As technology platforms scale, their ecosystems tend to overlap with other, potentially competitive platforms. The platform that wins is often the one that builds the strongest network effects and uses them to ward off or take on a competitor.

In Alibaba's case, back in 2008 it was the leading e-commerce platform in China and experiencing exponential growth. "The battle between Alibaba and eBay is what accelerated e-commerce in China, allowing it to take off," says Porter Erisman, author of Alibaba's World and former Alibaba VP. "When eBay withdrew from the China market, it left only Alibaba Group (and its Taobao marketplace) as the lone e-commerce giant in the market. With a huge head start beyond the next competitor, Taobao enjoyed the position of serving as the de facto search engine for anyone shopping in China--there just weren't enough other places that products were being sold online."

However, Alibaba recognized it had a serious competitive threat. Baidu, often called the “Google of China,” was the dominant Chinese search engine. While there are no exact figures, it is estimated that a double-digit percentage of Alibaba's website traffic came from Baidu. Baidu's web crawlers would archive Alibaba's inventory and web pages and connect its users to Alibaba's product pages when they searched for products on Baidu.

Erisman adds, "One can imagine that, had Alibaba allowed Baidu to index Taobao's pages, shoppers would have gradually migrated to Baidu to begin their product searches. Rather than let that happen, Alibaba sealed a wall around Taobao by blocking Baidu. It was a once-in-a-company's-lifetime opportunity that changed e-commerce history in China.”

Jack Ma famously said that Alibaba needed to become a leading player in China search around the same time that he gained operational control of Yahoo China as part of Yahoo's 2005 investment in a fledging Alibaba. But as a standalone search engine Yahoo/ Alibaba weren't able to compete with Baidu. Baidu also responded by creating Youa (an eBay-like marketplace) to compete with Alibaba's Taobao marketplace.

Alibaba's executive management, led by Jack Ma, decided that Alibaba needed to be the go-to website for product searches in China, not Baidu. By enabling Baidu to crawl Alibaba's websites, the company was allowing Baidu to act as the middleman between consumers and Alibaba. Instead, Ma wanted consumers to go to Alibaba first.

The platform wars had begun.

To understand the magnitude of this decision, imagine if Amazon had shut out Google 10 years ago? Would you still start a search on Google when you wanted to buy something? Would Amazon have been nearly as successful as it is now?

Alibaba wanted to change user behavior for shopping searches so that consumers would start their ecommerce shopping on Alibaba's site, not Baidu's. The thinking was that, hopefully, consumers would find more value going to Alibaba rather than Baidu. After all, Alibaba initially marketed its decision to block Baidu (and Google) as a way to prevent fraud from merchants who were manipulating paid search results on external sites.

It's hard to say how this strategy would have worked out for Amazon in the U.S. market, but this move was key to Alibaba's success in China. When it launched Taobao in 2003, Alibaba promised to keep Taobao free for its first three years in an effort to defeat eBay in China. eBay charged a percent fee for each completed transaction. As a result, it couldn't allow buyers and sellers to communicate before completing a transaction; otherwise they might complete their transaction outside of the platform.

By allowing users to transact for free, Taobao gained a big edge in the price-sensitive Chinese market. Additionally, Taobao introduced its hugely successful Wang Wang chat service to allow buyers and sellers to communicate before completing a transaction. This feature was a big hit in China because users often haggle over price before agreeing to a sale--the listed price isn't taken at face value like in the U.S. Additionally, product quality in China is more variable than it is in developed countries, so facilitating that communication was a key advantage for Alibaba over eBay in the Chinese market. As a result, Alibaba was able to build a much larger ecosystem with stronger network effects than eBay could.

Monetizing Like Google, Not Amazon

However, given its promise to keep Taobao free, Alibaba needed a different type of business model than eBay or Amazon. Product search is one of the most lucrative segments of search advertising, so it had huge revenue potential. That's why Alibaba ultimately decided on a revenue model that looks more similar to Google's Adwords than it does Amazon or eBay's ecommerce marketplaces. Instead of depending upon a percentage fee from each sale, Alibaba makes profit through its advertising model.

The bet has clearly paid off. Because Alibaba blocked external search engines, its marketplace became the dominant destination for shopping in China's e-commerce market, to a degree that neither Amazon nor eBay could achieve in the U.S.

Today, Taobao is Alibaba's largest and most successful platform, and it makes the majority of its revenue from product-search advertising. Alibaba's valuation has long since surpassed Baidu's–-a fact cemented by Alibaba's spectacular IPO last year.

Tipping the Scales takeaways:

  1. Be self-reliant (especially when you own and operate a platform mobile app): Meerkat grew off the back of Twitter's social graph. Then Twitter cut them off with just two hours' notice. Uber's relationship with Google soured when they both decided autonomous cars were in their future. Now Uber is looking to acquire Nokia's Here mapping technology to wean itself off of Google Maps. Separation isn’t easy, especially if resources are tight. So understand when a separation is critical to your future and when you can survive without separation. Take a look at Applico's thinking section on mobile apps for more info on how to build a mobile app, how much does it cost to build a mobile app, essential tips for mobile app success and essential tools for building a mobile app.
  2. Know the value chain: Understand where your traffic comes from and the players in that chain. It's critical to understand each link of the chain in order to make informed decisions about how to best move your platform forward.
  3. Understand existing behaviors before you try to change them: Expecting a user to suddenly start their searches on Amazon over Google is foolish. You must first understand the value exchange occurring on Google before trying to improve it on Amazon in order for that switch to happen. Alibaba had to first understand what the existing value exchange was before optimizing it to create the new behavior it wanted.

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