Title: Solving Taobao's Split: C2C Conflicts with B2C as Company Issues Begin to Emerge

by ci4837223 on 2011-08-29 13:52:41

In a few more than ten days, China's largest e-commerce enterprise, Alibaba, will welcome its twelfth anniversary. This birth year has been full of ups and downs for Alibaba. The uproar over the equity transfer of Alipay has left Jack Ma treading on thin ice, but he has not stopped there.

In June, Jack Ma sent a letter to all employees of Alibaba announcing the restructuring of Taobao, its largest online trading platform: Founded in May 2003, Taobao was split into three independent subsidiaries - Etao.com (etao.com), Taobao.com (taobao.com), and Tmall (tmall.com), which are parallel to other subsidiaries under the group such as the B2B listed company, AliCloud, and Wanwang. Taobao has nearly 200 million registered members and generated a transaction volume of 400 billion yuan in 2010.

After several weeks of top-down division, on August 22, the three newly separated subsidiaries made their first public appearance. "Now it's like we're running freely," said Daniel Zhang, who transitioned from CFO of Taobao to President of Tmall, describing his feelings to reporters.

According to Jack Ma's plan, the three lightly-equipped companies have been given different missions. He described Tmall as the Liu Deng army performing a thousand-mile leap into the Dabie Mountains, a force fighting on the main battlefield of B2C; Etao's ambition is to build a product price comparison system across the entire web while thoroughly organizing all relevant information before purchase, aiming to become the first entry point for consumer online shopping; and Taobao.com, the older brother, will handle C2C market business while shouldering the responsibility of optimizing the trading and customer service platforms, while also managing the incubation of new product models.

"The greatest risk is that a product fails." In the view of Zeng Ming, the Chief Advisor of Alibaba, the split is about using Taobao itself as an experiment to explore a way of ecosystem coordination in internal management.

It's like a talent show where everyone displays their strengths, with the biggest challenge being the scoring criteria.

Solving the Big Company Disease

"We didn't think about this before the Spring Festival." On August 23, in the famous bright-topped office in the Alibaba Entrepreneurship Building, Zeng Ming told Caixin journalists about the background of the split. "We started from the problems and felt that if the company continued to develop in the current model, we could see very obvious bottlenecks." Zeng Ming frankly admitted that despite the annual 100% increase in transaction volume, the eight-year-old Taobao already showed a series of large company symptoms: slower response speed, increasingly bureaucratic decision-making mechanisms, innovation mechanisms always feeling inadequate, and besides, natural conflicts between different business models like C2C and B2C.

To address these big company diseases, starting from April, Zeng Ming and Jack Ma began to simulate solutions. Splitting was the most radical option, but Zeng Ming said that after two months of repeated simulations, they found no other solution could fundamentally solve the problem.

In Zeng Ming's view, splitting in a sense disperses operational risks. Whether it's the mall or Etao, even if they don't succeed, at least the failure will be clear. He said, "If Taobao were still a whole moving forward, in a few years you might feel it's not developing fast enough, which is also a loss, just that the reasons for the loss aren't so obvious."

According to the design of Jack Ma and Zeng Ming, after the split, the three companies each have a direction to expand separately from the C2C, B2C, and search-comparison markets, while each company also takes charge of a few shared business platform incubations. Zeng Ming explained that by having each leading business company participate in business incubation, the ultimate goal is to form a balance and resource exchange.

Among them, the logistics platform incubation task was assigned to Tmall because the B2C-focused Tmall has the most robust demand for logistics and requires the fastest logistics response. Zhang Yong introduced that the group would place hardware construction including land and real estate outside of Taobao, and the key task of the mall is to solve specific business model and service standard issues, as well as logistics solutions. In the future, the Tmall logistics team must also serve the new Taobao.com doing C2C marketplace business, and also provide services to external merchants of Etao.

Etao is also responsible for two platforms - the wireless platform and the advertising platform. After the split, Etao became the largest advertising agent for both the mall and the marketplace; while Taobao.com holds the most fundamental service-sharing platform, including the product database, transaction process, user system, and customer service platform.

Once the split plan was established, the next step was the timing of the split. Jack Ma had two choices - June or the end of the year. He chose June, during which time Jack Ma was engaged in intense negotiations with Yahoo and SoftBank, the major shareholders of Alibaba Group, over the issue of the equity transfer of Alipay. Speculation was inevitable, but Zeng Ming's explanation was simple: "We couldn't afford to miss the opportunity."

