First, let me begin by saying that I initially got curious about the Shopee business model when someone told me their shipping is free (well, not all of it). How great is that for consumers! I got quite intrigued as to how they could recover this cost! So, I did a quick study on their business model from the viewpoint of an Angel Investor. Below outlines my findings, with one of my main goals being to figure if Shopee can be a sustainable business by the end of roughly 5 years...
I have to add that, I am actually very surprised how competitive the online marketplace business has become. This is the start of a new era of competitiveness - what a great time to be a consumer!
Note: None of this information should be assumed as accurate and most of them are found online through cited sources and/or my own guesses.
Parent Company - Garena (now Sea)
Funding: Garena (now Sea)
Shopee CEO: Chris Feng (Rocket Internet, Zalora, Lazada, Sea [Shopee])
Web Traffic3: SG 1.3m, MY 6m, TH 8.5m, ID 18.5m, VN 12.5m, Ph 6.7m, TW, 30m, TOTAL: 83.5m
What they do: Marketplace (?) for regional sellers and buyers
Shopee has one of the most competitive business models in the market today versus their alternatives;
Most of the above charge fees/commissions and listing fees while the Shopee business model does not. Most of these do not stand a chance against Shopee's revenue model. The subsidised shipping is currently being done by Shopee and Lazada. These are huge competitive advantages against the listing model (Carousell, Mudah) and the commission/fee model (Qoo10, 11Street, Lelong, eBay, Lazada).
Alibaba: Lazada, Alipay & Taobao
Since the rest do not really stand a strong chance in the long-term, let me explain why Lazada is the main competitor for Shopee.
Lazada, of course, has the advantage of its buyer, Alibaba (Their last valuation for Lazada was 3.15b to own over 80%). Alibaba's Alipay as the main payment system is a great strategy to make Lazada profitable both directly and indirectly. This is through the sharing of users and the profits from Alipay being channelled to sustain Lazada's cash burn. By the end of 2015, Lazada was bleeding with 30% gross margins and -100% net EBITDA margin4, or something close to profit margin, for the laymen reading this.
Still, Alibaba's Jack Ma is a highly respected businessman, and I do believe that his strategy of purchasing a loss-making company and placing in Alipay could prove to be one of his more sophisticated manoeuvres yet. Not many business owners use their Venture Capital arm in a way that a portfolio company could bleed in one pocket and profit from another, resulting in a net gain in the long-term. Strategies like this are what make great businessmen, as not only does it make money, but it also proves to be a great strategy to deter competitors that do not own (a) a huge fund and (b) a payment processing business. If you haven't noticed, Uber vs Didi Chuxiang (backed by Alibaba and the other Chinese tech giants) was almost the same. Some say that Uber lost because they were not able to accept Alipay as a form of payment.
One more thing that Shopee does not have is Alibaba's logistics hub in Malaysia's new digital free trade zone6. This is a clear path to lower cross-border logistics costs as an additional competitive advantage.
Shopee's Possible Revenue Streams (possible, because they haven't really done any of it yet, apart from ads);
Note that #1 is the most important plays here. Search placement gets them initial revenues to sustain early on. It is a significant Strategy because they forgo most other forms of revenues and have ads as their main revenue source, something Google did to win all their competitors in the year 2000.
Alibaba's Taobao uses this exact business model (above)- which is where Shopee probably got it from.1
Their own payment system occurs on every order, further sustaining the overall Sea group (not likely to be recognised as Shopee's revenues) cash flows.
Banner/Video Ads & Search Placement Advertising Revenue
Their 83.5m monthly traffic3 is roughly 1bil views a year (or more, due to low & peak seasons). That's some decent traffic, even though they are far behind compared to Lazada who has 7x the traffic.
Assuming the above is the average ratio for all countries (7x), we could say that in a few years, Shopee could have 10X the traffic they have now, or perhaps 30x if we include the e-commerce growth in Southeast Asia. The assumption that it should triple comes from below, from 2017 to 2021 (5 years).
The average CPM (cost per thousand views) for Amazon is somewhere between $1 to $4. Usually, SEA traffic would be cheaper due to the nature of the lower cost advantage, so let's assume the average CPM by 2021E would be US$1-2 so we have some numbers to work with. This is quite validated as Amazon's ads revenue is set to hit US$5 billion by 2018!5. However, I am not sure what else goes into that number apart from display ads and placements.
So this 30X traffic and average CPM of US$1 will help us figure out their ads revenue by 2021E - which is:
1b views/yr * 30X growth * ($1 / 1000 views) = US$30m Revenues/yr by 2021E
If the above was at $2 CPM, it would be US$60m in Revenues from ads alone by 2021E.
Payment System Revenues
This is something that neither Sea nor Shopee really has right now but seems logical to quickly build in order to stay competitive vs Lazada/Alibaba/Ant.
To understand how payment systems can make money, let's understand a few of Alipay's (a.k.a. Ant Financial) key offerings, as they probably have the most competitive business model on the market right now;
The magic of Alipay's strategy is that it enables the entire market rather than tries to make money out of everyone (unlike Paypal who charges from 3% with a $0.30 USD minimum). The net effect is that Alipay grows much faster, is adopted faster, and that it is viable for smaller value goods transactions. You would, for example, find that people might not buy or sell a $0.10 pen if the minimum transaction fee was $0.30.
As you can imagine, Alipay is a giant magnet that unifies all payment alternatives but in a cheaper & more convenient way (cashless). The huge amounts of users something like that brings in can be used to make money in other forms. One such way is Ant Financial's Yu’e Bao, currently, the world's largest money-market fund and another is the Sesame Credit, a credit rating service. I can only imagine what else will come next to bring in further forms of revenues.
Estimating revenues here would be pointless as I do not have a strong basis to work from. Any guess would be garbage in, garbage out.
Lazada's Operational Expenditure ranges from $134m to $571.5m (a very common way to push up revenue growth before they sold in 2016, by the way). It is worth noting that they raised a total of ~$480m in late 2013 and late 2014, so that's where most of the $340m total EBITDA losses are covered for 2014 and 2015.
Then check out these funding options: