How Alibaba makes money and Alibaba’s business model

Understanding Alibaba's Business Model
 
 
Chinese ecommerce giant Alibaba’s business model has 2 main components – ECommerce and ad technology. Alibaba makes money through purchases happening on its ecommerce arm which is world’s largest and advertisement revenue using an ad technology which is among the best in world due to its sophisticated advertising technology and the future marketing potential.  Alibaba as an eCommerce giant has been discussed in detail in my previous blog post Alibaba as eCommerce Giant. Alibaba’s foray into advertising is mainly aimed at increasing product sales for sellers at its market places and ecommerce sites, but its ad business has been also extended to advertisers wishing to push their products. 
In advertisement value chain, role played by participants varies greatly depending on their position in the value chain. For example, Advertisers aim to get their products sold and focus on creating content that resonates well with their target audiences. I have discussed Advertising Value chain in detail my previous blog Digital Advertisement Value Chain. Well targeted content keeps audience engaged and leads to repeat visits and repeat purchase. Publishers like media companies and content creators sell their inventory to the advertisers and aim to fetch maximum money for their inventory. Data Management Platforms helps in providing insights about users and segment these users into audiences based on user’s online behaviour. These segmented audiences can then be sold to appropriate advertisers leading to higher CPMs for publishers and targeted sales for the advertisers. 

Alibaba

Alibaba has large amount of users visiting to its various e-commerce platforms, market places and partner websites, leading to Alibaba getting access to vast trove of consumer and transactional data. Alibaba applies proprietary algorithms on these transactional data to evaluate quality of advertising inventory and based on these data predicts CTRs and conversion rates of marketing messages. This helps Alibaba segment advertising inventories leading better user targeting, increased marketing effectiveness, improved consumer targeting efficiency and enhanced ROI for advertisers.
For example Alibaba knows well in advance a user’s buying history and thus his taste, preferences and recent purchases. Based on this information and its targeting algorithms, Alibaba as a publisher is able to show perfectly targeted product advertisement to users.  This in turn helps Alibaba increase product sales for merchants listed on its e commerce platform. It also helps Alibaba enter and mark its presence in the ever important advertisement business. 
 
Key features of Alibaba’s online ad business are the following:

1. Data Management Platform

DMP helps in creating audience segments by using consumer’s online user behaviour (products people browse and buy) on Alibaba’s e-commerce platforms. Alibaba’s DMP data is further combined with advertiser’s audience data to deliver targeted advertisement to potential customers with similar attributes. This provides better targeting ability for advertisers on its ad exchange and its market place. 

2. Taobao Ad Network and Exchange (TANX)

TANX is one of the earliest and one of the largest real time online advertising exchanges in China. TANX handles and automates third party buying and selling of billions of advertising impressions on a daily basis by on Alibaba market places and non-Alibaba sites through real-time bidding auctions. TANX is powered by its DMP wherein DMP helps participants on TANX leverage its transactional data to evaluate and select online advertising inventory using both behavioural data of users as provided by DMP and browsing behaviour and shopping history as provided by advertisers. Unlike Alimama, TANX allows for transparent pricing of advertising inventory leading to increased ROI for marketers. TANX is not limited to merchants only and any brand advertiser can buy ads on TANX. Participants on TANX include publishers, merchants, Demand Side Platforms and third-party data and technology companies
U.S. rivals: Google’s AdX, Yahoo Exchange (formerly Right Media), Facebook Exchange, Twitter’s Mopub 

3. Taobao Affiliate Network

Taobao Affiliate Network is Alibaba’s network of third party sites like Weibo (China’s Twitter equivalent) wherein Taobao sellers run ads bought through Alimama. Sellers put marketing displays on our affiliates’ websites and mobile apps. Further, sellers pay a performance-based marketing fee primarily based on CPC or CPS basis with a significant portion of marketing fees getting shared with the participating affiliates. 
Taobao marketplace is one of the most prominent Alibaba’s e commerce property with 100 million visitors a day.
Rivals – Google Display Network, Facebook Audience Network, AOL’s Advertising.com

4. Alimama

Online marketing service is primary source of revenue as said by Alibaba in its US SEC filing. Advertiser can choose content-based PPC advertising plan (like adsense) or purchase banner or text link based on CPI or cost per time. Alimama is an online marketing technology platform that provides online marketing services to sellers. These online marketing services include services such as:
  1. P4P marketing service: Sellers bid for keywords that appear in search or browser results on a CPC basis based on prices as determined by Alimama’s online auction system. This facilitates market based price discovery based on online bidding system. This is similar to bidding of key words on Google ad words.
  2. Display marketing: Seller bids for display positions on areas like landing pages, channel pages and delivery confirmation pages of Taobao Marketplace and Tmall or Alibaba’s third-party marketing affiliates at fixed prices or prices established by a real-time bidding system on a CPM basis. Alimama provides one stop solution to promote product brands Display Marketing helps to promote product brands on Alibaba Market Place (Taobao) and Alibaba’s network of third party sites namely Taobao Affiliate Network. 
US Rivals – Amazon Advertising Platform, eBay Advertising, Google Shopping

