September 7, 2014

SCHULMAN | Ali-bonkers Over Alibaba

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By ERIC SCHULMAN

Farhad Manjoo ’00 wrote a column in The New York Times about Alibaba a few months ago — don’t worry if you’ve never heard of Farhad Manjoo or Alibaba, I’ll explain. Farhad Manjoo is a past Editor in Chief of The Daily Sun, but more importantly, the current technology columnist for The New York Times. Alibaba is a bootleg Chinese copy of Amazon (Hopefully, you know about Amazon. If you don’t, visit their website and thank me for making your life as a college kid infinitely better). Farhad Manjoo hopped on the Alibaba fanboy bandwagon and trashed Amazon after Alibaba filed for an initial public offering (or IPO, raising money by selling shares to the public). This is important because Alibaba’s IPO is today, and I think Farhad Manjoo is wrong about Alibaba.

Farhad Manjoo thinks Alibaba’s exclusive access to China makes it better than Amazon, even though its not innovative; he is wrong. Innovation is so important to e-commerce considering sending college kids cereal when they’re too lazy to go to Wegman’s isn’t profitable yet. Alibaba only pockets 0.5 to 1.5 percent in transaction fees for every dollar sold across its platform. It might look more profitable than Amazon on paper, but unlike Amazon, it doesn’t count products sold through its platform towards revenues. Business Insider estimates that more things are sold through Alibaba than Amazon and Ebay combined. If Alibaba counted these transactions, its margins would be less than a percent. Vis-a-vis Amazon would look just as lucrative as Alibaba if it didn’t count all the physical items sold through its site towards sales revenue. Alibaba needs to innovate until they figure become profitable; innovation is not overrated.

On the other hand, Alibaba’s advantage in China is overrated. For one thing, relying on China’s economy is a mistake. China’s economy is very volatile — it’s as reliable as the Port Authority bus terminal. The sketchy line between government and business in China doesn’t help things. If the Chinese government was a TA, then business would be that kid that the TA flirts with and grades less harshly. It’s not a perfect metaphor, but you get my point; when an outsider figures out what’s going on, this arrangement will fall apart. Alibaba needs to innovate. The barriers keeping out new competition in e-commerce are low enough without considering how much room China’s developing economy leaves competitors; Alibaba won’t beat new competition if it doesn’t innovate. And, growing sales within China won’t even matter if Alibaba doesn’t innovate to either lower costs handling business in bulk or use data from sales to exploit consumer habits. Farhad Manjoo overlooks the difference between growing sales and growing profits; if Alibaba doesn’t grow profits, its access to China is not the game changer Farhad Manjoo makes it out to be.

Farhad is right to doubt Amazon. But, if Amazon can’t innovate and make growing sales lucrative while beating its competition, there is no way Alibaba can. Arguably, Amazon already leverages its sales. The company grew 25 percent last quarter, and a good chunk of that growth must’ve come from data analytics considering it didn’t come from anywhere else; they already dominate U.S. e-commerce and the U.S. economy grew sluggishly. What’s more, Amazon is surrounded by innovation and Alibaba isn’t. China’s tech sector is just a pirated version of the U.S. one. Off the top of my head, the big names in Chinese tech are 58.com, Baidu and Alibaba. 58.com is Craigslist; go to the page and Google translate it if you don’t speak Mandarin. Baidu is Google with a different color scheme; you don’t need to speak Mandarin to realize. And of course, Alibaba is just Chinese Amazon.

Don’t get me wrong, I love China. It has certainly graced the world with amazing food (which Appel’s dining hall proceeded to ruin). China just isn’t known for its reliable economy or innovative tech sector — which is why Alibaba is really an awful company. They represent all the risks of the tech sector amplified by China’s volatile economy. Obviously the stock price in the coming weeks will be the judge on Alibaba, but I’m confident Farhad Manjoo is wrong.

Eric Schulman is a sophomore in the College of Arts and Sciences. He may be reached at eschulman@cornellsun.com. Schulman’s Schtick appears alternate Mondays this semester.