Alibaba tries out role of the noble monopolist

May 20, 2014

By Ethan Bilby

The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

Alibaba is trying out a new role: the noble monopolist. With an apparent 84 percent share of online consumer goods spending, it effectively owns the country’s Internet shoppers. Its payment affiliate is the biggest game in town. Both are attractions for its upcoming initial public offering. Alibaba’s long-term challenge is to keep showing that dominance helps the market rather than restricts it.

The company isn’t like China’s traditional monopolists. It comes from popularity rather than official handouts or restrictions – unlike, say, tobacco or salt, or the oligopolies that control telecoms and banking. Where “bad” monopolists promote inefficiency, Alibaba has done the opposite, connecting buyers and sellers who would never otherwise meet.

China’s thinking on market clout is still developing. A 2008 anti-monopoly law lets multiple regulators investigate even state-owned companies if they believe harm is being done to the marketplace, like setting unjustly high or low prices. China’s National Development and Reform Commission, which regulates prices, has been investigating China Telecom and China Unicom for over two years regarding broadband tariffs.

Alibaba isn’t on the radar. A hike in annual fees by its online marketplace Tmall led to protests by small merchants in 2011. China’s Ministry of Commerce then stepped in urging Tmall to defuse the conflict. Alibaba later agreed to delay new fees for sellers with positive ratings. While there was no suggestion of anticompetitive behaviour, it showed how Tmall’s market strength makes it both visible and sensitive.

Payment service Alipay is similarly strong, powering half of China’s online transactions last year. While not a part of Alibaba’s IPO, users registering for Tmall automatically receive an Alipay account. Other tech companies have faced scrutiny over linked services. China’s top court ruled this year software provider Qihoo 360 unfairly harmed rival Tencent <2988.HK> by bundling software with its QQ messaging program.

For now authorities seem to buy the “noble monopolist” concept. If anything, Alibaba is helping to prize open other, less efficient market concentrations: its online money-market fund platform Yu E Bao has forced banks to offer similar products to keep up. That allows it to argue its size is for the greater good. For investors, the question is for how long that continues to ring true.

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