Beijing's anti-monopoly findings on Alibaba: a deep dive
Includes official recognition of Alibaba's huge success
China’s State Administration for Market Regulation (SAMR) ordered behaviour changes to and slapped a record $2.8 billion fine on Alibaba on Saturday, April 10.
The news has been extensively reported by media outlets such as WSJ, NYT, Bloomberg, FT, and Reuters. Reuters also gathered some expert opinions. So consider this newsletter your complementary reading, in three parts:
Part I: What are the decision and instruction from SAMR on Alibaba exactly?
Part II: Here, what’s the all-important “relevant market” that Alibaba is found to abuse its dominance?
Part III: Read the SAMR’s decision from another angle: recognition of Alibaba’s huge success.
Usual disclaimers apply.
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Part I: What are the decision and instruction from SAMR on Alibaba exactly?
In addition to a press release (CHN), SAMR posted two official documents online. One is an administrative penalty decision (CHN). The other is an administrative instruction (CHN) document.
One interesting detail first. The decision notes, pursuant to Chinese law, before the administrative authority making a final penalty decision, it shall notify the company in question of the intended penalties and make clear the company 依法享有陈述、申辩和要求举行听证的权利 in accordance with the law enjoys the right to make statements, state arguments, and request a hearing.
In this case, as the penalty decision notes, 当事人放弃陈述、申辩和要求举行听证的权利 the party (Alibaba) waived its right to make statements, state arguments, and request a hearing before the hammer officially came down.
The penalty decision includes a lengthy analysis and eventually settled on two major orders:
（一）责令停止违法行为。
1. 不得限制平台内经营者在其他竞争性平台开展经营；不得限制平台内经营者在其他竞争性平台的促销活动。
2. 当事人应当自收到本行政处罚决定书之日起十五日内，向本机关提交改正违法行为情况的报告。
3. 根据《行政处罚法》坚持处罚与教育相结合的原则，本机关结合调查过程中发现的问题，制作《行政指导书》，要求当事人从严格落实平台企业主体责任、加强内控合规管理、保护消费者权益等方面进行全面整改，依法合规经营。
(A) ordered to stop the illegal acts.
1. (Alibaba) shall not restrict the operators in the platform to operate in other competitive platforms; shall not restrict the operators in the platform to promote activities in other competitive platforms.
2. the party (Alibaba) shall, within fifteen days from the date of receipt of this administrative penalty decision, submit a report to this authority on the correction of the violation.
3. According to the principle of combining punishment and education enshrined in the Administrative Punishment Law, this authority, based on the problems found during the investigation, makes the Administrative Instruction Document, requiring the party (Alibaba) to carry out comprehensive rectification in the areas such as strict implementation of the main responsibility of the platform enterprise (Alibaba), strengthening internal control and compliance management, and protect the rights and interests of consumers, and operate in compliance with the law.
（二）对当事人处以其2019年度中国境内销售额4557.12亿元4%的罚款，计182.28亿元。
(B) impose a fine of 4% of its 2019 sales of 457.512 billion yuan in China, amounting to 18.228 billion yuan.
从严格落实平台企业主体责任 strict implementation of the main responsibility of the platform enterprise (Alibaba) may sound hard to understand. It just means the company must do something within/by itself, to implement the decision and meet the order from the authorities.
The second order is straightforward: pay. The first decision, except the demand to submit a report within 15 days, has to be analyzed in the context of the Administrative Instruction Document, which lays out more concretely what Alibaba must do.
So below is the Administrative Instruction Document (CHN)
I. Comprehensively regulate its own competition behavior
1. immediately carry out a comprehensive and in-depth self-examination against the Anti-monopoly Law, review and regulate its own business conduct.
2. declare in accordance with the law its concentration of business operators that meets the declaration standards stipulated in the Provisions of the State Council on the Standard for Declaration of Concentration of Business Operators (ENG), and shall not unlawfully implement concentration of business operators that has or may have the effect of excluding or restricting competition.
3. shall not use technological means, platform rules and data, algorithms, etc., the implementation of monopoly agreements and abuse of dominant position in the market behavior to exclude, restrict market competition.
