Alibaba

by Duncan Clark

  EachNet clearly was in for a long haul, not projecting any profits until 2005. EachNet’s prospects of raising new venture capital investment dimmed further. Bo and his investors realized that their best shot at making EachNet the eBay of China was to sell out to eBay itself.

  eBay Comes to China

  In the fall of 2001, eBay CEO Meg Whitman made a trip to Shanghai to meet Bo. In March 2002, EachNet once again surprised the market with a landmark deal, announcing it was selling a 33 percent stake to eBay for $30 million.

  Despite EachNet’s challenges, eBay had been impressed by what it saw. The EachNet website had more than three million registered users, of which over 100,000 visited the site each day. The company had expanded from Shanghai to Beijing and Guangzhou. More than half of its business involved a party outside one of these cities. The site featured more than 50,000 items at any time, ranging from clothing to real estate, and offered by fixed prices or via auctions. Transactions exceeded $2 million a month.

  EachNet was tiny compared to eBay. But the allure of China was of critical importance to Whitman. She badly needed some good news to reassure investors after announcing just one month earlier the loss of the Japanese market to Yahoo Japan, backed by Masayoshi Son’s SoftBank, a blow to Whitman’s ambition to build eBay as a “truly global marketplace.” From $750 million in 2001, eBay was targeting $3 billion global revenue by 2005. Japan would have been a big step in achieving this, with more than $1.6 billion in goods traded, but eBay was late11 to the party there, launching only in February 2000, five months after Yahoo Japan. eBay’s strategy was a mess from the start. In Japan, eBay charged commissions but its competitor Yahoo Japan did not. Credit cards were still a rarity in Japan but eBay required customers to use them to register on its site. eBay chose a Japanese CEO and a local partner (NEC) with little experience of the Internet, charting a rapid course for irrelevance in the country. By the summer of 2001 it had garnered a measly 3 percent of the market. When in February 2002 eBay pulled the plug, its site offered just 25,000 products, compared to the 3.5 million on offer from its rival Yahoo Japan. In the Land of the Rising Sun, the sun had already set on eBay’s ambitions and the company laid off its staff.

  Where next? eBay had more success in South Korea12 and Taiwan,13 but only China could really move the needle. By 2002, China’s Internet population had grown to over 27 million, the world’s fifth largest.14 Whitman was earlier than many in Silicon Valley to recognize the importance of China: “With the demographics and incredible changes in China, our hypothesis is this could be one of the largest e-commerce markets in the world,” she told the media, projecting $16 billion in e-commerce revenue by 2006.

  eBay had failed to understand the needs of local customers in Japan but Whitman was determined not to repeat the experience in China. They wanted to back a leading player in the local market. EachNet was an obvious target. eBay senior vice president Bill Cobb later commented, “[Bo] had studied eBay up one side and down the other and had really tried to adapt a lot of the eBay principles to the market.” It didn’t hurt of course that Bo (and his cofounder, Tan Haiyin) had both attended Harvard Business School, Meg Whitman’s alma mater.

  Yet eBay didn’t just want to back EachNet; it wanted to buy it. The initial deal15 gave eBay one-third of the company but also an option to take full control, which it did just fifteen months later, taking its total outlay to $180 million. Rebranded eBay EachNet, the company became a vessel for eBay’s China aspirations. The decision to own EachNet outright set the stage for Alibaba’s triumph, and eBay’s humiliation.16

  Things looked good at the outset. With EachNet, eBay gained a 90 percent share of China’s consumer e-commerce market. But within two years eBay was reduced to irrelevance in China and forced to beat another embarrassing retreat from Asia.

  Why did things go so wrong so fast? Even though Whitman had granted Bo a generous allocation of options, making EachNet a subsidiary inevitably changed the dynamics with managers at eBay. Soon after the acquisition, for family reasons Bo had to move to California, which Meg Whitman was very generous in facilitating, as Bo had recounted to me in 2015. He stayed involved in the business, but the long distance between San Jose and Shanghai started to show. With Bo no longer in Shanghai, the head of marketing in the United States began to tell marketing in China what to do, and the head of technology did the same.

