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Alibaba Is Stuck With E-Commerce for Now

Alibaba Is Stuck With E-Commerce for Now

For more than a decade, Alibaba Group Holding Ltd. invested its growing cash hoard into dozens of businesses in a bid to diversify away from its e-commerce roots. But spreading its wings is increasingly difficult as Chinese regulators grow much more aggressive — with the company serving as a warning for others. Now, Alibaba has had to sacrifice margins to buy growth.

In a conference call after releasing earnings Tuesday, management outlined plans to keep plowing “excess profits” into various aspects of its e-commerce business including merchant support, a second-hand marketplace, and streaming commerce. There was little discussion of its $70 billion portfolio of equity and other holdings, despite the fact that additional income from interest and investments for the June quarter equate to 45% of earnings from operations.

Revenue for the period jumped 34%, once again driven by its core e-commerce business, though 12 points of that expansion came from its recent consolidation of hypermarket operator Sun Art Retail Group Ltd. Despite this huge growth, operating profit dropped 11% because it spent more money on budding new areas that include its move into consumer-to-consumer sales and discount platform Taobao Deals. 

Investors should get accustomed to seeing their “excess profits” going into high marketing costs for lower-margin businesses. The company has little wriggle room elsewhere.

It was almost a year ago that Alibaba’s most-promising spin-off was brought crashing back to earth by regulators intent on teaching founder Jack Ma a lesson. Ant Group Co.’s failed Hong Kong listing in November signaled just how seriously Beijing takes stability of the financial sector and antitrust concerns. Profits at Ant — which is one-third owned by Alibaba and provides payments, insurance and loan products — now remain largely stagnant and the chances of a gargantuan IPO coming to fill the coffers aren’t great. Before the government brought the wayward business to heel, the Ant listing promised to shatter records.

Ma, who founded Alibaba in 1999, stepped down as chairman in October and has largely stayed out of sight since the regulatory cracdown on Ant. The Alibaba investor call was helmed by his successor, Daniel Zhang, and Chief Financial Officer Maggie Wu.

Other companies in its stable include Alibaba Health Information Technology Ltd. (Ali Health), video-sharing provider Bilibili Inc. and outdoor advertising company Focus Media Information Technology Co. It even owns stakes in an investment bank, a securities brokerage and an electric-car company.

But a steady drumbeat of regulatory moves over the past year suggest that Beijing wants China’s internet giants to stay in their swim lanes while also resisting the urge to leverage dominance in their existing domains. Last month Alibaba, along with Tencent Holdings Ltd. and a handful of others were fined for failing to get approval for acquisitions they’d already undertaken.

Beyond mergers and acquisitions, just being really good at your core business can attract unwanted attention. In April, Alibaba was fined a record $2.8 billion for abusing its dominance in e-commerce. Among the reasons for the stiff punishment: The company used its data and algorithms “to maintain and strengthen its own market power and obtain improper competitive advantage,” the regulator ruled at the time.

This tightening regulatory leash doesn’t give Alibaba many places to roam. Which is why it’s making a big show of sacrificing profits to sow new seeds in fresh fields like streaming commerce — think TV shopping for the internet age — and cut-price retail. A decision to widen its share buyback plan by 50% to $15 billion, announced Tuesday, is further recognition that it really doesn’t have many other places to spend its money.

So while China’s pre-eminent internet giant has spent billions of dollars to spread into everything from cars to healthcare. It’ll need to be content with just being an e-commerce company, for now.

Alibaba reports its share of Ant earnings one-quarter in arrears.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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