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.


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:


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.


(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


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


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.

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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 :)


(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.


(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.


(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.


(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 :)


(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.


(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.


(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