  With the acquisition, eBay had dented EachNet’s entrepreneurial culture. The damage was revealed when another entrepreneurial company arrived on the scene: Alibaba. Worse still, Alibaba had the backing of SoftBank, the author of eBay’s defeat at the hands of Yahoo Japan.

  One senior EachNet engineer, who would soldier on for several years after the acquisition, summed up the critical problem: “eBay thought it was a done deal, but it turned out it was not.” eBay had a leading position at the outset, but the market was growing so fast that all that really mattered was grabbing the dominant share of the millions of new online shoppers. Incremental users, not incumbency, was the name of the game.

  In his B2B business Alibaba.com, Jack had trained his firepower on Merle Hinrichs at Global Sources. For his new consumer e-commerce venture, Jack set his sights on a much bigger target, an icon of Silicon Valley: eBay and its CEO Meg Whitman.

  Squaring Off

  Alibaba launched its preparations to enter China’s consumer e-commerce market in 2002, initially as a defensive move sparked by eBay’s entry. As Jack later explained, “I needed to stop eBay to protect Alibaba.” Although EachNet was targeting consumers, not the businesses served by Alibaba, Jack was concerned that some of the larger merchants active on EachNet could encroach on Alibaba’s turf: “At that time, there were only two companies in China that understood online marketplaces, eBay and Alibaba. I was particularly concerned that eBay’s power sellers would grow their business to compete in the B2B space.”

  Jack’s plans to target consumers encountered resistance within Alibaba. The B2B business wasn’t yet profitable, and the VC market was closed for the time being. Could the company really afford to open a new front when they were still fighting the B2B battle? Was Jack just being paranoid?

  CTO John Wu adamantly opposed the idea, visiting Jack the night before the new project was kicked off. John warned Jack that the move would harm Alibaba: “How on earth could you fight against eBay?” Jack replied that the market was still open: “There are one hundred million Internet users today, but only five million people are doing online shopping.” Jack’s ambitious plans for Alibaba also gave him a different perspective: “eBay wants to buy the Chinese market, but we want to create China’s Internet trading market.”

  With his firsthand experience as a small-business owner in Zhejiang, Jack was adamant that the threat from eBay was real: “In China, there are so many small businesses that people don’t make a clear distinction between business and consumer. Small business and consumer behavior are very similar. One person makes the decisions for the whole organization.” Jack also understood the temptation for eBay, later reflecting, “We launched Taobao not to make money, but because in the U.S. eBay gets a lot of its revenue from small businesses. We knew that someday eBay would come in our direction.”

  So it was decided. Alibaba would target the consumer e-commerce market. Jack was emboldened after a trip at the end of 2002 to Tokyo, where he found Masayoshi Son in a buoyant mood. Yahoo Japan had just repelled eBay from its shores, boosting SoftBank’s standing after several painful years of dot-com write-downs. SoftBank signed up to commit $80 million17 to Alibaba’s new venture.

  The project was kept highly confidential. Few within Alibaba were even aware that the idea of targeting consumers in China had been contemplated, let alone that a team had actually been formed to code a new website. Secrecy, and some useful Alibaba folklore, was achieved by sequestering a handful of employees, including Alibaba cofounder Toto Sun, in the original Lakeside apartment where Alibaba had been founded.

  Two years later Jack recalle
d the scene as he invited a half-dozen, handpicked employees to his office: “Our COO, CFO, the vice president of HR, and I were all there. We talked to them one by one: ‘The company has decided to send you to do a project, but you are required to leave your home, and you must not tell your parents or your boyfriend or your girlfriend. Do you agree?’” Holed up in the small apartment, the team got to work.

  In taking on eBay, Jack wanted to preserve the element of surprise. Explaining his strategy, he dipped into his reservoir of martial arts stories: “I’ve seen lots of people yelling ‘Fight the Shaolin Temple!’ at the foot of the Shaolin Temple; that’s complete nonsense. However, if I reach your doorstep to challenge you, I pretty much know that I will defeat you. In the future there will be no need to yell; as soon as you stand on the doorstep, people will be scared.”

