Alibaba shows how hard it is to kick a habit


Slowing growth and increased business spending prompted global tech companies to increase revenue from non-consumer offerings. Apple Inc., Microsoft Corp., Inc. and Taiwan Semiconductor Manufacturing Co. are among those that have built strong business models around the rise of cloud services. Alibaba Group Holding Ltd. hasn’t followed the trend and is unlikely to do so anytime soon.

Despite billions of dollars and years of investment in cloud, logistics and digital media and entertainment, the Chinese tech giant remains entirely dependent on its 20-year-old online marketing and sales business model. While management is adept at extracting money from the sale of goods, it has yet to figure out how to replicate that success in online services.

Since listing in New York in 2014, Alibaba has consistently posted operating losses from its collection of non-trading businesses. The only bright spot was a 598 million yuan ($89 million) profit from the cloud unit in the March quarter of this year. But that quickly evaporated in the June quarter when it fell back to a loss of 1.3 billion yuan.

Alibaba, which was founded in 1999, has always relied heavily on two pillars of its e-commerce model. The biggest contributor has traditionally been marketing services — which it also calls customer management — where the company charges merchants a fee on its platform to elevate their products higher in search results or to advertise. advertisements to potential buyers. The company also takes a commission on sales and more recently has moved into physical retail, including grocery stores and hypermarkets.

Collectively, this sector has generated more than 800 billion yuan in profits over the past seven years, according to calculations by Bloomberg Opinion. But non-e-commerce business has been a drag, losing more than $51 billion over the same period, with its local consumer services division – which includes online groceries and food deliveries – being the main contributor to this shortfall.

The cloud division, which allows customers and consumers to store data on Alibaba’s servers, is expected to be lucrative. Instead, it has posted an average operating loss margin of 15% since it began reporting fiscal year 2016 data. Amazon, on the other hand, posted an operating profit of 18, $5 billion from its Amazon Web Services business last year alone, with a 30% margin. Microsoft also managed to move away from reliance on Windows and Office products to reap $32 billion, or 39% of total revenue last year, from its smart cloud business by a 43% margin.

Even Apple, best known for selling iPhones, gets 23% of its revenue from services like Apple Music, App Store and iCloud. This division posted the strongest growth of the company in the last quarter. It does not provide a breakdown of profit per unit. Even semiconductor giant TSMC told investors last month that it expects customers who provide cloud and other services to be the main driver of chip demand, showing that chip makers hardware are also finding ways to leverage non-consumer products.

Cloud is not the only brake. Alibaba’s Cainiao logistics business helps deliver products to consumers and gives the company an edge over competitors, but continues to lose money. Management may find such a loss acceptable if it ensures that the core business remains ahead of rivals and Pinduoduo Inc. If so, investors should adjust their expectations accordingly.

Shareholders will also have to get used to the idea that Alibaba’s move into entertainment might also not be lucrative. Unlike Netflix Inc., which has been profitable for at least 15 years, Alibaba’s content business, which includes streaming service Youku and production company Alibaba Pictures Group, continues to drag profits down and shows no sign of ability to generate consistent income.

As China’s consumer economy has peaked, Alibaba will have to find new sources of profit growth. History shows that he has yet to find one.

More from Bloomberg Opinion:

• Alibaba has a bigger problem than tech crackdown: Tim Culpan

• If you think China cares about investors, think again: Shuli Ren

• What happened to common prosperity? : Matthew Brooker

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

Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. Previously, he was a technology reporter for Bloomberg News.

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