Companies on Ray Yang, Ph.D.

Costoco

Fri, 03 Jan 2020 00:00:00 +0000

Costco’s membership renewal rates in the united states and Canada have remained at roughly 90%. The traffic-driving value that Costco offers in its stores is fueled by cost leverage that, in turn, feeds additional store visits.

Costco has achieved a competitive advantage based on its intangible assets and cost leadership. The firm’s membership subscription model has held steady through the financial crisis and the rising competitions, especially Amazon’s Prime memberships. In addition to cost management and distribution leverage, Costco’s low prices are enabled by its procurement strength.

Costco sells roughly 3,700 different stock-keeping units (SKUs) in its stores, a fraction of the 75,000 to 80,000 at Walmart in the United States, which offers a significantly greater number of items via its marketplace. Costco’s sales per SKU were over 30 million, towering above Walmart’s less than 3 million and Target’s $1 million, contributing to its procurement cost advantage.

Costco benefits from a number of traffic drivers, particularly its food offerings (53 % of fiscal 2019 sales) and fuel. Fuel sales serve as a meaningful counterpoint to traffic pressure from digital sellers. With in-store prepared food offerings and a well-developed private-label portfolio, Costco’s store offering is well distinguished. With in-store ready food offerings, the Kirkland signature brand accounts for around a quarter of Costco’s sales and is also margin-accretive.

Costco has been increasing its e-commerce efforts (roughly 4% of sales), focusing on items not available in stores (including travel and other services) and a distinguished product novelty. The digitization of retail has strained traditional sellers. The pressure also intensifies on traditional competitors to provide omnichannel solutions.

Some risk factors: (1) Costco has thrived under a variety of conditions, but as competition increases and it expands into new markets, the degree of difficulty also rises. (2) Costco handles a significant amount of customer data, and a breach could expose it to financial and reputational risk. (3) Several costs that are outside Costco’s control include wages (particularly its gaps against competitors), currency, trade policy, and the broader macroeconomic environment.

Uber

Fri, 11 Oct 2019 00:00:00 +0000

Uber ’s position in the autonomous vehicle race could equalize gross and net revenue, after no longer needing to pay drivers. Uber technologies have matched riders with drivers completing trips over billions of miles. At the end of 2019, Uber had 111 million users who used the firm’s ridesharing or food delivery services at least once a month.

Uber helps people get from point A to point B by taking ride requests and matching them with drivers available in the area. The firm refers to this as personal mobility, which also shorter - distance transportation via electronic bikes and scooters. Uber faces stiff competition from players such as Lyft (in the U.S.) and didi, a business in which uber has a 20 % holding after the sale of its operations in China to didi in 2016. while uber no longer operates in China, it does compete with didi in other regions around the world. The market remains fragmented, and uber competes with many local ridesharing platforms and taxis. Globally, the market is fragmented. Uber has a 30% global market share and will be the leader in the total addressable ridesharing market ( excluding China ) by 2024.

The firm ’s food delivery service will be one of the main revenue growth drivers for the firm as it will benefit from cross-selling to its large ridesharing user base. Further, utilize of uber ’s overall on-demand platform can also help the firm progress toward profitability. Uber has been in talks to acquire Grubhub in an all-stock deal for each Grubhub share. The addition of GrubHub could strengthen the supply and demand sides of uber ’s network effect moat source. On the supply side, the firm would be better able to attract and retain restaurants. With more food delivery requests, uber is likely to also maintain more of its ride-hailing drivers. Also, this may not only reduce diner acquisition costs for uber but will also allow uber to more effectively cross-sell its two main businesses to a larger user base.

The ridesharing platform benefits from network effects and valuable intangible assets in the form of user data. These sustainable competitive advantages will help uber to become profitable and generate excess returns on invested capital. Uber ’s network effects benefit drivers and riders, creating a continuous virtuous cycle. As the number of drivers increased, the timeliness and reliability of the service improved. The riders on the platform benefit as more drivers are added, and existing drivers benefit from more riders, making the driver ’s use even more efficient. The increase in vehicle capacity usage is growing in the average number of rides dispatched per unique uber vehicle.