Another big question was how to ensure the teams were coordinated without losing morale. Among the three new independent companies, the outside world generally favored Tmall, and every Taobao employee would have an assessment of the prospects of the three new companies. In the open letter to employees, Jack Ma indicated that the group did not rule out the possibility of an overall IPO in the future. This somewhat reassured employees, as one employee of Alibaba Group hinted to Caixin journalists that they preferred a group-wide IPO rather than a split IPO.

The Mall Must Be Independent

For Tmall's future tasks, the group's requirement is to maintain a relatively dominant advantage in the B2C mainstream market.

By this year, the development of e-commerce has seen the B2C model reaching unprecedented heights. According to statistics from third-party research firm iResearch, in 2010, Tmall's transaction volume reached 30 billion yuan, with over 50,000 merchants gathered, accounting for nearly 50% of the entire Chinese B2C market share.

"But I will forget about the transaction volume this year," Daniel Zhang told Caixin journalists. The biggest goal of the mall this year is to enhance brand influence. He made no attempt to hide his desire for independence. What he hopes to see most is the expansion of Tmall's independent brand influence, quickly breaking free from mainly relying on diverting traffic from the C2C marketplace. "There's no doubt we need to develop our own popularity for the mall," Zhang said.

Zeng Ming also stated that the group hopes that by the end of this year or at some point next year, the number of users visiting Tmall daily will reach at least the millions level, and these users will come from outside the original pool of Taobao.com users.

According to Zhang Yong, only around 700-800 people were brought over from Taobao, with over a third being technical personnel, mainly system experts. He indicated that the core task of the future mall technology team will be to develop systems. The independent Tmall will operate according to corporate standards.

"Originally, Taobao's strongest suit was in applications, especially front-end applications, characterized by flexibility and rapid changes, purely internet-style play," Zhang explained. When e-commerce evolves into a platform-type B2C stage, the task becomes building a basic service platform that can be shared by different merchants and partners on top of these rapidly changing applications, which is the task of system building.

In addition, another priority for Zhang is how to prevent brand manufacturers from turning Tmall into a channel for clearing inventory? This involves how to adjust the product mix within stores, how to manage traffic diversion, ultimately operating based on the product lifecycle of retailers rather than just encouraging discounts.

As for the much-discussed phenomenon of brands going solo, Zhang expressed that what concerns him most is where consumers are. As long as consumers are with us, there's nothing to worry about. Merchants come and go freely on Tmall, and he believes that in the next 6 to 12 months, outsiders will see the fleeing merchants return.

Furthermore, Zhang plans to upgrade the entire mall, where success isn't judged by brand names alone but by consumer preferences. "We've already found many ways to manage supply chains from a platform perspective and collaborate with retailers in building supply chains," he said. He believes that when the market size exceeds 100 billion yuan, the further up the chain, the more advantageous platform B2C will be compared to self-operated B2C, making operations smoother.

Marketplace: KPI Metric is Innovation

Among the presidents of the three small Taobao companies, Daniel Zhang, who oversees Tmall, exudes calm professionalism, Wu Yongming of Etao exhibits typical engineer traits, while Jiang Peng, the head of Taobao Marketplace, always wears a cheerful smile, exuding optimism and sincerity.

After the split, Taobao Marketplace retained only the C2C market, often interpreted by outsiders as the relatively outdated and gloomiest prospect among the three sectors. But Jiang Peng isn't too worried. "The entire C2C e-commerce business of the Alibaba Group, including the user credit system, transaction system, and category system, all remain with Taobao Marketplace," Jiang said. As Zeng Ming put it, "The core elements are all in Taobao."

"The group has given me two tasks: to do well in the marketplace and to build a service-sharing platform," Jiang told Caixin journalists. The group evaluates Taobao.com's KPI not on performance but on innovation.

Last year in the first half, Taobao launched the group-buying product Juhuasuan. By leveraging the vast popularity of the Taobao platform, it effortlessly occupied the absolute first place in both transaction volume and user numbers among Chinese group-buying websites, leaving competitors far behind.

Zeng Ming hinted that by the end of 2011, Taobao.com must introduce at least two to three new products with innovation quality comparable to Juhuasuan. Jiang revealed that soon they would launch a completely new second-hand market product based on the existing second-hand goods platform.

