Amazon's Odds Get Longer as "D-Day" Approaches

William Patalon III

Part of our investment "thesis" with Alibaba Group Holding Ltd. (NYSE: BABA) is that the e-commerce giant has designs on markets besides China.

And we got a solid sign of that early last week.

Last Monday, at the Wall Street Journal's 2014 Global Technology Conference, Alibaba Chairman Jack Ma said he hoped his payments company, Alipay.com, could link up with Apple Inc. (Nasdaq: AAPL) and its new mobile payment system, Apple Pay.

"I'm very interested in that," Ma told journalists during an interview at the event. "A good marriage needs both sides working hard. I respect Apple and I respect [Apple CEO] Tim [Cook] very, very much – from the heart. I hope we can do something together."

Just a few minutes later, Cook – who was in the audience and interviewed up on stage right after Ma – said he would like to see Apple collaborate with Alipay.

This was more than just an exchange of pleasantries between two top tech CEOs.

It tells us that a deal will likely get done. And it would be an important deal for both companies.

Here's why…

The War May Have Already Started

In early October, we took our first look at Alipay, the largest player in China's online-payment market. Ma and Alibaba launched it in 2004. And it has grown into a behemoth: It has 300 million users and accounts for nearly half the market in China's electronic-payments segment.

And that "market" is huge. In China, Alipay already processes nearly four times the amount of payments the PayPal unit of eBay Inc. (Nasdaq: EBAY) does globally ($778 billion to $203 billion). Alipay is moving into online transfers, is loaning money to small businesses, and wants to start one of China's first "private banks" for wealthy investors, the New York Times has reported.

And by paying higher interest rates for Yu'e Bao (a money fund that's zoomed to be one of the world's largest over the past 12 months), Alipay is grabbing deposits that would previously have gone to state-run banks.

"Alipay has become the default payment platform for the majority of users for nearly every online or mobile e-commerce transaction, and an increasing number of offline transactions as well – I even use Alipay to pay my rent and utilities," Zennon Kapron, the managing director of Kapronasia, a Shanghai-based financial consultant, told The Times. "Banks are already facing challenges in maintaining profitability and credit quality, and they definitely recognize Alipay and Yu'e Bao as a threat."

Then there's Apple Pay, which the Cupertino, California-based "iDevice" giant rolled out on Monday.

Apple is working with Visa Inc. (NYSE: V), MasterCard Inc. (NYSE: MA), and American Express Co. (NYSE: AXP) – essentially a credit card-sector "trifecta." More than 500 banks have agreed to partner with Apple since the service was announced last month.

Apple Pay is largely a "point-of-sale" (POS) system that will give iPhones increased utility: consumers will be able to "swipe" their phones at checkout counters to pay for their purchases. With the security feature created by the iPhone thumb reader, Apple Pay would act as a digital substitute for physical charge cards. (There's also a "Touch ID" feature for purchases other than point-of-sale transactions.)

According to market researcher Gartner, the global market for mobile payments is projected to nearly triple – from $235 billion last year to $720 billion by 2017. In the U.S. market every day there are more than 200 million credit card and debit card transactions – with American consumers spending $12 billion in the process.

The idea is to make sure Apple Pay "works anywhere Visa and MasterCard are accepted," Darrin Peller, an analyst who covers payment firms for Barclays Capital, told Barron's.

And Cook, the Apple CEO, said his company's payment service had 1 million sign-ups in its first 72 hours. There are already more credit cards associated with Apple Pay than with all other similar "tap-and-pay" services combined.

For Alibaba, a linkup with Apple would be just the start of its move into the U.S. market.

Target: America

At the same Global Technology Conference, the Alibaba founder also vowed to expand his company's investments in the U.S. tech sector.

Earlier this year, Alibaba launched a "beta" (test) site for an American e-commerce site called 11Main.com.

Ma referred to it in comments he made at the conference. And he told attendees to expect more.

"We've invested a lot in this space and we're going to invest more," Ma said. "I got my inspirations from Silicon Valley… it's our time to come here and invest in Silicon Valley."

That's already happening. Alibaba has a U.S. investment team that's headed by Michael Zeisser, the former dealmaker for cable magnate John Malone.

During the past two years, Zeisser's unit has taken big stakes (and board seats) in strategically positioned startups in the e-commerce, mobile, and logistics sectors. Some of these players are "online," while others are "offline."

The goal of these investments is to "soften the beach" for when Alibaba decides it's time to make a big move into the U.S. market, Hany Nada, a founding partner of GGV Capital, a venture firm that invested in Alibaba in 2003, told Reuters earlier this year.

Ma and Alibaba "want the optionality to see if a technology or trend takes off in the U.S., or to see if it's applicable to bring back home," Nada said.

Alibaba has played down its U.S. ambitions – including any hints that it plans to make a head-on run at Amazon.com Inc. (Nasdaq: AMZN). But whether it admits it or not, Alibaba is one day going to invade the U.S. e-commerce market harder than the Allies hit Normandy and Omaha Beach back on D-Day in World War II.

All you have to do is look at the substantive investments Alibaba has been making in U.S. tech properties for several years.

Several stories in particular tell the tale.

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William Patalon III

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Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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