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IPO seen as threat to Amazon

Online sellers’ business models differ greatly

– Alibaba Group Holding is often called the of China. Yet the Asian company’s initial public offering filing shows that the differences between the two e-commerce giants are vast.

Alibaba disclosed last week in its prospectus with the Securities and Exchange Commission that its profit totaled $2.8 billion for the nine months ended Dec. 31 on revenue of $6.5 billion. By contrast, Amazon hasn’t had much in the way of net income during its 20-year history, with $274 million earned for all of 2013 on sales of $74.45 billion. Put another way, Amazon makes less than one cent for every dollar in revenue, while Alibaba makes about 43 cents.

“People may be very surprised by comparing the balance sheets of Amazon and Alibaba,” said Yan Zhang, professor of strategic management at Rice University, who has been tracking Alibaba. “Once they see the differences in the business models, they’ll understand why.”

Alibaba’s ability to churn out profits underscores how Amazon CEO Jeff Bezos’s strategy of pouring money back into the business and pressuring already razor-thin margins isn’t the only way to become one of the world’s biggest online-commerce companies. That may exacerbate investors’ recent dissatisfaction with Amazon – they have pushed down the company’s shares 25 percent so far this year, as Bezos ramps up spending on fulfillment centers and delivery operations.

Having Alibaba’s shares trading on a U.S. stock exchange will offer global investors an alternative to Amazon’s stock, said Edward Williams, an analyst at BMO Capital Markets. The option to invest in either Amazon or Alibaba may sharpen as both companies increasingly push into each other’s home turfs, with Amazon working to increase sales in China and Alibaba stepping into the U.S., he said.

“As they begin to play in each other’s sandbox, it becomes more of a threat,” Williams said. “That’s where competition becomes more intense.”

Mary Osako, a spokeswoman for Amazon, didn’t respond to a request for comment. Lin-Hua Wu, a spokeswoman for Alibaba, declined to comment.

The different financial profiles of the online commerce companies are driven by their cost structures. Alibaba doesn’t buy the products it sells, nor does it pay for the warehouses where goods are stored, or the delivery and logistics infrastructure needed to get a package to a person’s doorstep.

Alibaba’s three main websites – Taobao Marketplace, Tmall and Juhuasuan – instead serve as an intermediary to connect buyers and sellers. In a kind of hybrid of eBay and Google, Alibaba then collects fees on some sales or sells advertising for merchants who want to get featured higher when a customer searches for products.

In its prospectus, Alibaba said its business model is structured so that it doesn’t sell directly to customers because that would mean competing against the merchants on its marketplaces.

“This business model drives our profitability and strong cash flow, which give us the flexibility to further improve our platform, expand our ecosystem and aggressively invest in people, technology, innovative products and strategically important assets,” Alibaba said.

Amazon, meanwhile, has built out a massive infrastructure of distribution centers and delivery options. The company’s expenses rose 23 percent in the first quarter, with fulfillment costs climbing 29 percent and technology and content costs jumping 44 percent.

Alibaba may use IPO proceeds to move its business model into the U.S. market, which will pose a long-term threat to Amazon’s business, said Scot Wingo, co-founder and CEO of ChannelAdvisor Corp., whose e-commerce software is used by more than 2,000 online merchants.