Surprise! Amazon opens online marketplace on rival Alibaba's Tmall

Amazon CEO Jeff Bezos is now paying Alibaba to attract Chinese consumers.James Martin/CNET

E-commerce giant Amazon has, at least for the time being, decided that joining them is sometimes better than trying to beat them.

This week the company opened its own digital storefront on rival Alibaba's Tmall, an online marketplace for consumers in China, which hosts merchant's storefronts and lets Alibaba take a cut of sales.

The marriage between Amazon and Alibaba is, to put it mildly, an odd one. Alibaba is China's largest e-commerce company. And after going public in the US last year -- in an historic IPO that saw it raise $25 billion -- it has set its sights on e-commerce in the US, where companies like Amazon and eBay dominate. Meanwhile, Amazon has been trying for years to be a major presence in the Chinese market, where it's been able to capture only a small share.

Tmall is a key ingredient in Alibaba's China success. It provides digital storefronts to major retailers around the world and has been a commercial gateway to a growing Chinese middle class. Several prominent US companies, including Apple and Nike, have storefronts on Tmall. In the vast majority of cases, individual companies use Tmall to sell their own products directly to Chinese consumers; Amazon's portal to access goods from a wide range of companies is uncommon.

By opening a storefront on Tmall, Amazon finds itself in the unfamiliar position of having to pay another e-commerce company to sell products. The decision reflects how tough it can be to break into the Chinese market and attract consumers. Government regulations have historically safeguarded China-based companies, making it difficult for foreign firms to gain a foothold without at least partnering with a Chinese company. For instance, in the video game market, the only way for console makers to sell their hardware to Chinese consumers is to team up with a China-based business.

Alibaba has made clear that it wants to expand its presence in the US -- a market that's been more welcoming of foreign companies than China has. In January, Alibaba announced a new service -- which uses its digital-payment platform Alipay -- that's designed to make it much easier for US companies to sell directly to Chinese consumers.

The service, called Alipay ePass, enables a China-based customer to make a purchase on a US merchant's own US-based site. The customer pays through AliPay, which handles the transaction and converts the Chinese currency to the dollar and pays the US retailer. The retailer then ships the product to an Alipay facility in the states, which handles the logistics of getting the product to the customer in China.

Though some have cautioned that the move is part of a broader effort on Alibaba's part to eat Amazon's lunch, the Chinese company has shied away from comparisons to Amazon, saying that unlike its US-based counterpart, it doesn't actually sell its own products. Instead, Alibaba provides a portal for other companies to sell their wares.

Alibaba founder and CEO Jack Ma has been loath to draw too close a comparison to Amazon. Last year he said he wants to expand his business in the US but sees Amazon as a potential partner rather than a competitor.

"We are coming here not to compete," Ma said. "We're coming here to help a lot of small businesses, which I think a lot of things may need to be done. It's not a competition [with Amazon]."

An Alibaba spokeswoman echoed that sentiment in a statement on Friday, telling CNET that Amazon's decision to come to Tmall is welcome.

"Tmall has been a committed leader in providing quality products and services to consumers, and we continuously seek out partners who share the same passion," the spokeswoman said. "We welcome Amazon to the Alibaba ecosystem, and their presence will further broaden the selection of products and elevate the shopping experience for Chinese consumers on Tmall."

Amazon did not respond to a request for comment.

The company's Tmall storefront features a relatively small number of departments, including food, shoes and kitchen items. Amazon's own e-commerce site includes far more departments, ranging from video games to electronics to furniture to just about everything else.

Alibaba IPO could be biggest ever

Peter Parks/AFP/GettyImages

• by Richard Nieva 
   and Donna Tam 

After years of anticipation, Chinese e-commerce giant Alibaba made history on Tuesday when it filed for an IPO that could be the biggest such offering the US has ever seen.

It's unclear at the moment how much the company is seeking to raise or how many shares it wants to offer. Alibaba Group listed $1 billion as a placeholder for the funds it wants to raise, according toBloomberg. The figure will change as it goes through the review process with regulators.

The company is expected to eclipse the amount Facebook raised in its IPO -- $16 billion, currently the most for an Internet public offering.

Media reports estimate that the company is seeking between $15 billion and $20 billion, or about a 12 percent stake of the company. If it exceeds the $19.1 billion raised by Visa in 2008, it would mark Alibaba as the largest IPO in US history.

At this point, the Securities and Exchange Commission will review the F-1 filing and release multiple versions of it, so it's unclear when the public will know the actual IPO price. The next version of the document is expected in the weeks to come.

Alibaba did not identify what its ticker symbol would be or which exchange it would be traded on.

In the current F-1 -- different from the more common S-1 seen in IPO filings for US-based issuers -- the company provided the first detailed look at its business.

In the US, Alibaba is perhaps best known -- until now -- for Yahoo's minority stake in the company. Given the size of the expected IPO, Alibaba's about to go into the annals on its own.

In 2013, Alibaba had 231 million active buyers and 8 million active sellers. Some $248 billion worth of merchandise was sold through its site, according to the F-1. For mobile, the sales totaled $37 billion. The number of monthly active mobile users in December 2013 was 136 million. Alibaba's mobile sales account for 76.2 percent of all mobile sales for merchandise in China.

