Regulators may be doing Alibaba a favor after all | Tech News

Regulators may be doing Alibaba a favor after all

More focus on its core business could be just what the Chinese e-commerce giant needs.

| Updated on: Aug 21 2022, 17:17 IST
The logo of Alibaba Group is seen at its office in Beijing, China 
The logo of Alibaba Group is seen at its office in Beijing, China  (REUTERS)
The logo of Alibaba Group is seen at its office in Beijing, China 
The logo of Alibaba Group is seen at its office in Beijing, China  (REUTERS)

It's hard to put a positive spin on Alibaba Group Holding Ltd.'s $2.8 billion antitrust fine, but I'll try.

That penalty, announced last month and recognized in the March quarter, pushed the Chinese e-commerce giant into its first operating loss in eight years. Even without that one-off expense, the company's profit breakdown wasn't looking particularly solid. Although operating income, excluding the fine, climbed 48%, that benefited from comparison with the disastrous March quarter last year, when it was slammed hard by the global pandemic that originated in China. It was only 21% higher compared with results in the same period two years earlier.

Revenue isn't the problem. Sales at its China e-commerce segment, which includes marketing and commissions, climbed 72% — again from a low base a year earlier. Of great concern is that this core business once again contributed all of the operating profit because the rest of Alibaba's divisions remain a drag on earnings. Cloud computing, for example, posted 37% revenue growth but continues to lose money, as does its digital media and entertainment business. To be fair, Alibaba said it lost a big overseas cloud client for “non product-related reasons,” yet this shows just the precariousness of this non-core business.

Beyond the operating items, even its interest and investments took a hit. This line item is driven primarily by equity holdings, including publicly listed companies. 

Yet Chinese regulators are not keen on Alibaba's sprawling business, which now extends far beyond the founding model of selling goods to customers online. In November, the State Administration for Market Regulation outlined new rules that could end cross-subsidization and prohibit the use of data to target specific customers. It's also likely that regulators will take a look at the equity portfolios of Alibaba and rivals such as Tencent Holdings Ltd. Should this happen, there remains the chance that Alibaba will be under even further scrutiny and may be forced to shrink its empire. The most valuable member, fintech affiliate Ant Group, has already been cut down to size after its aborted Hong Kong listing last year.

Such directives may not be a bad thing. The $2.8 billion fine not only means a financial hit but serves to focus management on its key business. In Thursday's investor call, executives spoke of further investment in core strategic areas that would lower merchant costs and expand infrastructure. They noted new initiatives including a short-form video service on its Taobao platform as well as pushing deeper into groceries — natural evolutions from the underlying business that was started two decades ago. Importantly, it would mean more money going into the business that remains its strongest and most profitable. 

It's unlikely Alibaba would cut its losses on the non-core businesses by itself, nor sell down its expanding share portfolio. But given the unstable returns and significant distraction these investments bring, the long arm of the law may end up being a helping hand.

Author Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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First Published Date: 13 May, 20:42 IST