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Retailers, Beware: Alibaba Announces IPO in U.S. Market

Alibaba, the dominant retailer in China, announced plans for a stock market flotation on the U.S. market, rather than Hong Kong.

Alibaba has not yet specified which index it aims to join for its initial public offering (IPO). Nevertheless, most market analysts predict that it might turn out to be the largest public offering for an Internet company ever, worth even more than Facebook’s initial valuation of $16 billion.

Based in Hangzhou, Alibaba owns and operates two distinct online shopping services, Taobao and TMall. As of March 2013, the combined transactional value for both companies totaled $163 billion, far more than the worth of Amazon and Ebay combined. According to Bloomberg News, Alibaba is in talks with several investment banks regarding the stewardship of the IPO, including Deutsche Bank AG. Citigroup, Credit Suisse, Goldman Sachs, J.P. Morgan Chase and Morgan Stanley. U.S.-based Yahoo owns 24 percent of Alibaba.

Alibaba essentially functions as a middleman, facilitating transactions between buyers and sellers rather than moving its own inventory. In this way, its business model resembles that of Ebay’s. Alibaba’s primary revenue generator is Taobao, which some describe as an enormous online mall, offering a dizzyingly expansive array of products. It sells 760 million products from seven million retailers. Sellers don’t directly compensate Taobao to list their products on the website but rather pay to position their brand on the site, improving the chance it will be seen by candidate consumers.

TMall, on the other hand, is specifically designed to cater to major retailers and brands, assembles about 70,000 merchants and charges each merchant a variety of fees, including transactional commissions, to list their products on the site.

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Overall, Alibaba’s revenue is small in comparison to an online retailer like Amazon, mostly because it offers no products of its own. However, it can boast of much more impressive levels of profitability. In the third quarter, Alibaba’s revenue jumped an astounding 51 percent from last year’s performance to $1.78 billion.

Alibaba attracted attention this past holiday shopping season in the U.S. because it prospered while many of its American counterparts floundered. Every year on November 11, a deluge of Chinese shoppers descend upon the Alibaba website ready to take advantage of deep discounts and bountiful promotions. These consumers spend more on this one day than the American Black Friday and Cyber Monday combined. In fact, it’s not even close. This last December, Alibaba took in well over $3 billion in sales, more than twice the business done online last Cyber Monday in the U.S. Taobao and Tmall, did a total of $160 billion in sales last year, surpassing the combined totals of Amazon and Ebay.

Alibaba’s success depends on advertising revenue, since it charges neither shoppers nor sellers who use its websites. It has become as ubiquitous in China as Google is in the U.S., part and parcel of computing itself. Atsushi Watanabe, consultant at T.U. Business Consulting Co., said, “It’s hard to find a Chinese internet user who has never used Taobao or Tmall.”

Alibaba also has an unusual marketing advantage given its unparalleled ability to collect data on its users. The company has been disbursing entrepreneurial microloans as part of a government-sponsored program to stimulate business. The loan program necessitated Alibaba to set up a financial payment system not unlike PayPal in the U.S., and that has allowed the company to gather massive amounts of data on consumers and small businesses regarding their spending habits.

A spokesperson for Alibaba said that the retailer is seriously considering a Hong Kong IPO as well, “should circumstances permit.” Rumors have swirled that Hong Kong lobbied hard to persuade Alibaba to stage its IPO there, and has struggled to attract a new major listing, one worth more than $4 billion, since 2010.