Despite those figures, Alibaba recognized that having a stagnant mobile business could be a risk.

"While a significant and growing portion of participants access our platforms through mobile devices, this area is relatively new and developing rapidly and we may not be able to continue to increase the level of mobile access to and engagement on our marketplaces," the company wrote in the filing.

From Alibaba's F-1 filing.Screenshot by Shara Tibken/CNET

Alibaba was born in 1999, after co-founder Jack Ma, a former school teacher, settled on the name because he thought people would instantly recognize it from the folk tale "Alibaba and the 40 Thieves." In the 15 years since Alibaba's founding, the company has become a leader in e-commerce with a hyper-growth rate trumping better-known US competitors such as Amazon and eBay. The company's revenue rose 66 percent in its fourth quarter of last year. In contrast, Amazon's revenue rose 22 percentwhile eBay's climbed 14 percent.

The company's valuation, a wide range between $150 billion and $250 billion, puts it in the top 10 of the world's biggest tech companies -- a list that includes Apple, Google, and Facebook. In China, the 49-year-old Ma, sometimes called the company's spiritual leader, has a celebrity following.

Part Amazon, part eBay

Like Amazon, Alibaba runs several platforms and services that are related to e-commerce. While Alibaba's original site serves as a platform for suppliers to sell goods to other companies, it owns several other sites. These include TaoBao, an eBay-like consumer-to-consumer sales site, and TMall, which lets brands and businesses sell to consumers. The Internet giant also has its own messaging platform and cloud computing service.

Another notable business is the company's affiliate Alipay, which processes the company's e-commerce payments. Similar to PayPal, Alipay allowed Alibaba to do online business at a time when most of the country's residents didn't own credit cards.

Though the Alibaba Group launched the Alipay service in 2004, the two are now technically separate companies, after Ma spun out the payment service in 2010. The move generated a lot of controversy with investors Yahoo and Softbank, which claimed they had not approved the deal. Alibaba isreportedly exploring regaining a stake in Alipay, though any such deal would almost certainly be made after the IPO.

But Ma's Alipay decision may factor into how Alibaba's IPO is priced, said Jay Ritter, a professor of finance at the University of Florida. Because of corporate governance issues like that one, the company may have to choose a price that's 10 to 20 percent lower than it could otherwise fetch, to attract investors worried about that risk, said Ritter.

An Alibaba spokesperson did not respond to a request for comment.

Founded in Hangzhou, China, Alibaba's decision to list in the US is a loss for the Hong Kong market. Regional financial leaders hoped for a locally-held offering, which would have been a boon for the Chinese business landscape. But after disagreements with Chinese regulators over listing rules -- specifically over a company's control of appointments to its board of directors -- Alibaba chose to go public in the US.

As the company heads toward its market debut, which is expected sometime this fall, it has enlisted Credit Suisse, Deutsche Back, Goldman Sachs, JPMorgan Chase, Citibank, and Morgan Stanley to underwrite the process. Some of the company's investors include Silverlake and, of course, Softbank and Yahoo.

But while ties to Alibaba have been a financial godsend for Yahoo, they've also been a reminder of the aches in Yahoo's core business: The company's total market capitalization is about $39 billion. Subtract that from its stakes in both Alibaba and Yahoo Japan -- another Asian asset that's been a boon to Yahoo's finances -- and investors seem to be saying that Yahoo's core business is worth less than nothing. Last month after Yahoo announced first-quarter earnings, the company's stock rose 8 percent despite mostly unimpressive financial results, mainly from investor excitement over Alibaba's success.Even though Alibaba's importance has to do with more than Yahoo, the two companies are intimately tied. Yahoo owns a 22.6 percent stake in the company. After Alibaba's IPO, Yahoo could end up with $12 billion in cash on its balance sheet, according to Carlos Kirjner, an analyst at Sanford C. Bernstein & Co. Anticipation for the IPO has helped double Yahoo's stock in the last year, giving Yahoo CEO Marissa Mayer, who took over the company in July 2012, a more valuable acquisition currency while she's tried to turn around the lumbering tech giant.

In the lead up to Alibaba's IPO, the company has been on a patent buying spree, purchasing most likely in preparation of its US debut. It owns 102 US patents and has applied to purchase 300 more for functions like payment processing, product recommendations and picture searches, Bloombergreported last week. Bulking up on patents makes the company less susceptible to lawsuits from competitors who may want to throw a wrench into Alibaba's IPO plans.

As the company sets out for the public market, it also faces some challenges. Similar to Facebook at the time of its IPO, Alibaba is in an environment where its users are shifting from desktop computers to smartphones, and the company will need to adapt.

While Alibaba's e-commerce operation is colossal, 90 percent of transactions come from personal computers, according to the Wall Street Journal, and not mobile devices. Plus, regional competitors like the messaging service Tencent and the search engine Baidu are encroaching more on the e-commerce space, especially on mobile devices. So Alibaba must goad its customers onto smartphones to attract advertisers, particularly since the company makes much of its revenue by selling ads to vendors who want their storefronts to stand out.

Fortunately for Alibaba, there's precedent. Almost two years after Facebook went public in a similarly sized IPO, the social network now makes the majority of its advertising revenue -- 69 percent -- on mobile.