Paradox of Twitter’s stagnant user growth and increasing revenue

Recent stepping down of Dick Costolo as CEO of Twitter and Twitter co founder Jack Dorsey being made interim CEO has again put on front Twitter’s 3 main challenges namely stagnant user growth, user retention and disappointing advertisement revenue. The micro messaging platform has been plagued by slow adoption by users and its user growth has become stagnant in recent years. Further, Twitter is getting stiff competition from its rival such as Facebook, Line, WeChat, Instagram, Snapchat and Pinterest. Twitter user growth chart, its revenue growth over the years and MAU growth chart can be seen as below:

 

1. Stalled user growth – Twitter had 302 MAUs in March 2015 and its growth has become a bit sluggish in recent quarters while its compettitor Facebook had around 1.4 billion MAUs in March 2015 and Facebook is still growing. Further, Twitter is facing stiff competition form its rival messaging and apps Facebook, Whatsapp, Line, Viber, Snapchat etc. Twitter grew from 255 MAUs in March 2014 to 302 MAUs is March 2015 while its rival Facebook increased its monthly active users from 1.276 Billion active users in March 2014 to 1.441 million active user in March 2015. Investors see MAUs as an indicator of growth and potential size of a platform and thus the lacklustre user growth despite continuous efforts from top management is a major cause of concern for Twitter.
 
2. Weak Ad Business – Ad business is continuously under pressure to sale more ads and ad sales are continuously failing to meet the forecast. Twitter’s quarterly revenue fell down from $479 million in Q4, 2014 to $436 million in Q1, 2015. The advertising revenue also fell down from $432 million USD in Q4, 2014 to $ 388 million USD in Q1, 2015. Last quarter, twitter reported weakest quarterly revenue growth and also missed revenue expectation for the market. This raises serious concern about twitter’s ability to generate revenue from sources like advertisements, data licensing etc.
 
3. Improving user experience – Twitter is said to be difficult to use for new users who are not used to short form of communication. Further, flood of content in twitter makes the platform scary for new users leading to very low retention rate. This can seen in that around 1 billion users have tried twitter sometimes but these users did not stuck around to twitter for long. Twitter needs to work on making navigation easier for new and existing users so as to provide compelling user experience to the suers. Thus, the main focus of twitter’s user acquisition strategy should be based on making easier onboarding of new users into twitter and retaining these users who are acquired.
 


Above mentioned challenges haver put immense pressure on Twitter’s product to make twitter more appealing to the users and more monetizable. This has led to accelerated pace of prodcut development in Twitter and thus Twitter has made slew of changes in its product so as to manage key challenges faced by it. Following are some of the key prodcut changes that twitter needs to include or has alsready included in its prodcut line.


1. Genre wise seperation of topic – Twitter may provide users ability to browse topic based on genre, area of interest for ex. News, Business, Sports, Tech, Music etc.


2. Save option to the user – A tweet gets lost in vast ocean of tweets and user sometimes is unbale to get back to tweet or a link he wanted to read/reply in future. User should be provided a save option to save his favourite tweets which he wants to read in future or reply back in future.

3. Search functionality – There should be a search functionality wherein a user should be able to search tweets he or she might have missed or could not have saved to be read in future. The recent twitter google deal will also help users get tweets as result in Google search result. Twitter should provide a funclitonlity to search tweets in Twitter itself instead of asking users to go to Google and search a tweet. Location based search or topic based search are other area where twitter can make search more relevant to users.
 
4. Better experience for New Users – Twitter needs to work upon making twitter better for new users who are not used to short form of communication and the flood of content that they have to face when they use twitter for first time. The main focus of twitter’s user acquisition strategy should be based on making easier onboarding of new users into twitter and providing
 
5. Easier navigation for user – Twitter needs to work on making navigation easier for new user and existing user so as to provide compelling user experience to the suers.
 
6. Video Streaming – Twitter has recently launched live streaming app Periscope in march 2015. Twitter also plans to allow users to shoot and edit videos without leaving the twitter app. It also plans to allow users group direct messages and provide new camera tools.
 
7. Online bullies and Trolls – Online trolls have long been problematic for Twitter leading to serious users leaving the platform. Twitter needs to solve this problem and simplify reporting of these bullies so that serious and loyal users do not leave the platform.
 
