The Story of Alibaba
March 11, 2018
Early in the evolution of Alibaba, the company was scrambling for ways to attract users and generate significant network effects. The company’s “great explosion” in network effects didn’t occur until it devised a policy requiring every employee to find and list 20,000 items for sale by some person or merchant.
The resulting increase in product listings generated two-sided demand. Alibaba and it’s companion consumer site Taobao quickly became the fastest-growing site for online purchases, attracting any Chinese consumer looking to purchase almost any imaginable product
Prior to that great explosion, when Alibaba was struggling to attract traffic, CEO Jack Ma and his team had made counter-intuitive decision: they created technological barriers that prevented Baidu from searching their website. Baidu is China’s biggest internet search engine – the Google of China. Blocking Baidu’s bots from searching Alibaba for products being sought by Baidu users cut off a vast supply of potential customers. Doing this at a time when Alibaba was desperate for shoppers must have seemed a bit crazy.
But Alibaba’s leaders were playing a long term strategic game. They had their eye not just on the shopping interactions that would take place on their platform but on the potential to monetise the platform by selling advertising. They were determined to retain control of the community of would-be-shoppers that were gradually building on Alibaba – so that Alibaba alone would be able to sell ads aimed at those shoppers. Barring Baidu’s bots from Alibaba’s listings was a way of preventing Baidu from hosting the consumer-orientated ads that companies would ultimately want to direct to the growing numbers of Chinese online shoppers – and making sure that those ads would appear on Alibaba’s platform instead.
The strategy paid off big time. It worked wonders. As Alibaba’s user base expanded, it gradually displaced BBaidu as the most valuable online advertising platform in China. It’s as if eBay or Amazon had found a way to capture the targeted advertising revenues now enjoyed by Google. The income generated helps to explain why Alibaba earned more profits in 2014 than Amazon has earned in its entire history.