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Alibaba: A Mix of Amazon, eBay and PayPal With a Dash of Google

Alibaba Group Holding Ltd.— which is preparing to launch perhaps the largest U.S. stock listing ever of a Chinese company—dominates China's e-commerce market. But not everybody in the U.S. has a grasp of its scope.

Perhaps the best way to understand Alibaba is as a mix of Amazon, eBay and PayPal, with a dash of Google thrown in, all with some uniquely Chinese characteristics.

Unlike Amazon.com Inc., which buys goods from suppliers and sells them to customers, Alibaba has always acted as a middleman, connecting buyers and sellers and facilitating transactions between them. While it isn't an auction company, its middleman role is similar to the one played by eBay Inc.

Taobao, Alibaba's biggest website, is like a gigantic Chinese bazaar, with about 760 million product listings from seven million sellers. Merchants don't pay to sell products on Taobao. Instead, they pay Alibaba for advertising and other services to allow them to stand out from the crowd.

That no-fee model is part of Taobao's appeal in China. Much as with Google Inc., the ads from merchants appear with Taobao's product-search results.

While Taobao is mostly for small merchants, Tmall, another shopping site run by Alibaba, is designed for bigger merchants, including well-known brands such as Nike Inc. and Gap Inc. Apple Inc. this year opened a store on Tmall. Unlike Taobao, Tmall, which has about 70,000 merchants, charges each seller a deposit and an annual fee, as well as a commission on each transaction.

What sets Alibaba apart is size. The company has said that Taobao and Tmall account for more than half of all parcel deliveries in China. In 2012, the combined transaction volume of Taobao and Tmall topped one trillion yuan ($163 billion), more than Amazon and eBay combined.

Alibaba's revenue is about one-tenth of Amazon's because the Chinese company doesn't sell products on its site. But Alibaba is far more profitable. Alibaba's third-quarter revenue rose 51% from a year earlier to $1.78 billion. Net profit was $792 million, giving the company a profit margin of 44.6%, according to shareholder Yahoo Inc., which owns a 24% stake in Alibaba. Amazon posted revenue of $17.09 billion and a loss of $41 million in the same quarter.

Alibaba founder Jack Ma, shown last May, spoke at an event to mark the 10th anniversary of his company's Taobao Marketplace. ENLARGE
Alibaba founder Jack Ma, shown last May, spoke at an event to mark the 10th anniversary of his company's Taobao Marketplace. AFP/GETTY IMAGES
Alibaba, which could raise about $15 billion from its U.S. IPO, also has emerged as a huge player in China's creaky financial system. To solve the problem of buyers trusting merchants on its site, Alibaba created Alipay, a payment system that protects buyers if sellers don't deliver. Alipay has become so ingrained in China that when the company created a money-market fund, it became one of the world's largest in just eight months.

Alibaba also makes microloans and is taking part in a Chinese government program to set up five private banks on a trial basis in some big cities. Run by an affiliate of Alibaba, the payment system has allowed the company to accumulate a vast amount of information on Chinese small businesses, consumers and their online transactions.

Even though Alibaba remains by far the biggest player in China's fast-growing e-commerce market, the company faces stiff competition as more Chinese consumers use smartphones. Social-media and online-games company Tencent Holdings Ltd. is emerging as a powerful competitor because of its ability to use its popular WeChat mobile-messaging application as a platform to offer services such as e-commerce.