As uber benefits from its network effect, it gains access to valuable intangible assets in the form of user data, which helps the firm improve its services. In turn, Uber ‘s service may become more effective as it further monetizes real-time supply and demand-driven pricing. Uber may also use extensive data and knowledge to tap into other markets. Uber may use this data to tap into other markets. The firm may also increase its vehicles’ capacity usage. The firm compiles data from the rider app about the locations users request rides to and from and at what times of the day. When combined with the user-generated driver ratings, we think such information helps uber improve the timeliness of matching riders with drivers. Such overall enhancement in service could help the firm strengthen its network effect by increasing users and ride requests per user, which helps uber gather additional data.

Salesforce

Fri, 27 Sep 2019 00:00:00 +0000

Salesforce dominates the salesforce automation (SFA) and customer relationship management (CRM) space and controls 30% in a highly fragmented market by the end of 2019. The company has added legs to the business clouds, including customer service, marketing automation, e-commerce, analytics, and artificial intelligence. The management has put more emphasis on expanding margins across the clouds.

Salesforce has assembled a front-office empire that it can build on for years to come. Thanks to the company’s revolution, business software is increasingly accessed through a web browser and delivered over the internet, so inventing the Software-as-a-service (SaaS) software delivery model. Salesforce also offers customers a platform-as-a-service (PaaS) solution, complete with the AppExchange, to rapidly create and distribute apps. This further strengthens the substantial community of Salesforce users.

Salesforce is widely considered a leader in its served markets. The tight integration among the solutions and the natural fit they have with one another makes for a powerful value proposition. Indeed, more than half of enterprise customers use multiple clouds. Moreover, customer retention has gradually improved over time.

Salesforce paved the way for the software industry as it exists now by first selling the concept of SaaS to prospective customers and then selling the actual SFA and CRM products. The SaaS model, and SFA and CRM applications, rose in popularity as customers were able to avoid high up-front costs. SaaS vendors benefited from predictable revenue streams, the elimination of piracy, and supporting only one product version.

Salesforce has gone from no product to 33% market share over the last 20 years. Customers view salesforce as the clear front-runner in a category that increases the productivity of sales representatives. The mission-critical software indeed helps drive revenue for users. Also, customers are reluctant to switch away from the sales cloud because of the time, expense, and lost productivity of retraining the workforce on a new platform. The corporate risk of making a change is high, as executives engage in self- serving behavior. In fact, executives can jeopardize their own careers by pushing to switch from a leading solution that is functioning well and meeting their corporate needs.

Other than the sales cloud, service cloud includes a set of solutions aimed at helping an enterprise deliver customer service and support at scale. Customer service is another mission-critical function that directly helps a company retain customers. Similar to the sales cloud, customers are also reluctant to invest the time and expense of converting a critical revenue-driving function from one application to another. It is often more expensive to find a new customer than it is to retain an existing customer.

Salesforce has initiated the marketing cloud as one segment under is business clouds umbrella. Marketing automation creates mass-customized cross-platform campaigns to targeted audiences. The company was early to the market with a cloud-based application development platform for customers. Use of the platform provided the low-investment benefits of a SaaS product, allowing for immediate and smooth integration with salesforce.com’s solutions, in which developers can sell or give away the applications they developed on the AppExchange. A variety of publicly traded companies started out as apps developed on the platform and initially distributed on the AppExchange. In fact, AppExchange was a novel idea and predated Apple’s App Store by two years as it was revolutionary and enticing to developers.

Netflix

Fri, 20 Sep 2019 00:00:00 +0000

Netflix has continued to burn billions of dollars of cash to create its original content with no end in sight. The need for increased content and marketing spend outside of the U.S. will limit the rate of margin expansion for the international segment. However, the volume of sales of the company has continued to grow over the past years.

Netflix has used its scale to construct a massive data set that tracks every customer interaction. The firm then leverages this customer data to better purchase content as well as finance and produce original material. Netflix has expanded rapidly into markets abroad as the service has more subscribers outside of the U.S.

