Anti-Piracy Group Pulls Out Welcome Mat From Under Alibaba

| About: Alibaba Group (BABA)

A brouhaha over the admission of Alibaba (NYSE: BABA) to a leading US anti-piracy coalition has taken a somewhat strange twist, with word that the group has formally suspended the e-commerce giant just a month after it joined. The development occurred after several of the International Anti-Counterfeiting Coalition's (IACC) members quit after the group accepted Alibaba, including the latest defection last week by Tiffany & Co.

Tiffany's (NYSE:TIF) defection followed earlier withdrawals from the IACC by 2 other luxury goods makers, Michael Kors (NYSE:KORS) and then Gucci a short time later. (previous post) The coalition's members were unhappy because of Alibaba's previous status as an operator of marketplaces with rampant trafficking in counterfeit goods, even though the company has pledged to strongly step up its fight against such trade.

The IACC's decision to suspend Alibaba appears directly related to an investigative report by the Associated Press that found the organization's president had several conflicts of interest when he agreed to admit the Chinese company. Those included Robert Barchiesi's ownership of Alibaba stock, and also his close ties to an Alibaba executive and use of family members to help run the IACC. (English article; Chinese article)

The IACC said in a letter to members that the conflicts of interest weren't disclosed earlier due to weaknesses in its corporate governance. Alibaba's shares were down 2.5 percent on Friday, though it wasn't completely clear when the news came out and thus whether or not the stock's drop was related to the IACC suspension. The report I saw didn't contain any comment from Alibaba on its suspension.

This particular story is the result of Alibaba's high-profile campaign to show it is making serious efforts to combat piracy on its popular online marketplaces. Alibaba came under attack early last year after a survey by China's commerce regulator found that nearly two-thirds of the goods sold on its popular Taobao online market place were fakes.

Later the US Commerce Department also criticized Alibaba over the same issue in its annual report on global piracy late last year. (previous post) The whole issue severely dented Alibaba's reputation and its stock, which lost as much as half of its value in the months after the crisis erupted. Even now the stock has yet to really recover, and currently trades more than 30 percent below its high reached shortly before the crisis.

Lax Governance

To some extent the brouhaha also represents relatively lax governance at organizations like the IACC, whose leaders may sometimes use those groups as their personal fiefdoms. Alibaba had previously hired a number of major well-connected Americans to lobby Washington to keep its name off the annual list of the world's most "notorious" sites for piracy. Those same high-powered officials were also helping to craft Alibaba's public relations campaign to show it was serious about tackling piracy.

Accordingly, it appears that one of those officials probably used a personal relationship with the IACC to get Alibaba admitted to the group, obviously underestimating the major resentment such a move would cause. The IACC previously admitted that some of its members were unhappy about Alibaba's admission, but said that it stood by its earlier decision.

This particular development is quite embarrassing for both Alibaba and the IACC, but is mostly a public relations crisis rather than anything more serious. At the same time it does show that Alibaba is trying to change its ways, even if it's using some very aggressive tactics to change public perceptions. At the end of the day I don't expect this embarrassment will have too much impact on Alibaba's stock, though perhaps the shares could come under some short-term pressure until the brouhaha blows over.

Disclosure: None