Alibaba and the IPO

Chinese e-commerce giant Alibaba went public earlier this month, raising nearly $22 billion in the largest initial public offering (IPO) ever. Founded by Chinese national Jack Ma in 1999, the company takes its name from the classic tale of “Ali Baba and the Forty Thieves,” which tells of a poor villager who opens a secret treasure trove by shouting “open sesame!”

Just as Ali Baba unsealed a cave of treasures, Jack Ma and Alibaba have unsealed an enormous market.

Literary comparisons aside, Alibaba is huge. With a market value of almost $220 billion, Alibaba is worth more than both eBay and Amazon combined and controlled $170 billion in sales in 2012.

So how does a company you’ve probably never heard of before overshadow household names like eBay and Amazon with ease? Alibaba’s business model isn’t unique, and it isn’t very new either. Visit Alibaba.com -- the company’s primary operation -- and you will see a site eerily similar to the homepage of eBay or a similar consumer-to-consumer retailer.

To put it simply, Alibaba is China’s eBay. It’s also China’s Amazon. It’s also China’s Groupon, Overstock and PayPal. And WhatsApp. And Yahoo!

With half a dozen different “stores” and websites, Alibaba’s various domains make up a substantial portion of Chinese web traffic. This strategy of decentralized shopping also benefits Alibaba’s business strategy by preventing one site's results from showing up on another. Rather than using Google -- or Bing, if you’re into that sort of thing I guess -- to research the best price for a product, Chinese consumers must search each site independently. And, wouldn’t you know, the majority of those sites are owned and operated by Alibaba.

Alibaba’s divide-and-conquer strategy has earned it massive revenues and engrained itself in the Chinese economy. As the second biggest market in the world, China has allowed Alibaba to grow into a much larger and stronger company than it could’ve in many other places. If, for instance, Alibaba had begun in the Republic of Korea -- or a similarly well-developed but small economy -- it would have had to expose itself to international markets and pressures much earlier on in its lifetime.

Instead, U.S. investors got their first look at Alibaba as a fifteen-year-old, fully grown company. Alibaba has proven itself a capable player on a massive scale, working through the kinks of rapid growth and expansion in a more controlled environment.

Alibaba does face many new concerns in the international market, however. E-commerce relies on a healthy middle-class -- something that China hasn’t exactly fostered in recent years. Ma and Alibaba are aware of this trend, and have pushed into Europe and other regions in recent months. As it continues to expand into new countries and areas of business, Alibaba will face new threats and dynamics that the heavily regulated Chinese market does not contain.

These same regulations made U.S. investors weary of taking a stake in Alibaba’s success earlier this month, as each relationship between the Chinese government and Alibaba -- whose business practices are licensed in the Cayman Islands -- has its own nuances and complexity.

The IPO itself, however, was deemed a success. Shares jumped from the offer price of $68 to over $90 in the first day of trading, turning Jack Ma into the richest man in China. Yahoo!, which had purchased a substantial stake -- at one point 40 percent -- of Alibaba going into the IPO, also saw a huge windfall.

For many American investors, Alibaba is the first of its kind: an internet giant on the scale of Amazon that is neither U.S. born nor U.S. raised. Alibaba’s ability to expand into other markets will surely be tested in the coming years, but for now it has received a resounding vote of confidence.