II strict implementation of the main responsibility of the platform enterprise
4. strengthen the internal governance of the platform, and constantly improve the service agreement, platform operations, resource management, Internet traffic distribution and other transaction rules; set objective and neutral search, sorting and other algorithms, use data resources in a fair and impartial way; effectively improve the openness and transparency of the platform’s governance rules; and protect personal information and privacy in accordance with the law.
5. cooperate with operators in the platform in accordance with the principle of fairness, reasonableness and non-discrimination, and not to engage in acts such as charging unfair and high service fees to operators in the platform, imposing unreasonable restrictions or attaching unreasonable trading conditions to operators in the platform, or treating operators in the platform in a discriminatory manner.
6. establish an evaluation mechanism of external opinions by consumers, platform users, experts, etc.; consciously accept supervision from the society, and continuously improve the internal governance rules of the platform.
III improve the internal compliance control system of the enterprise
7. establish and effectively implement an anti-monopoly compliance system, clarify compliance management requirements and processes, and improve internal mechanisms such as compliance consultation, compliance inspection, compliance reporting, and compliance assessment
8. conduct regular compliance training for company executives and staff to enhance anti-monopoly compliance awareness and improve compliance capability
9. establish a system to regularly report compliance to the regulatory authorities and consciously maintain a fair and competitive market order.
IV. Protect the legitimate rights and interests of operators and consumers in the platform
10. provide comprehensive, true, accurate, and timely transaction information for operators and consumers in the platform in accordance with the law, and fully protect the rights of operators and consumers in the platform to information, fair trade, and free choice.
11. establish and smooth the complaint reporting channels, improve the complaint handling system and online dispute resolution mechanism, formulate and publicize dispute resolution rules, and deal with the reflections of operators and consumers in the platform in a timely and effective manner.
12. when the platform downgrades operator in search results, shelves goods, suspends services, or takes other punitive measures, they shall be promptly publicized.
13. establish a regular analysis system of competition issues that are raised prominently by various parties, strengthen communication with the regulatory authorities, and improve the internal rules in a timely manner.
V. Actively maintain fair competition to promote innovation and development
14. increase the opening up of data and payment, application and other resources in accordance with the law, fully respect the user's right to choose, not to refuse transactions without justifiable reasons, and promote cross-platform interconnection and interoperability.
15. take the lead in strengthening industry self-discipline and actively carry out healthy competition through technological innovation, quality improvement, service enhancement and model innovation to achieve innovative development.
16. adhere to the principle of inclusion and sharing, provide convenient and high-quality services for operators in the platform, especially small and medium-sized businesses, and promote the synergistic development of the platform economy and the real economy.
Your company (Alibaba) is requested to develop a rectification plan in accordance with the above requirements, clarify the rectification tasks and timeframe for completion, report to this authority by April 30; and submit a self-evaluating compliance report to this authority by December 31 each year for three years from the date of receipt of this guidance. At the same time, it is recommended that your company take the initiative to disclose your compliance to the society to accept supervision from the society.
Basically, Alibaba needs to
1) pay a lot of money. But by all accounts, $2.8 billion is unlikely to make a substantial dent in Alibaba
2) submit a report to SAMR within 15 days on the correction of its violation, according to the 1st document
3) develop a comprehensive plan of rectification covering everything mentioned in the 2nd document and submit it to SAMR by April 30
4) submit a self-evaluating compliance report annually in 2021, 2022, and 2023
5) disclose compliance to the public, as “recommended.” But this disclosure could be more selective and relaxed - not as strict as the one submitted to SAMR.
Some thoughts on the specifics in the Administrative Instruction Document
1) Alibaba would have to report regularly to SAMR per No.9, which would presumably create a regular channel with SAMR. Maybe more “window guidance” in the future?
2) It’s been widely noted that Alibaba and Tencent have been competing ferociously, and one prominent sign is they both deny the other party’s presence on their own platform.
But per No. 14 expect the presence of other Chinese Big Tech (Tencent comes to mind rapidly) on the platforms of Alibaba. and it’s likely Alibaba will ask for something for return, so maybe the presence of Alibaba’s something on Tecent’s WeChat.