8. App Aggregation and monetization through services – Twitter needs to emulate business model being used by Wechat, Snapchat and Facebook wherein these apps offers some specialized apps and services to the their users. For example Snapchat offers Discover sections which consist of stories from different publishers. Similarly Facebook provides apps for messaging, consuming news and sharing photos. WeChat provides services like eCommerce, gaming, mobile payment etc. Periscope is an attempt in this line and Twitter can also follow this in order to monetize its services.
 
9. Make conversations easier to follow – Conversations around a tweet are difficult to follow especially if there are large number of replies in a tweet. Twitter is working on grouping conversations together and highlight most interesting exchange around a tweet just below the tweet.
 
10. Removal of 140 character restriction in Direct Message – Twitter has recently removed 140 character restrictions for Direct messages, which will provide much awaited solutions to users who wanted to get this restriction removed.
 
11. Revamped home page for logged out users – Twitter has revamped its home page to provide a better experience to its logged out users by allowing non logged in users to follow trending tweets. Further, Logged-out users visiting the homepage can now see a feed of tweets from several popular accounts on the topic of their choice, similar to what they’d see if they were logged-in.
 
12. Recap feature – Twitter now provides list of missed tweets to users as and when he opens the app. These missed tweets include some of the best tweets user missed from the accounts he follows while he was away from Twitter.
 
13. Partner ship with Google, Yahoo Japan and Flipboard – Twitter has announced deals with Yahoo Japan and Flipboard that will see Twitter ads start coming as “promoted tweets” pop up on Yahoo Japan and Flipboard. Further, Twitter’s recent deal with Google will start start showing for tweets into Google search results. For Twitter, there is no direct monetization involved from the deal but Twitter stands to gain in terms of increased traffic.
 
14. Highlights for users – This feature brings summary of the best tweets tailored for the user via push notification by letting him quickly catch up with what’s happening in his world.
 
Twitter’s product has been tweeking with various product features and has been conducting series of endless A/B tests but it has to be seen in future whether these product changes will lead to break any logjam in user acquisition. Further, Growing its monthly and daily active users should be only one part of twitter’s plan as Twitter needs to diversify its advertising products and find more ways to monetize syndicated content so as to increase its revenue per user also. Further, Twitter needs to start reengaging with its 1 Billion account holders who tried Twitter in past but did not stuck around with it by providing a compelling user experience to these users and existing users.

Google declining CPC: Is mobile to be blamed for this?


Google posted its first quarter earning for 2015 on April 23, 2015 reporting $17.3 Billion revenue and EPS of $6.57.  Google missed market’s earning expectation of $17.5 Billion by a whisper and market gave Google thumps up for 12% YoY increase in revenue and the reported decrease in its Capital expenditure.
Pricing pressure on online ads led to 7% YoY decrease in Cost Per Click, however Google reported 13% YoY increase in aggregate paid clicks. The increase in aggregate paid clicks could offset the decline in cost per click and based on increased paid clicks Google could increase its YoY advertising revenue despite making less money per ad.  Finally Google ended up with $65.43 Billion cash and cash equivalents in Q1, 2015.
Some of the major highlights of Google’s Q1 earning can be seen as follow:
  • Revenue – Google’s Q1, 2015 revenue increased to $17.3 Billion, which is 12% up from $15.4 Billion revenue in first quarter of 2014.
  • Paid Clicks – increased by 13% YoY but decreased by 1% with respect to the previous quarter. This includes 12% YoY decline paid clicks from Networks and 25% increase in paid clicks due to Google sites
  • Cost Per Clicks – has seen decline for last 11 quarters and this has come up as big area of concern for Google. CPC saw 7% YoY decline.
  • Traffic Acquisition Cost – Traffic acquisition cost as a percentage of advertising revenue got down to 21.6% in Q1, 2015 to 23.1% in Q1, 2014.

 

Google’s Historical Revenue Data
Google gets most of its revenue through Advertising with 2 main components, namely advertising revenue from paid clicks on Google websites and advertising revenue on paid clicks on Google Network Members’ websites, contributing 89.5% of its total revenue in 2014.
 
Paid Click vers Cost Per Click mismatch in Google
Google has been grappling with Pricing vers Supply trend mismatch since 2011 wherein volume of paid search has been rising and cost for each click has been decreasing. This can also be seen in the figure as below:
Declining Cost Per Click
 
 
The falling CPC has led to  being interpreted as Google beginning to lag in advertising economy and thus started being left behind by players like Facebook and Twitter. But, can it always be said that falling CPC is the true measure of advertising effectiveness of a firm? We will discuss in detail about the trends in Google’s CPC and its advertising revenue in following section:
1. Shift to mobile
Google has around 90% market share in mobile search and thus dominates the mobile search engine market due to exceptional adoption of  Android OS by smartphone users. Android has 80% OS wise market share in smartphone landscape and google is expected to continue its leadership position in this area. Continuing decline in CPC has been attributed to massive shift to mobile and difficulties in monetising search on mobiles. Further, ads on mobile websites brings in smaller revenue than similar ads on desktop. But this trend may reverse due to innovations like Enhanced campaign.

