Pay phone

Taobao's top man: Jonathan Lu

Imagine being in a position to control as much as 80% of China’s online shopping.

That is the favoured position in which Taobao.com, China’s largest internet retailer, now finds itself. With millions of new users joining the internet each year, and growing talk of an uptick in consumer spending ahead, such dominance could pay rich dividends.

Today, there are about 300 million products listed for sale on Taobao (which translates from the Chinese as “search for treasure”).

Taobao is owned by entrepreneur Jack Ma’s Alibaba Group (see WiC27) and was launched in 2003.

That meant it trailed eBay – still the world’s largest online marketplace – by a year in starting sales in China. But it quickly struck a chord with local consumers by not charging for listing (unlike eBay) and now claims over 160 million registered members.

In fact, the key metric is how much of this user base is active (or purchasing on the site at least once every six months). Analysts think about a third of Taobao’s members qualify, which means that eBay still has a more active following on a global basis (about 90 million people). Few would bet against Taobao closing the gap.

Clothing, mobile phones, cosmetics and computer equipment are the site’s top selling categories. Transaction volumes reached Rmb200 billion ($29 billion) last year.

Taobao is different to eBay in that only a minor percentage of its revenues (about 5%) come from transaction fees related to auctions (versus about half of eBay’s revenue).

In part that’s because Chinese customers prefer to buy new items at a fixed price rather than bid for second-hand ones.

It is also a question of trust. Chinese consumers generally have lower expectations when it comes to buying and selling from one another, and often prefer to buy direct from a recognisable brand or store front.

That means that the bulk of Taobao revenues (estimated at $300 million last year) come from the merchants themselves paying for advertisements.

Brands like computer maker Lenovo and Japanese casual wear firm UNIQLO also pay placement fees to sell goods from a specially designed “Taobao Mall” online.

The trust issue also has implications for payment processes. So Taobao’s AliPay, an online payment service similar to eBay’s PayPal, now supports 80% of online sales made on the site. Payments are held in escrow until buyers confirm their satisfaction.

Despite its online dominance, Taobao is now looking to expand beyond the internet. In December, it announced that it was teaming up with network operator China Telecom and handset makers TCL and Lenovo Mobile to launch three customised handsets. The phones will carry the Taobao logo and come with applications allowing easy access to customers and vendors seeking the company’s services.

That puts Taobao in position for growth in mobile commerce too. China had over 730 million mobile subscribers at the end of October last year, and 155 million of those were already sending emails or surfing the web on their mobile phones.

Duncan Clark, chairman at technology consultancy BDA, thinks the branded phones are a smart move. Taobao could choose to launch other self-branded products from the most popular categories sold on its website. Rising mobile traffic should also help boost the site’s advertising revenue.

It is also working on a software application store like Apple’s App Store. Like Apple, it will split sales revenue with developers (see WiC41).

“Taobao.com is no longer satisfied with the growth of its customer numbers online and is trying hard to reach more customers by covering different media platforms,” says Cao Fei, at research firm Analysys.

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