Alibaba Gets Christmas Coal From Washington

| About: Alibaba Group (BABA)
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Summary

Alibaba's Taobao marketplace is likely to be included on the annual US "notorious markets" for piracy list for the next 1-2 years.

The move reverses an earlier decision by Washington four years ago, when it took Taobao off the list to acknowledge its efforts to fight the problem.

The company will remain under intense pressure to continue clearing up the piracy problem.

Christmas may be just around the corner, but the folks at e-commerce giant Alibaba (NYSE:BABA) won't be feeling much holiday cheer this year. That's because Alibaba's hugely popular Taobao C2C marketplace has just been included on the latest edition of Washington's annual "notorious markets" for piracy list, in a sharp rebuke to the company. The move reverses an earlier decision by Washington four years ago, when it took Taobao off the list to acknowledge its efforts to fight the problem.

This story has quite a bit of history, and centers on the bigger problem of rampant trafficking in knock-off goods in China. Many of those goods find their way onto online marketplaces like Taobao where consumers trade among each other, and Alibaba argues it's making big advances in stamping out such trafficking. But many US brands don't agree, and say that trading in pirated goods remains rampant on Taobao.

Caught in the middle is the US Trade Representative's (USTR) office, which each year publishes its "notorious" list of the world's most egregious online and offline marketplaces for trading in pirated goods. Alibaba and other big Chinese Internet names including search leader Baidu (NASDAQ:BIDU) and web portal Sohu (NASDAQ:SOHU) have all been included on the list in the past, but successfully had their names removed after convincing Washington they were successfully addressing the problem.

Alibaba convinced Washington as well and had its name removed in 2012 after an aggressive behind-the-scenes campaign led by seasoned US lobbyists. But the subject burst back into the headlines two years ago when China's commerce regulator issued a scathing report saying nearly two-thirds of the goods traded on Taobao were still fakes.

Since that time, a growing chorus of western brands and associations has spoken out quite openly against Alibaba, putting huge pressure on the USTR to return Taobao to the "notorious" list. Now the USTR has finally succumbed to the pressure, including Taobao on the latest edition of the list (USTR report, English article).

According to the USTR, Taobao still has a "large volume of allegedly counterfeit and pirated goods." The agency's use of the word "allegedly," combined with its explanation that Taobao offers "hundreds of millions of product and service listings" reflects Alibaba's influence behind the scenes, as both phrases offer Alibaba's own position that policing such a big marketplace is extremely difficult.

More Work Needed

The USTR also notes that Alibaba has taken recent steps to tackle the problem, but adds that while those steps "set positive expectations for the future, current levels of reported counterfeiting and piracy are unacceptably high." The bottom line is that the company has been put back on the list and could well appear on future editions until western brands and industry associations stop complaining.

Alibaba has responded with a statement saying it was "disappointed" by the news, and noting the many steps it has taken to tackle the problem. It also raised the possibility that the USTR "was influenced by the current political climate."

One of the main groups lobbying against Taobao, the American Apparel & Footwear Association, welcomed the decision, but also sounded a conciliatory note. "In the coming year, we will work with our members, USTR and other government agencies, outside stakeholders, and Alibaba itself to seek sustained improvements that lead to the permanent removal of counterfeits from these online platforms," AAFA said.

One last element we should examine is Alibaba's stock, which showed very little reaction to the news. The shares slipped by an insignificant 0.7 percent in after-hours trade after the announcement, though it's worth noting they're also down 18 percent from a peak in early October. That underscores the fact that this development in Washington is mostly a political embarrassment, and will probably have little or no impact on Alibaba's stock.

All that said, the company will remain under intense pressure to continue clearing up the piracy problem to a level that satisfies organizations like AAFA and many luxury brands that have also spoken out against Taobao. My guess is that Taobao will probably land on the list next year and possibly a year after that. Following that, the USTR may finally feel comfortable rewarding Alibaba by removing Taobao's name a second time if it thinks the company has made significant progress in the anti-piracy battle.