How Alibaba makes money: offering services in the digital market

Alibaba Group Holding Ltd. (BABA) is a holding company legally established in the Cayman Islands, but conducting its e-commerce business through its Chinese subsidiaries and floating rate entities (VIEs). Its primary activity is to provide a digital marketplace where consumers and sellers can connect and buy and sell from each other. Alibaba operates its business through four primary segments, led by its massive e-commerce business.

Its main competitors are other established Chinese e-commerce and internet companies, such as Tencent Holdings Ltd., as well as global and regional e-commerce companies, such as Amazon.com Inc. (AMZN). Since Alibaba is also active in cloud computing and digital media and digital entertainment, it also competes with companies specializing in those markets.

Key learning points

  • Alibaba provides digital marketplaces for merchants and consumers.
  • Alibaba’s largest business is its core e-commerce business.
  • Alibaba aims to be a leader in the development of trade infrastructure.
  • Alibaba and other giant tech companies in China have been ordered by Chinese authorities to stop blocking users of their apps from accessing rivals’ services from within those apps.

Financial data from Alibaba

Alibaba files financial statements with the US Securities and Exchange Commission (SEC) in accordance with generally accepted accounting principles (GAAP). The company follows a reporting schedule where the fiscal year-end (FY) falls at the end of March.

The company also reports certain non-GAAP financial measures, such as adjusted earnings before interest, taxes, amortization and amortization (EBITDA), and adjusted EBITA, which refers to earnings before interest, taxes and amortization. Although Alibaba’s reporting currency is the renminbi, the company offers conversions to US dollars, which are used in this story.

Alibaba reported early August financial results for the first quarter of fiscal year 2022 (FY), the three-month period ended June 30, 2021. Net revenue declined 7.8% year-on-year (YOY) to $6.6 billion. However, sales increased 33.8% year-over-year to $31.9 billion. Adjusted EBITA, the profit measure Alibaba uses for its individual business segments, declined 8.0% to $6.5 billion.

In its quarterly earnings, the company reported the growth of its annual active consumers, which increased to approximately 1.2 billion. Alibaba also noted that it was investing its excess profits and additional capital to support its merchants and for continued growth in new markets. The company said it increased its share buyback program from $10 billion to $15 billion, the largest share buyback program in its history.

Alibaba Business Segments

Alibaba monetizes its services through four key business segments it formally lists as follows:

  • Commerce (formerly Core Commerce)
  • Cloud Computing
  • Digital Media and Entertainment
  • Innovation initiatives and others

The company provides segment breakdowns of revenue and adjusted EBITA. The company also reports certain unallocated items, which relate primarily to the company’s administrative expenses and other miscellaneous items not allocated to its individual segments. These unallocated items are excluded from the percentages in the pie charts below and in the individual business segment sections below.

trade

Alibaba’s trading segment consists of the various digital retail and wholesale markets, as well as logistics and local consumer services. The company generates merchant revenue by selling a variety of marketing services, membership fees, customer management services, product sales, commissions on transactions, and software service fees. The company generates revenue from local consumers through platform commissions and on-demand delivery service fees.

The commerce segment is Alibaba’s largest source of revenue at $27.9 billion, or about 88% of the company’s total revenue, as of the first quarter of 2022. Revenue for the segment grew 35.2% compared to same period of three months a year ago.

In terms of income measures, the trading segment represents approximately 99% of the company’s adjusted EBITA, which fell 11.0% to $7.1 billion in Q1 FY 2022. Losses in two of Alibaba’s other business segments partly explain the higher reported figure in the trading segment than in adjusted EBITA for the company as a whole.

Cloud Computing

Alibaba Cloud provides enterprise customers with a complete suite of cloud services, including database, storage, management and application services, big data analytics, machine learning platform and other services. The company’s cloud computing segment generates revenue from enterprise customers based on the duration and specific use of the services.

Cloud computing is Alibaba’s second largest source of revenue with $2.5 billion, or about 8% of total revenue, as of Q1 FY 2022. Sales for the segment grew 29.1% compared to the same quarter last year.

Alibaba reported adjusted EBITA of $53 million for its cloud computing segment in Q1 FY 2022, compared to a loss in adjusted EBITA in the year-ago quarter. The cloud computing segment accounts for less than 1% of total adjusted EBITA.

Digital Media and Entertainment

Alibaba’s digital media and entertainment segment exists as part of the company’s strategy to generate revenues from consumption beyond its main trading activities. The segment primarily generates income from customer management services, in-house developed online games and membership fees.

Digital media and entertainment is Alibaba’s third largest source of revenue with $1.3 billion, or about 4% of total revenue, as of Q1 FY 2022. Sales for the segment grew 15.4% compared to the same quarter a year ago. Alibaba reported a $65 million loss in adjusted EBITA for the segment in Q1 FY 2022.

Innovation initiatives and others

The Alibaba and others innovation initiatives segment aims to innovate and develop new services and products that can meet the needs of its customers. Past innovations include the digital navigation app Amap and the network communication app DingTalk. The segment primarily generates revenues through service charges and product sales to consumers and business customers.

Innovation initiatives and others make up the smallest portion of Alibaba’s revenue at $213 million, or less than 1% of total revenue, as of Q1 FY 2022. Sales for the segment were up 37.2% compared to the same three-month period a year ago. Alibaba posted a loss of $333 million in adjusted EBITA in Q1 FY 2022.

Alibaba’s recent developments

On September 13, 2021, The Wall Street Journal reported that China has ordered the country’s major tech giants, including Alibaba, to stop blocking users of their apps from accessing competitors’ services from within those apps. The move by the Chinese authorities is part of a wider crackdown on the country’s technology sector. Alibaba is one of the other major tech companies in China recently fined for anti-competitive practices.

How Alibaba reports diversity and inclusivity

As part of our efforts to raise awareness of the importance of diversity in businesses, we are offering investors an inside look at Alibaba’s transparency and its commitment to diversity, inclusiveness and social responsibility. We’ve examined the data that Alibaba is releasing to show you how it reports the diversity of its board and staff to help readers make informed purchasing and investment decisions.

Below is a table with possible diversity measurements. It shows whether Alibaba discloses its details of the diversity of its board of directors, C-Suite, general management and employees in general, as marked with a ✔. It also reveals whether Alibaba breaks those reports down to reveal its diversity based on race, gender, ability, veteran status and LGBTQ+ identity.

Alibaba diversity and inclusion reporting
race Sex Skill Veterans Status Sexual orientation
Board of Directors
C suite
General management
Staff members