Media firms will continue to reap the benefits of both an additional window for existing content and another platform for new content. Larger firms like Disney and WarnerMedia have or will soon launch their own SVOD platforms to compete against Netflix. Such a usage pattern may constrain Netflix’s ability to raise prices without inducing greater churn. Netflix has also expanded further into local-language programming to offset the weakness of its skinny offering in many countries.

New content not only strengthens the relationship with current customers but also attracts new customers via word of mouth and the halo effect from critical acclaim and award nominations. The rapidly growing subscriber base (over 130 million worldwide) creates a humongous data set that Netflix mines to better purchase and create content. Netflix tracks every customer interaction, from large (total time spent at Netflix) to minute (whether a user pressed fast forward). By the end of 2019, Netflix accounted for 26% of all global video streaming traffic, beating out YouTube at 21% and amazon at 6%. The average Netflix user worldwide watches more than 90 minutes of video per day. Netflix can search for this information to better understand the network and device performance, customer behavior, and content popularity.

Netflix analyzes data traffic, video performance, and buffering to better understand where data loss and slowdown occurs. The company also examines specific subscriber actions by type of action and device used to formulate a better user interface and to tweak device-specific applications. The real-time nature of the data provides Netflix with the ability to iterate more quickly than traditional user groups or beta testing methods. A large number of subscribers using different devices across multiple countries generate an extensive, growing, robust data set.

The content discovery engine provides recommendations based on a subscriber’s previous viewing habits in context with similar viewing habits. While growing rapidly as a streaming video provider, the company understood the need to create original content to distinguish its offering. An often-cited example of this data is “House of Cards,” an adaption of a British miniseries starring Kevin Spacey. Netflix noted that the director David Flincher’s movies were generally watched from beginning to end, that Spacey’s films had performed well, and that the original version was popular with subscribers.

As Netflix is now available in almost every country, this cost could explode, particularly as new competitors like Disney enter the market and ramp up their content spending. The cost of licensing content will also rise as competitors emerge and bid for content that Netflix desires. The move to more original content adds costs and risks. Netflix ’s expansion outside the U.S. could continue to drag on cash flow due to different tastes and lower video consumption. The cost to deliver content could increase, and the need to pay for fast-lane network access could drag on margins. However, increasing price rates could limit growth and increase subscriber churn.

Microsoft

Fri, 13 Sep 2019 00:00:00 +0000

The shift to subscriptions accelerates growth after the initial growth pressure. The centerpiece of the new Microsoft grew at a staggering 92 % rate in fiscal 2018. It offers customers a painless way to experiment and move select workloads to the cloud. Microsoft can also leverage its massive installed base of all Microsoft solutions as a touchpoint for a strategic move. Microsoft continues to launch new services centered around these broad themes, as it continues to launch new services centers around these broad themes. Microsoft is an excellent launching point for secular trends in A.I., business intelligence, and the internet of things.

Office 365 (the cloud-based version of the traditional perpetual license Microsoft office) retained in office productivity software, which will remain steady in the foreseeable future. Customers will continue to drive the transition from on-premises to cloud solutions, and revenue growth will remain robust. The initial move to the cloud was painful, as both revenue and margins dropped. However, Microsoft’s revenue has accelerated, thanks to the cloud transition.

An office productivity suite generally consists of spreadsheet and presentation software applications. Microsoft offers a variety of versions of the office 365 suite and increasingly fewer perpetual license versions. Office 365 starts at approximately $6 per month and tops out at roughly $35 per user per month. The perpetual license version is $150. Office 365 already has more than 165 million subscribers.

Microsoft has continued to enjoy a dominant market share position in office suites, with Google being the only other vendor of consequence. Many users are willing to pay a minimum of $70 per year to use office 365 when free versions that are generally similar in terms of features and interface are available. Microsoft office benefits from high switching costs. Because of the significant installed base, it would be highly disruptive for a company to pivot to an office suite other than office 365. For example, reports within the financial function of countless enterprise users are pulled from an oracle, or other popular databases into an excel file that can then be manipulated.

