Alibaba Launches its Initial Public Offering

This past month, Alibaba, a Chinese e-commerce company, launched its initial public offering. This is very big news in the investment world, because at $25 billion, it was the largest in history. When trading ended on Sept. 19, the company was valued at $231 billion, and it generated enough buzz that Mohamed El-Erian, the chief economic adviser at Allianz mentioned that he believed that the sales could lead to a “broad market decline”, because most investors buying shares of Alibaba are most likely selling other stocks to buy Alibaba instead of using their own savings or borrowing money. Luckily, Alibaba alone should not be enough to “move the needle”, or at least not just yet.

Over the past fifteen years, Alibaba has become one of the largest e-commerce companies, and they are continuing to grow at a very fast pace. In my opinion a large part of Alibaba’s success comes from the fact that they follow the long tail business model, term named by Chris Anderson in 2004. Essentially, the long tail model is based on the belief that the collective sales of low demand and custom products can equal or exceed the sales of only the most popular items, however this model only works when there are large enough distribution channels. Since Alibaba is an e-commerce business, they are able to reach a much broader range of customers. There are no inventory or store rental costs, which enables them to sell very broad and custom products internationally.

I predict that the world will be seeing a lot more companies following this business model as consumers are expecting very specific products and are no longer limited to the stores in their region.