t shrink yet, it is hard to predict that what is Alibaba’s market share in the next few years. On the other side, Amazon’s market share in the e-commerce market was 37%. (Figure below) Specialists projected it will increase to 50% by 2021. Since Amazon’s domestic competitors are very limited, you can imagine how Amazon is dominating the U.S online shopping market. This is also the reason that the government is paying a great attention to its operation, such as Trump’s Twitter feud with Amazon.
Every e-commerce giant is constantly refreshing its own selling records, and we have created an illusion that the more they sell means the more company earn. Now, you understand this doesn’t apply to every e-commerce company, because Alibaba mainly makes the profit by charging the service fee from sellers, and Amazon makes the profit from the retail business. In fact, those differences depend largely on the differences in national conditions too. In conclusion, we have to admit that both companies are great and innovative. People call that the stock market is a barometer for the company. Admittedly, both investors have high expectations for the two companies. In the end, I hope that these two companies all have a bright future, delivering a better experience to people all over the world.