  Throughout the project, Jack emphasized that their target was not EachNet but eBay itself. Once the project became public knowledge, he wanted to ensure the fight was seen as a David versus Goliath struggle. One team member18 recalled the mood: “We were just a group of country bumpkins, and our competitor was eBay.” Reuters later summed up the culture as “kung fu commerce with a dash of theater.”

  To keep up morale the small group of software engineers took breaks between coding to play video games or do exercises. Jack encouraged the team to do handstands. As a child, he explained, looking at the world upside down had given him a different perspective on life.

  The new business was to be named19 “hunting for treasure,” or taobao in Chinese. Taobao.com’s tagline was “There is no treasure that cannot be hunted out, and there is no treasure that cannot be sold.”

  Taobao was officially launched on May 10, 2003, celebrated each year as “Aliday,” a “take your family to work” day and the date of the company’s famous group wedding celebration. Aliday celebrates the team spirit that helped Alibaba overcome an unexpected challenge that tested its employees as never before.

  SARS Attacks

  The SARS (severe acute respiratory syndrome) virus outbreak started in southern China in 2002, spreading to create clusters of infection around the world that caused eight thousand people to fall sick as well as almost eight hundred deaths. Seven thousand of those infected, and most of those who died, were located in mainland China and Hong Kong.

  In Hangzhou, four hundred employees in Alibaba’s head office underwent voluntary isolation at home after one of their colleagues, Kitty Song (Song Jie), fell ill with a suspected case of SARS. She had traveled to Guangzhou, the epicenter of the outbreak, as part of an Alibaba team participating in the biannual Canton Fair.

  SARS bound an already close company even closer. Because its origins and full impact were unknown, SARS was a frightening experience—as I experienced myself in Beijing at the time. The outbreak also bound people together.

  In early May, Jack donned one of the face masks that the company had distributed to all its employees and initiated a plan that confined all of its employees at home for one week. Soon after they were sent home, Alibaba’s office was sealed off to avoid any risk of infections from exposure to the suspected case. In a letter to employees distributed that day, Jack’s ability to inspire the troops, and to keep them focused on the company’s goals, was on full display: “We care for each other and we support each other. We never forget the mission and obligation of Alibaba, in face of the challenge from SARS. Tragedy will pass, but life will continue. Fighting with catastrophe cannot prevent us from fighting for the enterprise we love.”

  Although it sickened thousands and killed almost eight hundred people, the outbreak had a curiously beneficial impact on the Chinese Internet sector, including Alibaba. SARS validated digital mobile telephony and the Internet, and so came to represent the turning point when the Internet emerged as a truly mass medium in China.

  The virus gave a major boost to texting, which increased business for cellular companies like China Mobile. However, SARS also boosted the three Chinese Internet portals thanks to revenue-sharing agreements with the telecom company. As the shares in Sina, Sohu, and NetEase began to climb, investor interest in Chinese technology companies was suddenly reignited. Cell phone usage wasn’t the only thing to benefit; broadband Internet access got a huge lift, too, as millions of people, confined to their homes or dormitories for days or weeks on end, looked to the Internet for information or entertainment.

  Within days of home confinement, Alibaba employees had Internet connections installed at home. While the Hangzhou authorities supplied food and twice-daily disinfection visits, employees continued their work, holding virtual meetings in online chat rooms.

  Reliable information about SARS was hard to come by, especially in the early months of the outbreak, when China’s official media, including state broadcaster China Central Television, stayed mute. Instead people looked to their cell phones and PCs to learn about the virus and the best ways to protect themselves. Crucially for Alibaba, SARS convinced millions of people, afraid to go outside, to try shopping online instead.

