When I speak to other investors who invest in some of the types of companies we invest in, we often use shorthand to describe an emerging market Internet business that resembles a successful US one. The shorthand usually describes the business in question as the “this of that”. For example, the “Amazon of India” or the “Netflix of Russia”.
We use this shorthand to quickly describe the gist of what a company does. Does it deliver video over the Internet? Then it must be kind of like Netflix. Does it sell multiple categories of goods and have its own warehouses? Then it must be kind of like Amazon.
But an important part of using analogies like this involves recognizing that they have limitations. Sometimes, huge limitations. Emerging market companies are often so different from their US parallels that using analogies can really get you in trouble in terms of understanding what the company actually does.
Take, for example, Alibaba, sometimes referred to as the “Amazon of China” or the “Ebay of China”. We’ve written about Alibaba before in terms of its impressive size and scale in China, and why businesses like Alibaba can leapfrog offline competitors more easily in emerging markets. But what about how the business actually works?
Alibaba is a prime example of how the “this of that” shorthand can really get you in trouble. First, let’s take a look at Alibaba’s main business, selling goods to consumers in China.
Alibaba’s Chinese retail business is primarily a set of 3 marketplaces that enable consumers to buy goods from sellers, with other services wrapped around those core offerings. Taobao, Alibaba’s C2C marketplace, allows consumers to buy used and new goods from other consumers, similar to Ebay. TMall, Alibaba’s B2C marketplace, enables consumers to buy primarily new goods directly from brands and retailers, similar to how Amazon’s Marketplace business works. And Juhuasuan, Alibaba’s third major marketplace, is a daily deals business, similar to how Groupon works. Tightly integrated into these ecommerce marketplace offerings is AliPay, which enables consumers to conveniently pay for the goods they buy, similar to how PayPal works.
Alibaba also has a bunch of other services that help to increase the stickiness of Alibaba’s customers and merchants on the platform, such as cloud computing, digital storage offerings, etc, but let’s focus on the retail side of things to keep things simple.
So Alibaba is a set of marketplaces where consumers can buy things. Sounds straight-forward enough – kind of like eBay or Amazon Marketplaces. They must make money in a similar way, right?
Wrong. How they make money off of their marketplaces is where things get interesting. You see, unlike Amazon’s Marketplace or eBay, Alibaba earns most of its revenues from advertising. This is because, when consumers in China are searching for products, they usually come straight to Alibaba, and Alibaba charges its merchants if they want to promote themselves and make their products more visible to consumers.
If this monetization model sounds familiar, it’s because it is. This is basically what Google does in the US.
The reason why Alibaba can do this is because they account for ~80% of total ecommerce in China, and they usually don’t allow the products listed on their marketplaces to appear on Baidu (the “Google of China”). So unlike in the US, for example, where the ecommerce landscape is more fragmented and consequently most consumers start searching for things to buy on Google and then eventually end up on Amazon or another ecommerce site, in China the search process often starts directly on Alibaba.
And Alibaba charges merchants marketing fees to promote themselves on the site, similar to how Google Adwords works. In fact, in 2013 almost 70% of Alibaba’s China ecommerce revenues were generated by “online marketing services”, primarily keyword-based CPC ads.
Yes, that’s right, China’s biggest ecommerce player monetizes as more of a “Google for products” type of search advertising business.
So to summarize: if you are selling something in China, you should probably be on Alibaba otherwise consumers will have a hard time finding you, and if you want to increase your chances of being found on Alibaba, you need to pay to promote yourself. What a wonderful, wonderful monetization machine. And what a completely different model than Amazon and eBay.
Alibaba isn’t alone in this regard. Most businesses that you would think of as the “this of that” in markets like China, Brazil, Russia, Indonesia – most emerging markets – operate in a significantly different way than the companies that they are being compared to.
Let’s look at another “Amazon of China”, JD.com, which has its own warehouses similar to Amazon. JD.com processes a substantial amount of its customers’ payments thru cash-on-delivery rather than credit cards. As a result, the company has over 20 thousand delivery personnel delivering packages to customers and collecting cash from them. That’s pretty different than Amazon. The “Google of India”, JustDial, allows consumers to call a phone number to find what they are looking for, which is pretty different from Google. And the “Netflix of Africa”, IrokoTV (one of our portfolio companies) allows users to download video content to their feature or smartphones, which is pretty different from Netflix, too.
And then there are the businesses that have no remotely close parallels in the US or the developed world. Businesses like Qihoo (NYSE: QIHU), YY (Nasdaq: YY) or UCWeb (acquired by Alibaba), to name a few. These are $1bn+ companies that were created to solve specific issues that consumers face in emerging markets. You can’t even find anything remotely like them in the US.
It all just goes to show that, when it comes to the Internet, emerging markets are very, very different than what you may be used to.