Microsoft Dynamics is a cloud-based enterprise resource planning (ERP) and customer relationship management (CRM) suite of applications designed to help mid-sized companies, or divisions of larger companies, run their businesses. Dynamics accounts for approximately 2% of total revenue and is growing in the low double-digit area. The Dynamics revenue base is shifting from a perpetual license and maintenance model into a subscription model. As such, Dynamics has increased its profile and is slowly gaining share market share.

Microsoft’s presence in the P.C. market with both its O.S. and office productivity software allowed it to easily enter the server market. Today the I.T. backbone of many of the largest companies in the world is built on Microsoft server. Hence, replacing any part of the core of an enterprise’s I.T. environment would be a significant undertaking for any company in terms of cost, time, and risk. The early lead and substantial market share led to a wide variety of developers joining the ecosystem bringing in applications, middleware, and development tools.

In an IaaS model, the provider offers the hardware virtualization, networking, and storage as a computing service delivered over the internet. As software is added, IaaS quickly becomes PaaS. The provider also offers and hosts operating systems, middleware, and core I.T. applications. Currently, Microsoft Azure, Amazon AWS, and Google Compute are leaders in this category.

Microsoft has used its presence to attract more users to its user base, which in turn attracts more developers in a virtuous circle. Developers have a lot invested in learning certain languages and how to effectively write software under a given umbrella. It would be a time-consuming, and therefore costly endeavor to learn additional languages on a different platform. The GitHub acquisition (closed on October 26, 2018) bolsters Microsoft’s position for developers. Google, Apple, Amazon, and Microsoft each have a material presence on GitHub and use it for documentation of code. It remains to be seen if these mega-cap tech competitors will allow their developers to continue to use GitHub.

Nvidia

Fri, 06 Sep 2019 00:00:00 +0000

The increasing complexity of graphics processors provides a barrier to entry for most potential rivals, as it would be challenging to match Nvidia’s large R&D budget. The firm has a first-mover advantage in the autonomous driving market that could lead to widespread adoption of its self-driving platform. The ongoing expansion of artificial intelligence and deep learning that rely on Nvidia ’s graphics chips presented the firm with a potentially massive growth opportunity.

PC gaming enthusiasts generally purchase high-end discrete GPUs offered by the likes of Nvidia and AMD. This involves large swaths of data followed by techniques that develop algorithms to produce conclusions in the same way as humans. Today’s basic variants of AI are consumer-based digital assistants, image recognition, and natural language processing.

Nvidia’s DRIVE PX platform is a deep learning tool for autonomous driving. It is being used in research and development at more than 370 partners. The company views the car as a supercomputer on wheels, although this segment currently contributes relatively little to the top line. Nvidia has patents related to the hardware design of its GPUs in addition to the software and frameworks used to take advantage of GPUs in gaming, design, visualization, and other graphics-intensive applications. The latest pc games typically require system software updates that optimize the performance of GPUs.

Nvidia has a cost-leadership advantage and intangible assets related to the design of graphics processing units (GPUs). The firm is the originator of and leader in discrete graphics, having captured the lion’s share of the market from longtime rival AMD. The market has significant barriers to entry in the form of advanced intellectual property, as even chip leader intel was unable to develop its own GPUs despite its vast resources and ultimately needed to license IP from Nvidia to integrate GPUs into its PC chipsets. Nvidia has gained share at the expense of AMD as gamers have moved from mainstream graphics cards to performance and enthusiast segments. These GPUs range from $150 at the low-end to over $1,000 for premium cards, with Nvidia’s gaming gross margins in the high 50s.

Web behemoths such as Google, Facebook, Amazon, and Microsoft have found GPUs to be adept at accelerating cloud workloads. To train a computer to recognize spoken words or images, it must be exposed to massive amounts of data to educate itself. Conclusions involve taking what the model learned during the training process and putting it into real-world applications to make decisions. The training process is ideal for GPUs that have massively parallel architecture.

