China’s months-long investigation of Alibaba for anti-competitive practices concluded on Saturday as the e-commerce heavyweight was slapped with a record RMB 18.2 billion ($2.8 billion) fine for violating the Anti-Monopoly Law for a variety practices, most importantly “forced exclusivity.”
The State Administration for Market Regulation (SAMR), China’s top market regulator, defined Alibaba’s dominant market position in a 24-page decision released on April 10. Alibaba’s annual revenue from e-commerce services accounted for more than 70% of the combined revenue from China’s top 10 e-retail platforms, while its overall turnover represents more than 60% of China’s online retail sales during 2015 to 2019, according to SAMR.
The regulator determined that Alibaba had been “abusing” its market dominance by imposing “forced exclusivity” on merchants, a practice in which platforms force merchants to sell their wares on only one company’s platform or services.
“I think this is a good thing to bring more competition, both for the market and for the long-term growth of Alibaba itself. Alibaba’s high gross margin and its high pay to employees are to some extent determined by the company’s monopolistic position,” (our translation) Song Peijian, a professor at the Business School of Nanjing University, told TechNode.
“It’s like the platform is collecting taxes from the merchants. There are cases when merchants are recording hundreds of millions of RMB but still can’t make money from their business. That’s unimaginable in the traditional industry,” Song added.
What impact will the penalty and the ban on forced exclusivity have on Alibaba? And what is forced exclusivity—the main violation authorities cited in their decision—and why was forced exclusivity so important that Alibaba kept going despite multiple warning signs?
The fine Alibaba received is the largest in the history of Chinese antitrust law, breaking a record set by a fine imposed on US chipmaker Qualcomm. In February 2015, Qualcomm agreed to pay a fine of $975 million to settle a 14-month investigation into its anti-competitive practices led by the National Development and Reform Commission of China.
The Alibaba fine is also the second-largest antitrust penalty worldwide for a single company, according to a research note by the law firm Dentons China. The largest fine in history remains the European Union’s EUR 4.34 billion (around $5.2 billion) fine on Google in 2018 for using its Android mobile operating system to illegally “cement its dominant position” in search.
While the RMB 18.2 billion penalty, 4% of the group’s 2019 revenue, is China’s largest for antitrust violations, the sum is small compared to Alibaba’s more than RMB 312 billion in cash and cash equivalents as of 2020. The 4% penalty is also well short of the maximum 10% permitted in the antitrust law.
Alibaba shares in Hong Kong and US both jumped on news of the conclusion of the investigation—regarded as a major source of uncertainty for the e-commerce platform—despite the fact that the penalty was double the rumored sum of $1 billion.
“Determination of the penalty means Alibaba’s antitrust case has come to an end. A series of negative events has dragged Alibaba’s market cap near to a historic low. As long as it is slightly favorable, the stock price will usher in a rebound,” Wang Shan, an analyst at Tiger Brokers, told TechNode (our translation).
Michael Norris, research and strategy manager of Agency China, said that immediate market response to the fine reflects “a belief the regulatory overhang over Alibaba will conclude shortly.”
“It’s highly arguable the regulatory uncertainty over anti-trust investigations has done more damage to Alibaba’s share price than the fine for ‘forced exclusivity’,” he added.
The record-breaking fine against Alibaba is a direct sign that China has become a major antitrust regulator internationally, said Deng Zhisong, a partner at Dentons China.
While pledging full compliance with the administrative decision, the company played down its impact, saying that it expected no material impact on its business from the end of forced exclusivity, according to Chairman Danial Zhang during the Monday briefing. In addition, management said Alibaba will spend billions to lower merchant costs, responding to allegations that they’ve been overcharging merchants.
Forced exclusivity and timeline
Many Chinese tech giants have been accused of different forms of ‘forced exclusivity,” also known as “choose one of two.” Alibaba’s version forces merchants to sell exclusively on its marketplaces, such as Taobao and Tmall. Changing to a multi-platform format means its merchants can now sell on rival platforms like Pinduoduo and JD.com.
Vendors already operating on multiple platforms are prohibited to join rivals’ promotional events, such as the June shopping festival known as “618” and year-end shopping spree Singles Day. Merchants who don’t comply face punishment such as reduced marketing resources, decreased search result rankings, and even bans from Alibaba’s marketplaces.
- September 2010: Fights over forced exclusivity in China’s tech world date back more than a decade ago when Qihoo 360 sued Tencent for forcing hundreds of millions of users to choose between security software offered by Qihoo and Tencent’s QQ. Known as the 3Q war, this landmark case was China’s first first major tech antitrust case and helped to establish jurisdiction for similar cases.
- November 2012: Alibaba, which popularized the annual “Singles Day” sales promotion on Nov. 11, trademarked the shopping festival in an attempt to exclude rivals from holding promotions under the same theme. JD.com and other e-commerce companies launched Singles Day sales anyway, forcing merchants to take sides in a battle between platforms.
- July 2017: JD and flash sale retailer Vipshop released a joint statement, accusing Alibaba’s Tmall marketplace of monopolizing the market by forcing merchants to sign exclusive deals with Alibaba.
- June 2019: Home electronics manufacturer Galanz accused Alibaba’s Tmall of removing its products from search results after the electronics manufacturer refused to remove listings from rival platform Pinduoduo.
- October 2019: Alibaba PR head Wang Shuai dismissed concerns over the matter, stating that “so-called forced exclusivity is a non-issue.”
- November 2019: China’s market regulator during a forum in Hangzhou reminded more than 20 e-commerce players that forcing businesses into exclusive agreements with one marketplace is illegal.
- March 2019: China’s market regulator introduced a set of e-commerce rules, including terms prohibiting practices that facilitate forced exclusivity.
