Alibaba Wishes $2.8 Billion Could Take the Target Off Its Back

(Bloomberg Opinion) -- When Qualcomm Inc. was handed a record penalty by China’s antitrust regulators in 2015, executives at the U.S. chipmaker could have been forgiven for popping champagne.

Although they were on the hook for a $975 million fine, the ruling by the National Development and Reform Commission ended a yearlong investigation into the company and affirmed its technology-licensing business model. Proof of its lucky escape came over the next six years as China grew from composing 50% of Qualcomm’s revenue to 60% during a period when the company’s global sales actually dropped.

Alibaba Group Holding Ltd. is unlikely to be so fortunate. On Saturday the Chinese e-commerce giant copped a $2.8 billion penalty, the largest since the Qualcomm case. It was imposed by the State Administration for Market Regulation, a successor to the NDRC. 

The key infraction was Alibaba’s long-standing policy — since at least 2015 — of using its dominant market power to force merchants to choose its platforms over those of rivals, the anti-monopoly regulator wrote in a statement. This practice effectively compelled sellers into exclusive agreements with Alibaba, hurting both merchants and competing e-commerce providers. 

Alibaba responded Saturday with a 550-word letter of contrition: “Alibaba would not have achieved our growth without sound government regulation and service, and the critical oversight, tolerance and support from all of our constituencies have been crucial to our development.” 

If the matter ends there, then Alibaba is in the clear. The penalty is equivalent to a mere 4% of domestic annual revenue — by contrast, Qualcomm’s fine was double in scale — at 8% of its China sales. 

Qualcomm’s chief sin, according to the regulator at the time, was to charge smartphone makers a licensing fee based on the total cost of parts in a device, including those components it didn’t supply — thus artificially inflating the bill. Its remedies for this infraction included offering licenses for certain patents and unbundling various other patents in its portfolio. And yet crucially for the chipmaker, it was allowed to continue levying a toll on the entire device and merely had to discount that figure by 35%. 

The risk for Alibaba, though, is that this financial penalty begins a great unwinding of its business model.

What attracts buyers to Alibaba’s platforms — including Taobao and Tmall — is the knowledge that almost every item available will be there, and many probably won’t be found elsewhere. That alone is a pretty powerful draw. Yet the regulator also noted that such an anti-competitive approach hurts consumers while restricting innovation and the free flow of services. In other words, there’s less room for new businesses and ideas to pop up if one player has already stitched up the market.

While Chief Executive Officer Daniel Zhang in February sought to play down the importance of exclusivity, just a few years ago he was proudly telling investors how it achieved incredible growth thanks to the company’s ability to secure exclusive product selections and planned to continue that approach. 

With China’s consumer market starting to mature and the economy slowing, having any edge minimized could hurt not only revenue growth but also profit margins, as the company is forced to spend more on marketing to drive traffic. If this key advantage is removed entirely, there’s also the chance that new players will chip away at Alibaba’s sales in specific product categories, reducing its reputation as the place where you can find everything.

Worse still could be a deeper look by regulators at Alibaba’s broader business model.

Beyond simple e-commerce, the company has delved into physical retail, food delivery and entertainment. In May 2019, Chief Financial Officer Maggie Wu told investors that a key strength, compared with peers, was “the synergy among our group companies,” such as the combination of ele.me home delivery, Taobao shopping and Alipay’s payments, which allowed Alibaba to “really utilize the assets from our other companies to cross sell.”

That’s the kind of boast that may come back to haunt them. Ant Group Co.’s aborted Hong Kong offering already tells us that the financial-services business is in trouble — Alibaba owns 33% of Ant — yet its position in sectors beyond e-commerce could spur further investigation.

In November, SAMR — the organization that just fined Alibaba $2.8 billion —  outlined new rules that could end cross-subsidization. Other possibly forbidden practices may include the use of data to target specific customers — an important practice for larger players like Alibaba, which not only have more users, but a greater catalog of services where it can profile them.

Everywhere you look, Alibaba’s strengths — its huge consumer base, broad array of services and reams of data — are starting to look like targets for authorities keen to rein in the nation’s major internet player. Homing in on any one of them alone may not be enough to fell the giant, but a death by a thousands cuts remains the bigger risk. And that’s the kind of fate a $2.8 billion check won’t be able to cover.

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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