It’s been reported Alibaba’s Taobao Deals and Xianyu have applied to appear as mini-programs within Tecent’s WeChat, so that’s something to watch. If Tencent is wise enough, as it should be, turning Alibaba down may be sending the wrong signal on the authorities’ push for cross-platform interconnection and interoperability.
3) Criticism from public opinion, especially via Chinese media, on Alibaba’s competition practice will have more bearings, per No. 6 and No. 14.
If some of the criticism is loud enough, Alibaba can’t just ignore it, not only because of the overall atmosphere these days but also that the SAMR instructions now effectively institutionalized public opinion as something Alibaba must take into consideration on an ongoing basis.
4) Expect a lot more billable hours for competition advisory businesses and professionals from Alibaba - and other Chinese Big Tech.
5) There will be increased transparency as to how Alibaba runs its powerful platforms, as demanded by SAMR, for example in No.4 and No. 12.
It will be interesting to see how, say, Alibaba’s Tmall publicizes its decision and rationale when it downgrades operator in search results, shelves goods, suspends services, or takes other punitive measures.
6) SAMR forbids Alibaba to strong-arm merchants to choose between “my way or the highway.” But Alibaba is a business facing competition and almost certainly it will come up with some other methods to, well, “incentivize” merchants.
7) Per No.2, Alibaba shall not unlawfully implement concentration of business operators that has or may have the effect of excluding or restricting competition. So perhaps it will have to report major mergers and acquisitions in the relevant (and associated market?) to the authorities beforehand in the future.
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Part II: Here, what’s the all-important “relevant market” that Alibaba is found to abuse its dominance?
Certain legal technicalities always fascinates your Pekingnologist, who however is not a lawyer. So take this part with an extra grain of salt.
Alibaba is not the first to take the hit of anti-monopoly investigations in China, but this is definitely the highest-profile case to date and may set a precedent for other Chinese Big Tech in what Beijing terms as the “platform economy.”
So the analysis of Alibaba’s wrongdoing by SAMR, as laid out in the administrative penalty decision (CHN), deserves the attention of other Chinese Big Tech and lawyers, analysts, etc.
One of the basics in anti-monopoly cases is to 界定相关市场 define the “relevant market,” where the alleged business abuses its dominance.
Here is the Article 2 of the 国务院反垄断委员会关于相关市场界定的指南 Guide of the Anti-Monopoly Committee of the State Council for the Definition of the Relevant Market (ENG). (The Guide is explicitly cited in the penalty decision.)
Article 2 Functions of Defining the Relevant Market
All competitive behaviors (including those which have resulted or may result in excluding or limiting competition) all occur within a particular market scope. The definition of the relevant market is to define the market scope within which the business operators compete with each other. In the work of prohibiting monopoly agreements between business operators, prohibiting the abuse of dominant market positions by business operators, controlling the concentration of business operators that has resulted or may result in excluding or limiting competition and other work of anti-monopoly law enforcement, the definition of the relevant market may be involved.
Scientifically and reasonably defining the relevant market is very important to such key issues as identifying competitors and potential competitors, determining the market share of business operators and the degree of market concentration, deciding the market position of business operators, analyzing the impact of business operators' behaviors on market competition, judging whether business operators' behaviors are illegal and what legal liabilities they need to assume if their behaviors are illegal. Therefore, the definition of the relevant market is usually the starting point for analyzing competitive behaviors and an important step of the anti-monopoly law enforcement work.
The penalty decision notes
调查过程中，当事人提出，本案相关商品市场应界定为B2C网络零售平台服务市场，理由是B2C网络零售平台服务与C2C网络零售平台服务在商业定位和商业模式上存在较大差异，不具有合理的替代关系。
During the investigation, the party (Alibaba) proposed that the relevant market in this case should be defined as the B2C (business-to-customer) online retailing platform service market, on the ground that B2C online retailing platform service and C2C (customer-to-customer) online retailing platform service have significant differences in terms of business positioning and business model, and do not have a reasonable substitution relationship.
This is rejected by SAMR, which spends 16 paragraphs (!) to say the “relevant market” in this case should be the market of 网络零售平台服务 online retailing platform service - in other words, combining both B2C and C2C.
