Many investors likely recognize Alibaba (NYSE:BABA) as the largest e-commerce and cloud company in China. However, it also leads China's digital advertising market with a 33% share of revenue in the first half of the year, according to consultancy firm R3.
ByteDance, the parent company of TikTok and Toutiao, ranked second with a 23% share, followed by Baidu (NASDAQ:BIDU) at 17% and Tencent (OTC:TCEHY) at 14%. Let's take a closer look at how Alibaba rose to the top of that market, and why it enjoys unique advantages against its advertising rivals.
Why is Alibaba an advertising company?
Alibaba doesn't report its advertising revenue separately. Instead, its latest quarterly report reveals that 85% of its revenue came from its core commerce business, 8% came from its cloud business, 6% came from its digital media business, and the remaining 1% came from its innovation initiatives and others unit.
Alibaba only occasionally mentions its advertising platform Alimama. CFO Maggie Wu claimed that Alimama accounted for 60% of Alibaba's total revenue during an investor day over two years ago, but the company hasn't updated that percentage.
Alimama gathers user data from Alibaba's sprawling ecosystem -- which includes its e-commerce marketplaces, its UCWeb browser, streaming media services, and the AliPay payments platform -- and lets customers buy display ads across those platforms.
A large percentage of Alimama's ad revenue comes from Taobao and Tmall, which let merchants promote their product listings via CPC (cost-per-click) bidding platforms. Larger merchants and brands can also purchase display ads across Alibaba's marketplaces.
Amazon (NASDAQ:AMZN), which became the third largest digital advertising platform in the U.S. last year, employs similar strategies. Alibaba's rival JD.com (NASDAQ:JD) also sells display ads across its marketplace, but it doesn't sell promoted listings because it's a direct retailer that doesn't rely on third-party sellers.
In short, merchants who want to attract more shoppers on Taobao and Tmall must pay a premium for promoted search results and ads. That cycle will remain strong as long as Alibaba's core commerce business keeps growing -- and the unit's 40% year-over-year growth in revenue last quarter indicates that it still has plenty of room for growth.
A wider moat than other advertising companies
Alibaba's strategy of locking merchants into its advertising and e-commerce ecosystem arguably gives it a wider moat than other advertising players like Baidu, Weibo (NASDAQ:WB), and Tencent. Those three companies -- which own China's top search engine, microblogging platform, and mobile messaging app, respectively -- all posted sluggish year-over-year ad revenue growth in their most recent quarters.
Baidu's ad revenue slid 9%, Weibo's ad revenue grew just 1%, and Tencent's revenue rose just 13%, marking a significant slowdown from previous quarters. All three platforms struggled with the Chinese economy's slowdown, which throttled ad spending, and competition from Gen Z-oriented platforms like TikTok and Bilibili.
Alibaba's ad platform is better shielded from those headwinds, since a constant stream of merchants is trying to climb to the top of its online marketplaces. This business should also continue expanding as Alibaba expands beyond China with platforms like AliExpress, which lets overseas shoppers buy goods from Chinese shoppers; Kaola, which lets Chinese shoppers buy overseas goods; and Lazada, the top e-commerce platform in Southeast Asia.
Alibaba expects that expansion to boost its number of annual active shoppers from over 860 million today to over a billion by the end of fiscal 2024. That growth will inevitably tether more merchants to its advertising ecosystem.
Why doesn't Alibaba identify itself as an advertising platform?
Alibaba CEO Daniel Zhang only briefly mentioned the company's advertising business once during the company's latest conference call with analysts, noting that its unprofitable digital media unit was still "creating opportunities in digital advertising, memberships and cross-selling" within Alibaba's ecosystem.
Yet Alibaba still seems reluctant to identify itself as an "advertising" company, likely because it would confuse investors and draw unfavorable (albeit flawed) comparisons to other struggling ad players like Baidu and Tencent. Nonetheless, investors should be aware that Alibaba quietly leads China's advertising market, and that business locks in advertisers much more aggressively than other platforms.