Insight - Alibaba shows how tough it is to kick a habit
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SLOWING growth and a rise in corporate spending have spurred global technology companies to boost revenue from non-consumer offerings. Apple Inc, Microsoft Corp, Amazon.com Inc and Taiwan Semiconductor Manufacturing Co (TSMC) are among those who’ve built solid business models around the rise in cloud services.
Alibaba Group Holding Ltd has failed to follow the trend, and looks unlikely to do so anytime soon.
Despite billions of dollars and years of investment into cloud, logistics, and digital media and entertainment, the Chinese tech giant remains entirely reliant on its 20-year-old business model of eCommerce marketing and sales.
While management is adept at extracting money from selling goods, it’s yet to work out how to reproduce that success in online services
Ever since listing in New York in 2014, Alibaba has consistently posted operating losses from its collection of non-commerce businesses.
The only bright spot was a 598 million yuan (US$89mil or RM397mil) profit from the cloud unit in the March quarter of this year.
But that quickly evaporated in the June quarter when it slumped back to a 1.3 billion yuan (RM857.4mil) loss.,
Alibaba, which was founded in 1999, has always leaned heavily on two pillars of its eCommerce model.
The largest contributor has traditionally been marketing services – which it also calls customer management – where the company charges merchants on its platform a fee to elevate their products higher in search results, or to deliver ads to prospective shoppers.
The company also takes a commission on sales, and more recently has entered into physical retail including groceries and hypermarkets.
Collectively, this sector has delivered more than 800 billion yuan (RM528bil) in profit over the past seven years, according to Bloomberg Opinion calculations.
But the non-eCommerce business has been a drag, losing over US$51bil (RM227bil) in the same period, with its local consumer services division – which includes online groceries and food deliveries – being the biggest contributor to that shortfall.
The cloud division, which allows customers and consumers to store data on Alibaba’s servers, ought to be a money-maker. Instead, it posted an average operating loss margin of 15% since starting to report data from the 2016 fiscal year.
Amazon, by contrast, made US$18.5bil (RM82.5bil) in operating profit from its Amazon Web Services business last year alone, with a margin of 30%.
Microsoft has also made a successful transition away from reliance on Windows and Offices products to garner US$32bil (RM142.7bil), or 39% of total income last year, from its intelligent cloud business with a margin of 43%.