Jack Ma Should Channel Becks

Some fancy footwork will be needed for Alibaba to defeat pirates and keep its large catalog of products.
At Closing, April 20st
179.11 USD

For the past seven years, Alibaba Group Holding Ltd. has been helping China's singletons commiserate, or celebrate, their unencumbered lives with an annual Singles' Day sale on Nov. 11. This year, the e-commerce giant wants to take that love global.

That Alibaba has been described as "facilitating the sale of counterfeit and pirated goods to consumers and businesses" is not an irrelevant dot point in the story of Jack Ma's expanding empire. Just 2.2 percent of revenue came from Alibaba's international retail business last year, versus 79 percent from China. Wholesale and services accounted for the rest.

Balance of Power

China retail remains Alibaba's most important business, with international barely a blip on the radar

Source: Bloomberg

At the heart of Alibaba's retail-business model is the company's online marketplace, where sellers gather to ply their wares to more than 400 million customers, helping Alibaba post an average 43 percent increase in quarterly revenue over the past three years. It's this marketplace model that helped turn over $7.2 billion of merchandise in the first two hours of Singles' Day trading early Friday, on track for another record.

In addition to official online storefronts from global names including Burberry, Moleskine and Maserati, thousands of independent retailers also turn to Alibaba. And an untold number of those use it to sell fake goods. How much of that $1 million per second in the first two hours was legit and how much was counterfeit is almost impossible to discern.

Coming from such a small base, it shouldn't be hard for Alibaba to use this year's Singles' Day to boost overseas buyers, as CEO Daniel Zhang pledged last month. To burnish its offshore credentials, Alibaba has in past years brought in an all-star cast of foreign names from Adam Lambert to Kobe Bryant. Pop star Katy Perry was scheduled to appear this year but canceled at the last minute and was replaced by David Beckham.

To be clear, these Western names aren't being hired to help sell to foreign customers but rather give local Chinese the appearance that Alibaba is an international company with global reach. Chairman Ma has said before he wants half of Alibaba's sales to come from outside China.

So far, Alibaba's plan to boost overseas revenue has been more talk than action. It's dabbled with investments in India and Southeast Asia, but has done little to put boots on the ground, particularly in Western markets. Facing huge competition from Amazon.com Inc. globally, and local rivals in individual markets, Alibaba's best chance of gaining traction outside China would be to market its larger catalog at lower prices, a strategy that might conflict with aggressive action to weed out those who sell fakes.

Growth Trajectory

Alibaba has managed to maintain sales momentum without tapping foreign markets

Source: Bloomberg

Alibaba has said it's working hard to prevent piracy. Ma wrote in an opinion piece for the Wall Street Journal that "counterfeit goods are absolutely unacceptable, and brands and their intellectual property must be protected."

That is Alibaba's dilemma. Removing pirates would not only cut the number of sellers, but also the catalog of products available and by extension, sales volumes, thus reducing the firm's advantage over competitors. It would also open the door for other e-commerce companies to meet the demand for fakes. On the other hand, letting the pirates roam free will likely incur continued wrath from foreign governments, brands and industry groups while also sowing seeds of doubt in the minds of international consumers who tend to be less forgiving of counterfeits.

For Ma to get the ball past stricter intellectual property protections while still hitting his goal of an unassailable catalog of offerings, he really will need to bend it like Beckham.

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

    To contact the author of this story:
    Tim Culpan in Taipei at tculpan1@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.