My first two posts on this mammoth S-1 covered a high-level sizing of Alibaba and a deeper dive into some of Alibaba Group’s governance which in some ways mirrors the Politburo structure.  Today I’m going to analyze monetization across Alibaba’s various businesses.  How exactly is each marketplace and complementary service monetized?  How does that stack up against analogous US internet companies?  And most importantly how attractive is the whole based on the sum of the underlying parts?

Unfortunately Alibaba doesn’t actually break out revenue by marketplace or business unit.  What we can glean from the S-1 is a qualitative understanding of the monetization of each marketplace, as well as a clearer understanding of revenue from the wholesale part of Alibaba (Alibaba.com/1688) vs the retail parts (Taobao, Tmall, Juhuasuan) and how much comes from China vs non-China (<10% of revenue is non-China).

Here’s what we know about the key retail marketplaces:

Taobao (marketplace for individuals & small sellers – akin to eBay) –> Sellers on all the Alibaba marketplaces can purchase advertising on Taobao in a variety of forms including CPC keywords, CPM display, and as a commission on closed sale (Taobaoke – like an “internal” affiliate fee).  There are no commissions on closed sales (other than Taobaoke) or placement fees on Taobao.  Some Taobao sellers also pay a monthly subscription for software (Wangpu) which helps them create better looking and easier to manage storefronts.

Tmall (storefronts for larger, branded merchants like Nike, Gap, etc.) –> While Tmall is frequently compared to Amazon.com, it’s business model is totally different.  In fact JD.com, which priced it’s IPO yesterday, is a direct seller (e.g. stocks inventory) and is really more analogous to Amazon.  Alibaba’s Tmall is a true marketplace like eBay, though many of the types of products sold on Tmall would be equivalent to what US consumers buy retailers own websites or Amazon.  The bigger merchants on Tmall sell their branded wares and pay a commission to Tmall of 0.5 – 5.0% based on product category for all sales settled through Alipay (~80% of Alibaba’s GMV is settled through Alipay).  Also other Tmall merchants can advertise on Tmall in both CPC keyword and CPM display formats, but small sellers from Taobao or Juhuasuan are not permitted.

Juhuasuan (group buying / flash sales – akin to Zulily, Gilt, etc) –> Juhuasuan sellers pay 0.5 – 5.0% (based on product cateogry) of all sales settled through Alipay similar to Tmall, though additionally Juhuasuan generates revenue from placement fees paid by sellers to secure a particular slot based on category, time, etc.

Key Takeaways:

1) Retail E-Commerce Brings Home the Bacon – While Alibaba’s roots were as a wholesale (B2B) marketplace, retail commerce drives the company both today and in the future.  The wholesale marketplaces now account for <20% of the group’s total revenue and have essentially stopped growing, whereas the retail e-commerce revenue is still growing >65% YoY.  In a couple years the wholesale part will probably be <5-10% of the total.

2) Tmall Monetizes Better Than Taobao – We don’t know the precise breakdown of revenue between the two, but we do know that for every $1 of GMV Alibaba generates more revenue from Tmall than Taobao.  The makeup of the revenue is different too (see #4 below).

3) Alibaba Monetizes at a Far Lower Rate than eBay – eBay generated about $8.3B in revenue from its marketplaces last year (excludes revenue from PayPal and eBay Enterprise) on $76.4B in GMV.  So for every $1 of GMV that flowed thru its marketplaces, eBay captured about 10.8 cents.  Alibaba on the other hand generated $6.5B in revenue in 2013 from its retail marketplaces on $248B in GMV.  So Alibaba captured only 2.6 cents out of every $1 in GMV that was sold on its marketplaces.  But Alibaba is clearly making it up on volume as they say.

4) It’s Unclear if Alibaba Looks Like an Media Company or a Marketplace – To be clear, Alibaba’s sites are obviously marketplaces.  They drive huge volumes of transactions and Alibaba doesn’t hold inventory like an Amazon.  But it’s not clear if the monetization of the group as a whole looks more like Google or more like eBay.  Taobao is essentially monetized through advertising, albeit ad buying done by sellers across the Alibaba marketplaces.  Taobao drives significant traffic across all Alibaba’s marketplaces and there seems to be a real ecosystem/network effect at work here.  This is pretty different from eBay, which generates some revenue from ads & marketing services, but the vast majority (80%) from transaction fees.  Tmall generates a lot from transaction fees and probably some from ads though again we don’t know the precise split.  If and when we know more about the split between Taobao and Tmall revenue, we’ll have a greater understanding of what the best financial analog is for Alibaba.

5) Alibaba Is Still Growing Like a Weed – Astonishing as it is for a company with a quarter trillion in GMV and approaching $10B in revenue, Alibaba is still growing as a whole nearly 60% each year.  Wholesale is essentially stagnant but China retail which again is the main driver is growing faster than the whole (65% YoY).  While China now has >600 million internet users, that still means there’s another half billion or so that are not yet on the internet.  So there’s reasonable prospects Alibaba’s retail commerce engine will continue to grow at a fairly rapid clip for awhile.

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Note (1): I’ve attempted to split out non-commerce revenue for the various companies to make an apples-to-apples comparison, or as close as we can get based on publicly reported numbers.  So for Alibaba I stripped out revenue from cloud computing and other activities, for eBay this excludes PayPal and eBay Enterprise (the division composed of the old GSI, Magento, etc), and for Amazon I stripped out Amazon describes as “non-retail” revenue (AWS, etc).