Is Alibaba Buying its Customers?

Alibaba is taking quite a uniquely aggressive approach to beating the competition: paying its consumers to use its services. Alibaba, China’s biggest e-commerce company, competes with 360Buy.com and Tencent Holdings for a share of the country’s Internet shopping market, estimated at 193 million buyers. Just through the summer, it plans to spend 300 million yuan ($47 million) on promotions for electronics sold on its EBay (NASDAQ:EBAY) style online shopping front, Tmall. The plan is to subsidize its vendors’ deals for their customers, or in some cases, pay rebates straight to customers.

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China already has more consumers shopping for goods online than the U.S., and according to one estimate, the market may triple to $364 billion by 2015. While Tmall made up 37 percent of Chinese business-to–consumer e-commerce in the first quarter—more than double the 17 percent of 360Buy.com—it hopes to corner a lot of more of that burgeoning market. Suning Appliance, Tencent, and Amazon.com (NASDAQ:AMZN) each have about 2 percent of the market.

Alibaba’s resembles EBay in the business model by not stocking the merchandise itself. That means it can be more profitable than competitors 360Buy.com or DangDang (NYSE:DANG), whose business model is closer to Amazon’s. Dell (NASDAQ:DELL) and Fast Retailing’s Uniqlo clothing brand are among the companies that use Tmall.

Competitors have responded with their own promotions, with both Tencent and 360Buy.com also offering promotion programs. But reaching the scale of Alibaba will be difficult. Alibaba is the second-biggest generator of online advertising revenue in China, behind search engine Baidu (NASDAQ:BIDU). Its net income grew seven-fold to $237 million in the quarter ended December, while revenue rose 88 percent to $1.02 billion.

“The financial strength of Alibaba means they are in a position to invest in marketing their various platforms,” Chen Shousong, an e-commerce analyst at Analysys, told Bloomberg. “They are going to be doing what they can to fight off the competition and build a big lead.”

In fact, the company is also seeking debt and equity financing to fund its planned $7.1 billion share buyback from Yahoo (NASDAQ:YHOO). Chief executive officer Jack Ma says the company may sell shares in an initial public offering within five years.

“Alibaba is probably in the best position right now of anybody—they have the platform in place, and the critical mass of eyeballs,” says China Market Research Group analyst Ben Cavender.

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