Most specificly, SAMR argues
根据平台内经营者不同，网络零售可分为B2C网络零售和C2C网络零售两种模式。B2C网络零售是指企业卖家对个人买家的零售模式，C2C网络零售是指个人卖家对个人买家的零售模式。两种模式中的卖家均为平台内经营者，网络零售平台向其均主要提供网络经营场所、交易撮合、信息发布等服务，帮助平台内经营者与消费者达成交易。因此，B2C和C2C两种网络零售模式下的平台服务并无本质区别，网络零售平台通过调整平台规则，即可以实现两种网络零售模式的转换。因此，为不同类别平台内经营者提供的网络零售平台服务属于同一相关商品市场。
According to the different types of operators in the platform, online retailing can be divided into B2C and C2C. B2C refers to the retail mode of enterprise sellers to individual buyers, and C2C refers to the retail mode of individual sellers to individual buyers. The sellers in both models are operators within the platform, to which the online retailing platform mainly provides online business venues, transaction aggregation, information dissemination and other services to help the operators within the platform accomplish transactions with consumers. Therefore, there is no essential difference between the platform services under the B2C and C2C models, and the online retailing platform can easily achieve the conversion of the two models by adjusting the platform rules. Therefore, the online retailing platform services provided to different types of operators within the platform belong to the same relevant market.
You are welcome to buy me a coffee or pay me via Paypal.
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Part III: Read the SAMR’s decision from another angle: recognition of Alibaba’s huge success.
In finding Alibaba’s monopoly, SAMR built a case highlighting how dominant Alibaba is in the “relevant market” - China’s online retailing.
So below, taken from the penalty decision, can also be seen as a sort of authoritative recognition of Alibaba’s success :)
（一）当事人的市场份额超过50%。一是从平台服务收入情况看。2015—2019年，当事人网络零售平台服务收入在中国境内10家主要网络零售平台合计服务收入中，份额分别为86.07%、75.77%、78.51%、75.44%、71.17%。二是从平台商品交易额看。平台商品交易额是指网络零售平台上的商品成交金额，是平台上所有经营者经营状况和消费者消费状况的综合反映。2015—2019年，当事人网络零售平台商品交易额在中国境内网络零售商品交易总额中，份额分别为76.21%、69.96%、63.58%、61.70%、61.83%。
(I) The market share of Alibaba exceeded 50%. First, from the perspective of revenue. In 2015-2019, the share of Alibaba’s online retailing platform service revenue in the combined service revenue of the 10 major online retailing platforms in China was 86.07%, 75.77%, 78.51%, 75.44%, and 71.17% respectively.
Secondly, from the perspective of the value of transactions in goods across the platforms. That refers to the amount of transactions of merchandise on the online retailing platforms, which is a comprehensive reflection of the operation of all operators and consumption of all consumers in the platform. From 2015 to 2019, Alibaba’s share of all China’s online retailing was 76.21%, 69.96%, 63.58% , 61.70%, and 61.83% respectively.
NOTE: However, the numbers are generally going DOWN by the year.
相关市场高度集中。根据平台服务收入市场份额，2015—2019年，中国境内网络零售平台服务市场的HHI指数（赫芬达尔—赫希曼指数）分别为7408、6008、6375、5925、5350，CR4指数（市场集中度指数）分别为99.68、99.46、98.92、98.66、98.45，显示相关市场高度集中，竞争者数量较少。近5年来，当事人市场份额较为稳定，长期保持较强竞争优势，其他竞争性平台对当事人的竞争约束有限。
(II) The relevant market is highly concentrated. Based on the market share distribution of the platform service revenue, the Herfindahl-Hirschman Index (Wikipedia) of the online retailing platform service market within China from 2015 to 2019 are 7408, 6008, 6375, 5925, and 5350 respectively.
And the CR4 (Four-firm Concentration Ratio) index are 99.68 , 99.46, 98.92, 98.66, and 98.45, respectively, showing that the relevant market is highly concentrated and the number of competitors is relatively small. In the past 5 years, the party (Alibaba) has a relatively stable market share and has maintained a strong competitive advantage for a long time, and other competing platforms have limited competitive constraints on the party (Alibaba).