Nvidia has become a key player in the artificial intelligence accelerator market with its GPUs for AI training and possibility workloads. The firm launched its latest A100 data center GPUs. The A100 boasts impressive performance enhancements from its predecessor (V100). Nvidia is the sole beneficiary of the burgeoning ai and self-driving trends. Data center revenue grew considerably, as customers leverage both Nvidia’s training and key AI applications such as natural language processing (NLP).

Google

Sun, 25 Aug 2019 00:00:00 +0000

Google uses technology to improve the user experience in nearly all its offerings while making the sale and purchase of ads efficient for publishers and advertisers. The adoption of mobile devices has been increasing. The online advertising market has taken notice and is following its target audience onto the mobile platform. Google partake in this mega-trend on the back of its Android mobile operating system’s growing market share, helping drive revenue growth and maintain Google’s leadership across many internet categories.

Google’s search engine is perceived as being the most advanced in the industry, which allows the company to remain focused on innovation and long-term growth opportunities. Google has leveraged its technical expertise to create its private cloud platform and increase its market share in this space. In the mobile internet space, Android’s dominant global market share of smartphones leaves Google well positioned to continue generating top-line growth as search traffic shifts from desktop to mobile.

Google has a massive consumer base that allows the company to collect data for precision advertising. Google can offer an attractive return on investment (ROI) for advertisers and build a growing network of advertising customers. Through network effects, the addition of each ad and advertiser improves the efficiency of Google’s programmatic advertising offerings, allowing the firm to better monetize the network.

Google has applied machine learning to its Google App, Gmail, and cloud offerings. As technological advancements improve the user experience for each product, the likelihood of further usage also increases. Google’s continuing investment in machine learning should help increase the effectiveness of ad rankings and placements. The monetization of machine learning stems from the fact that technology increases the volume and click-through rates (CTR) of ads. Google monitors real-time search trends, where ad impressions can be purchased in advance. Relatedly, programmatic video ad spending has grown at a healthy rate.

Google holds significant intangible assets related to overall technological expertise in search algorithms and machine learning, as well as access to and accumulation of data that is deemed valuable to advertisers. Google’s brand is a significant intangible asset, as Google has become eponymous with searching. The Google brand as a significant driver of user growth for YouTube, Maps, Gmail, and Chrome. An expanding user base helps the company collect more data and monetize through online ads. As Google has successfully increased its users’ dependence on its products, the company also managed to keep changing the usage of those products to increase the user switching cost.

Facebook

Fri, 16 Aug 2019 00:00:00 +0000

Facebook ’s ad revenue per user has been growing continuously, demonstrating the value that advertisers see in working with the firm. The application of AI technology to Facebook ’s various offerings, along with the launch of VR products, will increase user engagement, driving further growth in advertising revenue. Facebook provides the most massive audience and the most valuable data for social network online advertising.

The firm’s Facebook app, along with Instagram, Messenger, and WhatsApp, is among the world’s most widely used apps on both Android and iPhone smartphones. Facebook is taking steps to further monetize its various Apps, such as providing interactive video ads. The firm is also applying artificial intelligence and virtual and augmented reality technologies to various products, which may increase Facebook user engagement even further, helping to further generate attractive revenue growth from advertisers in the future.

The company’s main offerings all have strong network effects. These network effects serve to both create barriers to success for new social - network upstarts as well as barriers to exit for existing users who might leave behind friends, contacts, pictures, memories, and more by departing to alternative platforms. Facebook has emerged and established itself as the clear-cut social media leader.

Facebook has also slowly become an entertainment hub, which helps increase engagement and user time spent on Facebook. The users are posting more videos and providing a live video feed from where they are at a certain point in time. Additional apps created by developers on the Facebook platform also help maintain users within the Facebook ecosystem. Users are on Facebook and Instagram a combined 65 minutes per day (compared with a daily 64 - minute average during 2016 - 2018 ) posting videos and photos.

