Is Alibaba Really Worth It?

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\"RROn the verge of becoming the biggest initial public offering in US history, one has to wonder if it’s really worth the $187 billion some analysts are projecting. As we witness Jack Ma, former schoolteacher and founder of Alibaba, strut across a stage portraying himself as Jeff Bezos and Steve Jobs combined, at least he’s talking the talk. Walking the walk, as we all know, is a horse of a different color.

And to that point, off stage he’s been on a wandering and random acquisition binge, making some 30 investments since the beginning of the year, worth close to $7 billion. Whether or not he was just trying to find stuff to invest all of the cash gushing through the business, the deals he has made seem highly questionable.

They certainly don’t appear to fit into any kind of strategic vision, nor do they compliment or provide synergies for the core business — perhaps with the exception of buying stakes in a Chinese department store. However, investing in Singapore’s postal service and then a 50% stake in a Chinese soccer team, following a 15-minute chat with the owner over cocktails (and Ma knows nothing about soccer), would seem to be more opportunistic than strategic. He’s also made deals through his affiliates, such as lending one of Alibaba’s co-founders enough money to invest in a Chinese Internet television company named Wasu Media. Worse, and bringing Alibaba’s due diligence process into question, is the acquisition earlier this year of film studio ChinaVision Media to be re-christened Alibaba Pictures, which was later discovered with possible “accounting issues” that could impair Ma’s assets. Regardless of the degree of impairment, this incident reminds investors that Chinese business and accounting practices often play by their own rules.

So this kind of ad hoc use of capital into unrelated businesses must give IPO watchers and potential investors reason to pause. Alibaba is widely and deeply penetrated throughout China with its giant Taobao and Tmall sites regularly shopped by some 600 million users and generating sales of more than $170 billion (larger than Amazon and eBay combined). But Ma’s vision of becoming a global juggernaut has to start with crossing the hurdle of successfully establishing a branded platform in the daunting US market. And even though Alibaba’s volume is larger than the combined revenues of Amazon and eBay, it has been able to grow rapidly to that size because China’s remote and hugely populated markets lacked retail stores, and the zillions of Chinese needed stuff. In a brilliant move, Alibaba further enabled all those online consumers who don’t have credit cards by developing Alipay, a third-party online payment platform with no transaction fees. The system will not transfer payment to sellers until the customer’s satisfaction is verified.

Alibaba’s online platforms in China are also host to thousands of small “mom and pop” businesses which create and sell small quantities of basic and/or artisanal items, again skipping their need to invest in a physical store. In fact, it was Jack Ma’s original vision to create an open marketplace where everybody could participate and make a living.

All of Alibaba’s rapid and profitable growth notwithstanding, gaining dominance in the US, which is over-stored, over-stuffed and over-websited to begin with, will require more than an enormous amount of capital. It will require a deep understanding of the American consumer and an even deeper understanding of how to market to them, particularly when Internet giants like Amazon, eBay and thousands of other smaller players are all well established and already connected with American consumers.

The assumption that offshore brands can immediately embed themselves with the American consumer is a huge common misstep and why most of these companies fail. No other country has such a highly complex marketing, distribution and communications infrastructure, which is difficult enough for leaders who have competed in the US “Super Bowl” of retailing their entire careers. The sad reality is that outsiders who view the US as their “oyster,” find “share wars” and slow-to-no-organic growth after they enter the largest, yet toughest and most competitive marketplace in the world.

Furthermore, if Ma’s future path for growing the business continues to randomly and opportunistically acquire non-related businesses, any sustainable growth focus will eventually become foggy if not chaotic. To succeed, the business must be 100% strategically focused — crystal clear in its mission, culture and objectives – with a cohesive and seamlessly integrated value chain for a 24/7 connection with its consumers … or it will die.

And, on that note, I believe Mr. Ma and team are going to have a very tough time “walking the walk.”



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