NOTE: The Herfindahl-Hirschman Index is going DOWN, and that means China’s online retailing platform service market is in fact becoming LESS concentrated.
（三）当事人具有很强的市场控制能力。一是当事人具有控制服务价格的能力。当事人在与平台内经营者的商业谈判中，通常以格式合同方式，直接规定交易佣金费率和年度营销推广费支出水平，平台内经营者谈判能力较弱。二是当事人具有控制平台内经营者获得流量的能力。当事人通过制定平台规则、设定算法等方式，决定平台内经营者和商品的搜索排名及其平台展示位置，从而控制平台内经营者可获得的流量，对其经营具有决定性影响。三是当事人具有控制平台内经营者销售渠道的能力。当事人经营的淘宝和天猫平台商品交易额在中国境内网络零售商品交易总额中占比超过50%，是经营者开展网络零售最主要的销售渠道，对经营者具有很强影响力。
(III) The party (Alibaba) has strong market control capabilities.
First, the party has the ability to control the price of services. The party in the commercial negotiations with the operators in the platform, usually in the form of a standard form contract, directly specify the transaction commission rate and the level of expenditure for annual marketing and promotion, showing the operators in the platform has weak negotiation capabilities.
Second, the party has the ability to control the operators within the platform to obtain Internet traffic. The party determines the search ranking of operators and goods in the platform as well as the display positions in the platform by formulating platform rules, setting algorithms and other methods, thus controlling the Internet traffic available to operators in the platform and exerting a decisive impact on their operation.
Third, the party has the ability to control the sales channels of operators within the platform. The Taobao and Tmall platforms operated by the party account for more than 50% of the total online retail merchandise transactions in China, and are the most important sales channels for operators to carry out online retailing, which has a strong influence on the operators.
（四）当事人具有雄厚的财力和先进的技术条件。一是当事人具有雄厚的财力。2015—2019年，当事人净利润分别为（略），年均增长率24.1%；市值从2015年12月的1.32万亿元增长至2020年12月的4.12万亿元，强大的财力可以支持当事人在相关市场及关联市场的业务扩张。二是当事人具有先进的技术条件。当事人凭借进入网络零售平台服务市场的先发优势，积累了大量的平台内经营者和消费者，拥有海量的交易、物流、支付等数据，对比其他竞争性平台优势明显。当事人具有先进的算法，能够通过数据处理技术实现个性化搜索排序策略，针对性满足消费者需求，并精准监测平台内经营者在其他竞争性平台上的经营情况。同时，当事人是中国境内最大的公有云服务提供商，具有强大的算力，为当事人网络零售平台服务提供大规模计算、大数据分析等一整套云服务。当事人还具有先进的人工智能技术，并建立了可靠的安全系统。上述财力和技术条件巩固和增强了当事人的市场力量。
(IV) The party has strong financial resources and advanced technological capabilities. First, the party has strong financial strength. 2015-2019, the party's net profit was REDACTED, with an average annual growth rate of 24.1%; the party’s market valuation grew from 1.32 trillion yuan in December 2015 to 4.12 trillion yuan in December 2020. The strong financial strength can support the party's business expansion in the relevant market and associated markets.
Second, the party has advanced technological capabilities. The party has accumulated a large number of operators and consumers within the platform by virtue of its first-mover advantage in entering the online retailing platform service market, and has a huge amount of transaction, logistics and payment data, which gives it an obvious advantage over other competitive platforms. The party has advanced algorithms that enable personalized search sorting strategies through data processing technology to target consumer needs, as well as accurately monitor the operations of its operators on other competing platforms.
At the same time, the party is the largest public cloud service provider in China, with strong arithmetic power to provide a full set of cloud services such as large-scale computing and big data analysis for the party's online retailing platform services. The party also has advanced artificial intelligence technology and has established a reliable security system. The above financial and technological capabilities consolidate and enhance the market power of the party.
