On Saturday (April 10), China used its most violent weapon to date in its cartel war against Big Tech.

Market regulators fined Alibaba around 18 billion yuan ($ 2.8 billion) and said the company had abused its dominant position. At the heart of the penalty is a business tactic that forced Alibaba traders to choose between their platforms and those of their rivals.

The fine, which accounts for around 4% of Alibaba’s Chinese revenue in 2019, is one of Beijing’s harshest warnings to tech giants that have freely expanded without much regulation. But since the end of last year, China has joined the global trend of governments tightening scrutiny over the monopoly practices of tech companies and expanding influence – with tech mogul Jack Ma’s empire facing the most dire consequences yet. The government foiled Ant Group’s monster IPO in November after Ma criticized regulators while antitrust regulators fined Alibaba and rivals like Tencent for failing to report past deals.

Investors and analysts appeared relieved by the regulator’s move as the fine removed some of the uncertainty surrounding Alibaba’s review, which said it will “ensure compliance with the resolve”. (However, the fate of the sister company Ant is less clear: The People’s Bank of China announced on Monday (12 should be regulated more in the sense of a traditional bank.)

Alibaba’s shares closed around 6.5% in Hong Kong today, while analysts at US investment bank Jefferies said the cartel ruling was a “new starting point” for the company.

“We believe that the recent decision and penalties by the State Administration for Market Regulation (SAMR) will address market concerns about the Alibaba antimonopoly investigation,” Jefferies said in a press release.

Specifically, SAMR, which launched an investigation into Alibaba’s alleged monopoly practices in December, said in its notice on the fine (link in Chinese) that certain business tactics were responsible for the heavy fines. “Since 2015, Alibaba had abused its dominant position in online retail platforms by sending merchants ‘er xuan yi’ to merchants on its platforms, prohibiting them from opening stores or participating in promotional activities on its competing platforms,” ​​it said.

The company has also used technical means such as data and algorithms to ensure that the he xuan yi policy is being carried out, it added. The regulator has ordered Alibaba to stop such practices.

What is “er xuan yi”?

“Pick one of two” or “er xuan yi” (二 选 一) in Chinese, refers to platforms that force merchants into exclusive partnerships or distribution channels, a practice that has existed in the Chinese e-commerce sector for years. While media reports and complaints from traders in the past have provided evidence of their existence, the SAMR’s statement gives us the most detailed insight yet into how companies like Alibaba have carried out such a tactic.

Alibaba had asked some retailers to either verbally agree or write in contracts that they would sell their products only or predominantly on the company’s platforms rather than those of their competitors. Some of the practices included preventing merchants from setting up flagship stores on other platforms, using Alibaba as the only online sales channel in China, or limiting the number of stores on competing platforms, said the SAMR, which added that merchants have largely complied.

The company also required retailers not to participate in major promotional activities on competing platforms or to ask for their consent to host promotional events on other platforms in order to limit the “influence” of their competitors. Alibaba sent screenshots of merchants ‘promotional activities on competing platforms during the country’s biggest shopping festivals such as “Double 11” Singles’ Day to imply they shouldn’t, according to SAMR.

Meanwhile, Alibaba had imposed penalties on traders who did not obey the Er xuan Yi rule. This included a “gray list” of dealers who break the rule, preventing them from participating in large promotional events. Some also received a reduced search weight, which meant that the vendors’ products ranked lower in search results or could not even be found by customers. Such practices “eliminated” and “reduced” the competition the company was facing in this area, the regulator said.

For now, at least, the fine could lead Alibaba and other e-commerce companies to be “very cautious” in imposing exclusion measures, said Angela Zhang, associate professor of law at Hong Kong University and author of the book Chinese Antitrust Exceptionalismal. This means that companies need to have other ways of retaining merchants. Alibaba CEO Daniel Zhang said on a conference call today that the company will lower barriers to entry and lower business costs for its merchants, saying he does not expect any “material negative effects” from the exclusivity change. Zhang said the company’s previous exclusive agreements only affected some brands’ flagship stores on Tmall, an e-commerce site operated by Alibaba.

“Instead of imposing restrictive conditions, this is an alternative way of motivating traders to stay on their platforms. It is more expensive for the company, but it is also the practical means for the company to remain competitive, ”Zhang told Quartz. “This step therefore directly benefits the users, including retailers and consumers.”

Alibaba did not immediately respond to a request for comment.