- December 2021: Chinese market regulators launch an anti-monopoly investigation targeting Alibaba.
Forced exclusivity practices exist in other platform industries too. Restaurant owners are also pressured to take sides with food delivery platforms like Meituan and Ele.me. Those willing to list exclusively on one of the food delivery platforms enjoy a lower commission fee. Similarly, drivers on ride-hailing platforms benefit from lower commission rates if they only work using one app.
Why forced exclusivity
Alibaba Chairman Zhang said eliminating forced exclusivity would have no material impact on Alibaba’s business. But if the practice didn’t matter, why did the company keep it so long in the face of lawsuits and pressure from regulators?
Alibaba, China’s top e-commerce platform for decades, had faced intensifying competition from rivals like Pinduoduo, JD, and more recently, mini programs on Tencent’s WeChat and short video apps including Douyin and Kuaishou. Forcing exclusivity on its merchants helped fend off rivals, making it harder for them to offer competitive selections of goods.
“It’s a crucial measure in the early development of online marketplaces, but not so important for a business as big as Alibaba (our translation),” said an analyst who asked to stay anonymous for sensitivity of the matter.
Despite forced exclusivity, the SAMR report showed that Alibaba’s market share has been gradually declining over the years. Its annual revenue accounted for 86.0% of earnings from China’s top 10 e-retail platforms in 2015. The figure has been dropping by single-digit percentages each year ever since to 71.2% in 2019. Its overall sales volume in proportion to China’s online retail sales declined to 61.8% in 2019 from 76.1% in 2015.
In March, Pinduoduo overtook Alibaba as China’s largest online selling platform in terms of number of users. Pinduoduo reported that it reached 788.4 million annual active buyers in 2020 compared with Alibaba’s 779 million annual active buyers during the same period.
Although Alibaba’s core e-commerce business still outperforms Pinduoduo in other key metrics, including revenue, gross merchandise volume, and per-order sales, Pinduoduo’s growth in user base is a warning sign for the tech giant that has dominated China’s e-commerce for decades.
Norris said forced exclusivity may also have been a means to keep Alibaba merchants’ digital marketing spend with Alimama, Alibaba’s digital marketing arm, rather than spread across multiple platforms.
Is it a monopoly?
Before accusing Alibaba of monopolizing the e-commerce market, regulators had to answer a question: Is there any such thing as an e-commerce market? E-commerce giants from Alibaba to Amazon have argued that e-commerce is just one among many forms of retail, and that its biggest companies should be seen as reasonably sized players in a retail market that includes malls and supermarkets.
SAMR rejected this argument on Saturday, finding that e-commerce is a separate market, and for the first time laying out a definition of an online services market and a method to measure the market share of a player in such a market.
While SAMR has been pushing to revise laws and regulations to keep up with its antitrust campaign in tech, it relied on established law dating to 2009 in its Alibaba decision, suggesting that the recent tech antitrust push was possible under the old law.
SAMR’s analysis used an approach familiar from traditional antitrust cases, known as “demand-side substitution analysis.” It said that the functions of online marketplaces, such as Alibaba’s Taobao and Tmall, are “non-interchangeable with offline marketplaces,” and that online marketplaces serve different merchants than offline marketplaces because the scope and costs of their services are different.
China’s 2008 Anti-Monopoly Law defines a player with more than 50% of a “relevant market” as a “dominant player.” In defining Alibaba as a dominant player in the online marketplace, SAMR cited data about Alibaba’s service revenue from merchants; China’s e-commerce market’s Herfindahl-Hirschman Index, a standard measure of market concentration; analysis of Alibaba’s leverage in negotiations with merchants; as well as Alibaba’s “strong abundant finance resources and advanced technological abilities.
Regulators are working on changes to antitrust law that may make it easier to prove monopoly status in future internet cases. In January 2020, SAMR proposed an amendment to China’s Anti-Monopoly Law, which will take into consideration factors such as network effects—services that rise in value as their user bases grow—as well as company size and data assets when determining whether a company is a dominant player. SAMR also in March finalized a set of guidelines helping regulators define relevant market share in the internet sector.
Alibaba clearly seeks to move on from the antitrust investigation. Vice Chairman Joe Tsai said on Monday during the conference call with investors, media, and partners that the company has “put this matter behind us.” Tsai added that he was not aware of any other investigations involving the company relating to the Anti-Monopoly Law, although the regulators continue to conduct a broad review of Chinese tech firms’ investment transactions.
Levying a sizable fine on one of China’s largest internet sites highlighted the state’s increased scrutiny of conglomerates, sending shivers down the spines of many Chinese tech peers.
Just two days after Alibaba’s fine, regulators announced a $180,000 penalty on Sherpa’s, a Shanghai-based English-language food delivery app targeted toward foreigners.
In the wake of the penalty, regulators summoned on Tuesday 34 of the country’s largest technology companies from various segments, including ByteDance, Baidu, JD, Pinduoduo, Ctrip, Bilibili, and Qihoo 360. The regulator warned every major internet firm in China to heed the Alibaba example.
Beijing gave Chinese online platforms a one-month window to rectify practices that were unfair to competition, such as forced exclusivity, user data leaks, and price discrimination. SAMR said those that failed to comply with regulatory requirements in follow-up checks will be “severely” punished.
Alibaba is already moving to respond to this pressure. For years, China’s tech giants strived to construct their self-sustained ecosystems in order to lock users in. But in a surprising move since mid-March, Alibaba took a step to open up its ecosystem by bringing Taobao Deal and re-commerce service Xianyu to Tencent’s WeChat. This may be a sign that the thick walls tech companies built against one another are beginning to crack.