Bottom line: A new conciliatory tone will help to diffuse a spat between Alibaba and a regulator that accused it of being soft on piracy, but the issue will weigh on the company for the rest of this year.
After reaching a fever pitch last week, rhetoric in the high-profile spat over piracy between e-commerce giant Alibaba (NYSE: BABA) and one of the nation’s main business regulators appears to be softening as the 2 sides move towards a compromise. The latest headlines say Alibaba and the State Administration For Industry And Commerce (SAIC) have joined hands to fight piracy, marking a sharp toning down of the angry rhetoric that was flying for much of last week. At the same time, Alibaba is now facing the usual flood of shareholder lawsuits, as law firms accuse the company of misleading investors by failing to disclose the magnitude of the piracy problem before its record-setting IPO last year.
Of course the investor lawsuits don’t really care about piracy in China, but instead are far more interested in Alibaba’s stock price. The company’s shares tumbled more than 14 percent last week, including a 9 percent plunge on one day at the height of the tussle between Alibaba and the SAIC, wiping out more than $30 billion in investor value.
The SAIC conducted an audit last year that showed nearly two-thirds of the merchandise traded on Alibaba’s popular Taobao C2C e-commerce platform was fake. It presented the results of the audit to Alibaba last summer, but held off publicly releasing the report until last week for fear of affecting Alibaba’s record-breaking IPO that raised $25 billion in September.
In releasing the report last week, the SAIC was critical of Alibaba for failing to take the piracy issue more seriously, and also expressed its frustrations at the company for failing to be more cooperative in the audit. Alibaba responded by questioning the SAIC’s audit for a number of reasons, including its methodology and small sampling size, and threatened to take some form of action against the government agency.
Now it seems that tempers have calmed down a bit, which is probably good for Alibaba since any legal or other actions it might have tried against the SAIC probably would have been useless. According to the latest reports, the SAIC has released a statement saying its chief, Zhang Mao, has personally met with Alibaba’s founder Jack Ma, and the pair have agreed to work together to fight piracy. (Chinese article)
At the same time, the SAIC has emphasized that its controversial white paper at the center of this high-profile spat is simply a form of administrative guidance that follows a discussion on the subject, and does not carry any legal weight. Zhang is quoted reaffirming the importance of e-commerce to China’s economy, and Ma is quoted saying his company will make fighting piracy one of its top priorities.
This sudden shift to conciliation was undoubtedly the result of tense talks between Ma and Zhang at the height of the crisis, and doesn’t really change very much at a more substantive level. The fact of the matter is that piracy appears to be a much larger problem than Alibaba had indicated on Taobao, a C2C marketplace where individuals trade goods between each other.
But investors should at least welcome the defusing of tensions between Alibaba and one of China’s top commercial regulators. Many were wondering if Alibaba’s stock would continue its downward plunge heading into the weekend amid the simmering tensions. The new conciliatory tone appears to have had some positive effect, and Alibaba’s shares dropped a relatively modest 0.8 percent on the last trading day of last week.
Of course US lawyers who specialize in shareholder lawsuits didn’t care about the conciliation, and at least 6 announced they were opening investigations into whether Alibaba deceived investors by failing to disclose the magnitude of the piracy problem. Such lawsuits are quite common and I have little doubt that Alibaba will resolve them with minimal trouble and cost. But it may be more difficult to resolve the piracy problem, which will dog Alibaba and its shares for the rest of this year.