2. Growth of advertising on you tube

As per Google CFO Pichette, rapid growth of advertising on youtube rather than difficulty in monetisation mobile search is the main reason for decline in CPC. Further youtube ad monetisation is influenced by following factors:
a. Rapid growth of youtube viewership – Youtube has over 1 Billion MAU and youtube has grown very rapid in world more especially in less developed countries. Further, ad rates are less in less developed countries than ad rates in developed countries and this has led to overall decline in CPC.
b.  Growth of True View ads on Youtube – Number of advertisers on youtube has grown substantially by 45% YoY and all the top 100 largest advertising brand on Youtube run True View ads.  True View ads charge advertisers only when an ad is watched for 30 seconds or more by a user and this leads to lower monetisation from True View ads than monetisation from Google.com. This has also led to decline in CPC for Google.

 

3. Multi platform enhanced campaign – Google introduced multi platform Enhanced Campaigns so as to make cross device paid search campaigns easier for advertisers to manage.  Multi platform enhanced campaign tie mobile and desktop bids together and thus ads on tablet can not be separately bid by an advertiser. Further, it was also presumed that CPC price for tablets will be pulled up to desktop levels as there will be same bid for both desktop and tablets. Most AdWords campaigns were converted to Enhanced by the end of July last year.
4. Realignment of advertising revenue in favour of mobile devices
Since large number of web traffic (in range of 50%) has started coming from mobile devices, advertisers have started realigning their ad budgets in favour of mobile devices.  Further, advertisers with less spending on mobile advertisement started putting more money for mobile advertisement and this might have led to decrease in desktop revenue as some money have got diverted from desktop and have been shifted towards mobile. Lack of price discovery arising due to shift in spending pattern of advertisers might have skewed the overall CPC but in longer run CPC for mobile devices and desktop may align to their respective prices.
5. Role of emerging markets
Increased share of emerging market has also led to overall decrease in CPCs as increased number of clicks from emerging market brought overall CPC down.  Most of Google growth is coming outside USA and European market which is a low priced market. Thus although, Google is able to add search volume but this addition is coming at a cheaper rate bringing overall CPC rate down.

6. Increasing CPC but decreasing paid clicks on Google Network Member’s site – For the last 2 quarters, CPC on Google network member’s properties has been increasing YoY and paid clicks on these properties have been decreasing YoY. The increase in CPC might be due to the fact that network ads might have been historically sold at lower price than Google’s site and this increase might be due to catching up by network’s ad CPC.

7.Decreasing CPC but increased paid clicks on Google Site –  But, Google web sites sold more
ads at a decreasing price a scan be seen below:
But as a whole, it can be seen below that Google earns more money form its own sites than network sites as can be seen below:

8. Increased contribution of advertising in Google’s revenue:

Google earned 59 Billion USD revenue through advertising which constituted 89.5% of its revenue. This shows Google’s dependence of advertising for its revenue and any decreasing trend, either in price or volume can have large impact on Google’s competitiveness.

 

Revenues (in millions) by revenue source for the periods as presented:
 
Year ended December 31
2012
2013
2014
Advertising Revenue
Google Websites
 31,221
 37,422
 45,085
Google Network Member’s websites
 12,465
 13,125
 13,971
Total Advertising Revenue
 43,686
 50,547
 59,056
Other Revenue
 2,353
 4,972
 6,945
Total Revenue
 46,039
 55,519
 66,001
Percentage of revenues by source as a percentage of total revenues for periods presented:
Year ended December 31
2012
2013
2014
Advertising Revenue
Google Websites
67.8%
67.4%
68.3%
Google Network Member’s websites
27.1%
23.6%
21.2%
Total Advertising Revenue
94.9%
91.0%
89.5%
Other Revenue
5.1%
9.0%
10.5%
Total Revenue
100%
100%
100%

Thus, it is difficult to say if average CPC is cause of worry for Google if overall click volume and overall revenue is increases.  and overall revenue is increasing. If Google is able to leverage its presence in desktop, search, youtube, chrome, android etc in a better way and is able to deliver well targeted quality ads for advertiser then falling CPC in short run should not be cause of worry for advertisers as there might be many exogenous factors that may be leading to decrease in overall CPC.
Note:
Google’s revenues from Google Network Members’ websites include revenues generated primarily through advertising programs including AdSense for search, AdSense for content, AdExchange, AdMob, and DoubleClick Bid Manager.
Paid clicks on Google websites include clicks related to ads served on Google owned and operated properties across different geographies and devices, including search, YouTube engagement ads like TrueView, and other owned and operated properties including Maps and Finance.