  The suspected case of SARS within the company turned out not to be infected by the virus after all, and so for Alibaba, SARS ended up a blessing in disguise. Because the Taobao stealth team had relocated to work in the Lakeside apartment, they were not affected by the quarantine of the main office. Jack was still confined at home and unable to join the Taobao team for the May 10 launch, as he later recalled, “A few of us agreed to talk on the phone at eight P.M. and raised our glasses in the air and said ‘Wishing Taobao a safe journey.’ The day that Taobao was launched there was a line on the website that declared, ‘Remembering those who worked hard during SARS.’”

  During the SARS outbreak, Alibaba employees self-quarantined and worked from home, 2003. Alibaba

  Taobao

  Although Taobao was launched on May 10, visitors to the website could not discern any connection with Alibaba. Taobao made a virtue of its start-up status by relying on word-of-mouth marketing to popularize the site, including postings on the many free bulletin board systems and other online forums popular in China at the time.

  Taobao’s association with Alibaba was kept so well hidden that a number of Alibaba employees even voiced concerns to management about a potential new rival on the scene. Jack recalled, “We have a very active intranet. In late June, someone posted a message asking the company’s senior management to pay attention to one website, which might become our competitor in the future.” Soon the Alibaba intranet was alive with discussions about who was behind Taobao, and employees commenting on the disappearance of some of their colleagues. Finally, on July 10, 2003, Alibaba announced that Taobao was part of the company. “There was a resounding cheer within the company,” Jack recalled.

  The cat was out of the bag, and with the full resources of Alibaba at its disposal Taobao was now free to take on eBay. Yet Jack wanted Taobao to maintain an innovative, start-up culture, something aided by a preemptive move by eBay to try to sew up the market. eBay signed exclusive advertising contracts to promote its site on all the major China Internet portals, preventing them from displaying ads promoting rival sites. This forced Alibaba to adopt a series of guerrilla marketing techniques, including reaching out to hundreds of small but fast-growing sites and online communities that eBay had deemed unimportant.

  With the backing of SoftBank, Jack took a move from Yahoo Japan’s playbook. In 1999, when it launched its e-commerce business, CEO Masahiro Inoue asked his 120 employees to list items for sale on his new site to make it look active and popular. Four years later in China, Jack did the same: “We had all together seven, eight people [in the Taobao team]. . . . Everyone had to find four items. I rummaged through my chests and cupboards. I barely had anything at home. . . . We pooled about thirty items, and I bought yours and you bought mine, that’s how it started. . . . I even listed my watch online.”

  Jack also insisted that Taobao maintain a distinctively local culture, including choosing nicknames20 from Jin Yong’s novels or other p
opular tales. Taobao was successful at developing a whimsical culture and instilling a strong sense of teamwork. Yet it would be years before Taobao would make any money. Fortunately, Alibaba could count on SoftBank’s support once again. In February 2004, SoftBank led a new $82 million investment to replenish Alibaba’s coffers, in preparation for Taobao’s long battle with eBay.

  This transaction also was the end of the road for Goldman Sachs. Shirley Lin had left the bank in May 2003. With no one to oversee the stake, Goldman had written down the value of its stake to zero. The following year, just before the new investment led by SoftBank, Goldman sold off its entire 33 percent stake. The bank had paid $3.3 million for it in 1999 and sold it for more than seven times that amount five years later. This seemed like a good result at the time, although no one involved with the deal still remained at Goldman to take any credit. The investors who bought out the stake saw an immediate appreciation once SoftBank anted up more funds for Taobao. Worse was to come for Goldman, though, when in 2014 the full extent of the mistake sank in. The stake the investment bank had paid $3.3 million for in 1999 would rise in value to more than $12.5 billion at the IPO had they held on to it. Worse still, the partners at the bank could calculate how much they personally had forgone. Some calculated their missed windfall at more than $400 million, quite a few mansions in the Hamptons.

  Along with SoftBank, other investors committing fresh funding to Alibaba included Fidelity Investments, Venture TDF, and new investor Granite Global Ventures (later known as GGV Capital), backed by Rockefeller affiliate Venrock. The deal was announced as part of a move to “aggressively expand” Taobao to make it the “most popular online marketplace for Chinese retailers and individuals to list their products on the Internet.”