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

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. 


How online advertising works? – Key components of digital marketing value chain

Online advertising value chain consists mainly of the following participants:

  1. Advertisers
  2. Publishers
  3. Ad Network
  4. Ad Agency
  5. Ad Exchanges
In the most basic form, Online Advertising value chain can be shown as follow:
Online Advertising Value Chain

Advertising Inventory

Advertising inventory is the actual product being sold in above advertising value chain. Advertising inventory is the number of advertisements or amount of ad space a publisher can make available to an advertiser. It mainly implies the supply of opportunities to display advertising in a digital medium. It comes in many forms and includes space website, RSS feeds, blogs, mobile applications, e-mails etc.

Publishers (Supply Side of ad value chain)

Publishers create advertising inventory by providing an opportunity to serve advertisements on their web sites, mobile apps and video games. Publishers sell their ad inventory to advertisers, their agencies and ad networks and thus lie at supply side of ad value chain. Publishers get ad revenue for selling their advertisement inventory. In the most Example includes publishers like Google, Yahoo and Microsoft search engines which create huge amounts of ad inventory that gets sold directly to advertisers and agencies.

Advertisers

Advertisers and their agencies seeks opportunities to display their advertisements and thus lie at demand side of value chain agencies. Publishers, ad networks and ad exchanges lie on the supply side of ad value chain.

Ad Agency

Ad Agency buys ad inventories on behalf of their client i.e advertisers. They plan media strategy on behalf of advertisers that will give maximum value to the advertiser.

Ad Networks
Ad network purchases ad space/ad inventories from publishers and aggregates these ad space/ad inventories in order to sell to advertisers. Ad networks make money by buying ad inventory at lower price and selling these inventories at higher price.
Small publishers are unable to sell their inventory due to lack of sales team and big publishers are unable to get appropriate value for their inventories which have some times very low value. Thus, small publishers often sell their entire inventory through ad networks. Ad networks provide a platform to these publishers for selling their inventories. Similarly large publishers often sell their remnant inventory through ad networks. Example – Google Adsense
Advertisers need to put advertisement for their products on various digital platforms. They put advertisements for brand marketing (raising general awareness) and direct response marketing (getting someone to actually buy something online now). Advertisers sell their advertisement to publishers and ad networks. Example in this case is Ad words which is the advertiser-facing side of the AdSense network.

Ad networks use a central ad server to deliver ads to consumers and also enables targeting, tracking and reporting of ad impressions.