NOTE: Well, it appears Alibaba is now the victim of its own success here :)
（五）其他经营者在交易上高度依赖当事人。一是当事人平台对平台内经营者具有很强的网络效应和锁定效应。证据表明，当事人平台拥有大量消费者用户，且平均消费水平远超其他竞争性平台。同时，当事人的消费者用户黏性很强，跨年度留存率达98%。因此，当事人对平台内经营者具有很强的跨边网络效应和锁定效应，平台内经营者难以放弃当事人平台上的庞大消费者群体和巨大流量。二是当事人平台是品牌形象展示的重要渠道。在网络零售平台服务市场，当事人平台拥有很高的经营者和消费者认可度，是品牌形象展示的重要载体。调查过程中，平台内经营者普遍表示，与其他网络零售平台相比，当事人平台的影响力更大，消费者更为认可，放弃在当事人平台经营不仅影响营收，还会对其品牌形象产生较大不利影响。三是平台内经营者从当事人平台转换到其他平台的成本很高。调查显示，当事人平台是大多数平台内经营者最主要的网络销售渠道，在其网络销售额中的占比普遍较高。平台内经营者在当事人平台获得了众多固定用户，积累了大量的交易、支付、用户评价等数据，并依赖这些数据开展经营活动。用户和数据是重要资源和无形资产，难以迁移到其他竞争性平台，平台内经营者转换至其他竞争性平台面临较高成本。
(V) Operators are highly dependent on the party in transactions.
First, the party's platform has a strong network effect and lock-in effect on operators within the platform. Evidence shows that the party's platform has a large number of consumer users and the average consumption level far exceeds that of other competing platforms. At the same time, the party’s consumer users are very sticky, with a 98% retention rate across years. Therefore, the party has a strong cross-side network effects and lock-in effects on operators within the platform, and it is difficult for operators within the platform to give up the large consumer base and huge traffic on the party’s platform.
Second, the party’s platform is an important channel for brand image display. In the online retail platform service market, the platform of the party has a high degree of operator and consumer recognition, and is an important carrier for brand image display. During the investigation, the operators in the platform generally said that, compared with other online retailing platforms, the influence of the party's platform is greater, and consumers are more recognizant of it. Abandoning the operation in the party's platform will not only affect revenue, but also have a greater negative impact on the brand image.
Third, the cost of switching from the platform to other platforms is very high. The survey shows that the platform is the main online sales channel for most of the operators in the platform, and the proportion of their online sales here is generally high. The operators in the platform have obtained many fixed consumers in the party’s platform, accumulated a large number of transactions, payments, user reviews and other data, and rely on these data to carry out business activities. Users and data are important resourcess and intangible assets, which are difficult to migrate to other competing platforms, and operators in the platform face high costs to switch to other competiting platforms.
（六）相关市场进入难度大。进入网络零售平台服务市场不仅需要投入大量资金建设平台，建立物流体系、支付系统、数据系统等设施，还需要在品牌信用、营销推广等方面持续投入，进入相关市场成本较高。同时，网络零售平台须在平台一边获得足够多的用户，才能实现有效的市场进入。目前中国境内网络零售平台获客成本逐年提高，潜在进入者达到临界规模的难度不断增大。
(VI) Great difficulty in entering the relevant market. Entering the online retailing platform service market not only requires investing a lot of capital to build the platform, establish logistics system, payment system, data system and other facilities, but also requires continuous investment in brand and recognition, marketing and promotion, and other areas, which makes it costly to enter the relevant market. At the same time, online retailing platforms must acquire a sufficient number of users on one side of the platform in order to achieve effective market entry. Currently, the cost of acquiring customers for retailing platforms in China is increasing year by year, and it is becoming increasingly difficult for potential entrants to reach the critical mass.
（七）当事人在关联市场具有显著优势。当事人在物流、支付、云计算等领域进行了生态化布局，为当事人网络零售平台服务提供了强大的物流服务支撑、支付保障和数据处理能力，进一步巩固和增强了当事人的市场力量。
(VII) The party has significant advantages in the associated market. The party has made comprehensive layout in logistics, payment, and cloud computing, which provide strong logistics service support, payment guarantee, and data processing capabilities, further consolidating and enhancing the party's market power.
Well, it reads as if Alibaba will do just fine.
Thanks for your time.
P.S.: a Pekingnology newsletter on Dec. 29, 2020 on the Detailed breakdown of PBoC deputy governor's Q&A on Jack Ma’s Ant Group