Unlike any other online platform globally, Facebook has accumulated data about everyone with Facebook and/or an Instagram account. Without the need for cookies enabled on desktop or mobile browsers, the firm knows its users ’ browsing history on many non-Facebook sites or apps. With access to such data and to billions of photos and videos uploaded by its users, Facebook continues to enhance the social network by offering even more relevant content. This positive feedback loop further increases the value of its data asset, which only Facebook and its advertising partners can monetize. Specifically, Facebook monetizes user information only by using it to increase the effectiveness of its advertisers. Advertisers ’ willingness to use Facebook is demonstrated by the 26 % average annual growth of Facebook ’s average ad revenue per user (ARPU), during the past five years.

Facebook ’s large and growing user base and the rich data that it generates help advertisers post more effective target ads, in terms of brand awareness, resulting in a high return on investment (ROI). Most Facebook users are now accessing Facebook and its apps via mobile devices. Thus, the main driver behind the growth of online advertising has been the mobile advertising market and video advertisers.

The firm ’s management has demonstrated its focus on long-term returns on investments. With a large amount of cash, along with little debt, Facebook is well-positioned to make additional investments in acquisitions or more research and development. The firm will continue to make decisions regarding capital allocation that are beneficial for its social network users and its shareholders.

Apple

Fri, 09 Aug 2019 00:00:00 +0000

Apple has plenty of opportunities to reap the rewards of its iPhone business. Apple’s iPhone and IOS operating systems have consistently been rated at the head of the pack in terms of customer loyalty, engagement, and security, which bodes well for long-term customer retention. Apple pay, Apple Watch, Apple TV, and Airpods are also driving incremental revenue and helping to retain iPhone users over time.

Apple’s walled garden approach for its popular iOS allows it to charge a premium for relatively commoditized hardware not too different from that sold by companies like Samsung, and Dell. Customer switching costs are elevated for Apple users as a non-apple IOS experience does not exist. Unlike computing platforms for the windows or android ecosystems that boast PCs and smartphones, Apple enjoys stellar returns on its devices by offering unique user experiences with its iOS ecosystem.

The robust App store helped foster iPhone adoption and grew Apple’s user base, with applications ranging from productivity, social media, gaming, and so on. Apple has also been focusing on newer software and services to augment the user experience and retain customers. For Apple’s customers, few other technology titans are offering comparable expertise in both hardware and software design, which allows the firm to more seamlessly build integrated products.

Competitors such as Samsung and Google specialize in hardware and software, respectively. But neither Samsung nor Google has been able to offer a comprehensive and integrated product like the iPhone. Both have attempted to develop software or operating systems (Samsung’s Tizen OS) and hardware (Google’s Pixel smartphone). Nonetheless, Apple’s expertise in both hardware and software represents an intangible asset that even the strongest of tech firms have struggled to replicate.

The active base of apple devices reached 1.5 billion at the end of 2019, up from 1. 4 billion a year prior, showing the strong stickiness Apple has created. These switching costs are not insurmountable, illustrated by the rise and fall of former mobile device titans such as Nokia, Motorola, and Blackberry. Apple may not be immune to pitfalls, as consumer sentiment for technology gadgets can be unforgiving, with one buggy or subpar product potentially driving customers to other companies.

Apple’s integration of hardware and software also supports its developer networks. Apple iOS will be loaded on to only a handful of screen sizes or iPhone models, versus the hundreds of devices and manufacturers that support android. This leads to a more fragmented Android ecosystem, which is relatively harder for developers to support. Some competitors are willing to sell hardware at essentially cost to drive revenue or stickiness in other business segments. A recent focus on AI assistants such as Google Now and Amazon Alexa has also put pressure on apple’s Siri that has fallen behind its peers in efficacy. Herein lies another area Apple may face headwinds if consumers further prioritize voice-recognition capabilities. Apple’s device may be at risk as it is not likely to supersede their iOS counterparts.