Taobao is the best testing ground for new products due to its massive user base and traffic accumulated over eight years, which gives new products a miraculous effect akin to turning stones into gold — this is also the enviable competitive advantage. Industry insiders speculated that once the second-hand market product is launched, it would immediately pose a survival threat to a batch of websites primarily focused on second-hand markets, such as 58同城 and Ganji.com.

Jiang Peng's second task is to explore the SNSification (social networking service) of Taobao. He particularly emphasized to Caixin journalists that this task is not about separately building a new SNS community product, but about SNSifying through relationships to reinforce the sharing of shopping experiences within the site.

"Everyone needs time to find the right items for you, and sharing among friends greatly reduces your search costs, while also quickly expanding the range of things you play with on Taobao," Jiang optimistically believed that Taobao can also be made into an SNS platform and generate strong chemical reactions.

Additionally, communication and collaboration between Taobao Marketplace and the other two split-off subsidiaries are also matters Jiang Peng needs to consider. He admitted that in the early stages of independence, phenomena such as resource competition or waste are unavoidable. In the future, Tmall will continue to obtain traffic diversion from various entrances set up on Taobao.com for quite a long time. Moreover, regarding mature C sellers shifting to the mall, Taobao Marketplace can only let it happen naturally.

Jiang Peng indicated that sellers needing to build brands would apply to enter the mall, but dealers hoping to sell in bulk wouldn't therefore abandon the crown shops in the marketplace. Between the shops of the same merchant in the marketplace and the mall, there is no direct connection channel, relatively isolated, fully capable of satisfying consumers' different shopping needs according to the different game rules of the mall and the marketplace.

The split has little impact on Taobao's revenue growth. Juhuasuan, which was included in Taobao, has a transaction volume target of 10 billion yuan this year. Additionally, from the seller growth perspective, in the first half of 2011, the year-on-year increase in sellers was around 130%. Another noteworthy point includes Taobao's expansion in China's third- and fourth-tier cities over the past two years, where modern retailing has not yet truly been established, and most of the goods sold on Taobao cannot be seen or bought in the local offline retail markets.

"I dare say that in China's third- and fourth-tier cities, traditional retail hypermarkets will definitely have very few opportunities," Zeng Ming told Caixin journalists. In the future, the retail industry in China's third- and fourth-tier cities will directly face正面 competition with Taobao, and judging from the current development speed, Taobao's penetration rate in these markets is not slower than the expansion speed of offline traditional retail. Especially the rise of Taobao proxy purchasing will further enhance Taobao's competitiveness.

Etao: The Challenge of a Public Information Platform

Wu Yongming faced the split with calmness. He told Caixin journalists that after becoming independent, Etao would, first, use Etao as a brand to create a one-stop online shopping entrance covering PC and mobile ends for all-web consumers; secondly, the Taobao marketing system (Taobao Union) facing merchants would be fully opened under the Etao platform.

Technically speaking, after years of private exploration, Alibaba has accumulated a huge talent base and is now widely recognized as the domestic e-commerce company with the strongest search technology. Currently, Etao's product information collection covers more than 2,000 shopping websites and over 600 group-buying websites outside of Taobao.

From the user experience information collected by the technical department, consumers using Etao are more interested in standardized and branded products and are more inclined to compare prices, user reviews, and other information across different e-commerce sites. For standardized products, Etao provides more detailed comparisons, reviews, and information on product pages compared to non-standardized products.

Moreover, Etao is attempting to use Alipay accounts to achieve one-stop purchasing and transaction services. Currently, over 100 merchants have been integrated through account linking. However, the background of Taobao makes it difficult for Etao to convince the outside world that its search mechanism and information recommendation mechanism do not give Taobao any hidden preference or benefit transfer through technical means. Therefore, the next big challenge for Etao is how to establish an external image as a fair and objective information-sharing platform covering the entire web.

When asked how to define fairness and objectivity, Wu Yongming's response was that it cannot be defined. As one of the eighteen founding members, Wu Yongming is a typical technology leader who rarely elaborates voluntarily and seldom uses adjectives: "We independently developed the search function to ensure the fairness of the search." In contrast, Zeng Ming's statement was extreme. He told Caixin journalists that currently, the KPI evaluation of Etao within the group has even reached the point of seeing whether the weight of Taobao in its information services is low enough.