Amazon

Fri, 02 Aug 2019 00:00:00 +0000

Amazon dominates North America ’s online retail category with estimated gross merchandise volume (GMV) of approximately $275 billion in the region during 2019. With more than half of the world ’s internet users coming from developing markets, Amazon has ample international growth opportunities for its marketplaces, cloud services, advertising, and devices. Amazon’s device portfolio - including Kindle, Fire TV, Dash, Echo, and Alexa - enabled products - are intriguing customer acquisition/retention tools.

The combination of competitive pricing, unparalleled logistics capabilities and speed, and high- level customer service makes Amazon an increasingly vital distribution channel for consumer brands. Amazon maintains a consumer value proposition by expediting the Prime shipping and expanding digital content library, and new member benefits. As the traditional brick-and-mortar retail industry has undergone a period of rapid transformation over the past several years.

Amazon generates strong cash flow from seller services, which is reinvested in advertising, service, and website enhancements that keep its marketplace strong. Amazon’s brand has come to represent low prices, a wide selection, convenience, and superior customer service — a rare combination among retailers. Amazon ’s operational efficiency of the distribution network, which satisfies consumer demand for free and expedited shipping.

Amazon benefits from a network effect, as low prices, an expansive breadth of products, and a user-friendly interface attract millions of customers, which in return, attracts merchants of all kinds to amazon.com. Customer reviews, product recommendations, and wish lists increase in relevance as more consumers and products are added to the amazon platform, enhancing its network effect. The customer reviews and product recommendations are growing in presence as more retailers are adding to the site, enhancing the network effect.

Amazon has continued to develop into a formidable player in digital media, given its vast content offerings, into new verticals, and the ability to sell hardware. Amazon ’s cloud computing offerings possess more than 3 times the computing capacity in use than the next 10 largest providers combined. With investments in additional capacity and other innovations, AWS has become an increasingly positive gross margin contributor.

Alibaba

Wed, 31 Jul 2019 00:00:00 +0000

Alibaba is a big data-centric conglomerate, with transaction data from its marketplaces, financial services, and logistics businesses. Big data has also allowed the company to move into cloud computing, media/entertainment, and online-to-offline services. The strong network effect and big data obsession enable the leading E-commerce platform player in China to extend into many other growth avenues.

Alibaba’s internet services affect a staggering vast majority of Chinese internet users, an 83 % penetration rate for the Taobao/Tmall E-commerce marketplaces by the end of 2019. This provides Alibaba with an unparalleled source of data that it can use to help merchants and consumer brands develop personalized mobile marketing and content strategies to expand their target audience.

Alibaba benefits from a strong “two-sided” network effect. The value of the platform to consumers increases with a greater number of sellers, and vice versa. Millions of Chinese consumers consider Taobao and Tmall as their default go-to options when seeking products and services online. Taobao users with a strong appetite for branded products can shop Tmall for a better shopping experience, and assurance of higher quality, whereas Taobao’s online marketplaces are interconnected, which compounds its network effect then breeds other competitive advantages and growth opportunities. Taobao and Tmall have developed a powerful brand as Alibaba’s core intangible assets.

The decision to consolidate Cainiao and invest more heavily in new smart warehousing and other logistics technologies will shift Alibababa away from a pure virtual platform. The enhanced logistics capabilities stemming from its partnership with other retailers strengthen this platform’s network effect and make it more compelling for buyers and sellers.

Alibaba has had limited success with its previous e-commerce endeavors outside China. The acquisition of NetEase’s cross-border online commerce platform Kaola is considered complementary to Tmall Global. Global merchants have enjoyed a low cost and flexibility on the Alibaba’s global purchase platform, which has helped Alibaba maintain and accelerate their market share in import and outport services.

Alibaba’s desktop and mobile monetization rates have been on upward trends. The company has also increased its investments in user experience as other local and global players look to expand its presence in China. Alibaba has increased its monetization rates overtime via improved seller conversion rates from personalized the embracing of data-enriched marketing tools by mobile sellers, and increased contribution from Tmall.

Alibaba Cloud is likely to develop into a growth engine and a significant cash flow contributor overtime for the company. The early mover advantages in big data and cloud computing in China gives the company distinct advantages. Increased demand from corporations and other government groups look to reduce information technology expenditures.