by Duncan Clark
She gives credit to Alibaba’s achievements in designing Taobao to suit the local market: “They had a uniquely Chinese platform—and by the way they didn’t charge anything for years and years and years and years—and they just outexecuted us.”
After Bo stepped down, eBay struggled to find a replacement, going through a series of executives, from James Zheng to a Taiwanese-born American, Martin Wu, newly hired from Microsoft China, who would last only twelve months.
Whitman today rues the loss of the entrepreneur who had founded EachNet: “What I would have done is left Bo Shao in charge and owned the thirty percent of China that we originally owned and let him do his own thing.”
Sensing eBay’s disarray in China, Jack pushed ahead. At a four-hour session in a stadium in Hangzhou in September 2004 to celebrate Alibaba’s fifth birthday, Jack rallied all two thousand employees of Alibaba, including the fast-growing Taobao team, who held aloft flags emblazoned with worker ants, the mascot of Taobao. The ant was chosen to symbolize how even the smallest creatures can prevail over their enemies provided they work closely together. The assembled masses then held hands and chanted a song, “True Heroes,” whose lyric “You have to go through a thunderstorm to see a rainbow, and no one can succeed easily” was a reference to the challenge of SARS that they had overcome. This was followed by “The ants that unite can beat an elephant,” after which everyone headed off to a disco, where Jack danced on the bar into the wee hours.
The elephant in the room was, of course, eBay. From the moment he conceived of Taobao, Jack maintained a relentless focus on the company. In a much-quoted analogy, Jack commented to Forbes magazine in 2005, “eBay may be a shark in the ocean, but I am a crocodile in the Yangtze River. If we fight in the ocean, we lose, but if we fight in the river, we win.”
The tide was turning against eBay. From a market share of more than 90 percent in 2003, eBay’s market share fell by half the following year—barely ahead of Taobao.
And there was another problem for eBay: online payment.
On October 18, 2003, just five months after the launch of Taobao, Alibaba rolled out Alipay, its own payment solution. Although it was rudimentary, reminiscent of the early days of Alibaba’s customer log three years earlier, it proved an instant hit with customers.
Lucy Peng, a cofounder of Alibaba, is today CEO of Ant Financial, the Alibaba affiliate that controls Alipay. In 2012, at a talk I moderated for her at Stanford University, she reflected on the launch of the service: “The simple [escrow] model established a trust system in online shopping during its early stages. This was a very primitive model. . . . During Alipay’s initial operations one department had a fax machine, after clients wired monies via banks or post offices, they had to fax bank slips to Taobao. We would then double-check and confirm.”
It would be three months before eBay woke up to the threat of Alipay. In January 2004, PayPal assembled a task force in San Jose to pick up on EachNet’s earlier unsuccessful efforts to devise an escrow solution.
In the United States, eBay had shelled out $1.4 billion to buy PayPal in 2002. But it was slow to integrate the company and roll it out to China. To be fair to PayPal, regulatory obstacles in China were an important factor in the delay: The country’s banking sector is closely guarded by the government. Also, China’s currency is not freely convertible, meaning that foreign payment providers are banned from facilitating international transactions or offering credit. PayPal struggled to come up with workarounds to these challenges, including local partnerships.
PayPal had started out in the United States as a huge risk taker, legendary for its swashbuckling founders and early executives, today often referred to as the “PayPal mafia”: Peter Thiel, Reid Hoffman (cofounder of LinkedIn), and, after they bought his payments company, Elon Musk (Tesla Motors, SpaceX, SolarCity). But within eBay, and far from home, PayPal would struggle in China from the outset.
Attempts to figure out a way forward for the company in China were complicated when PayPal was sued for alleged patent infringement in the United States by AT&T, causing new work on escrow solutions to grind to a halt. To keep momentum on solving the China problem, eBay’s newly established China Development Center initiated its own proposed escrow product, called An Fu Tong (AFT). The idea was that while PayPal was tied up with the lawsuit in the States, AFT could be deployed as a stopgap solution. Finally, in December 2004, eBay could provide an answer to Alipay and deployed AFT in China. But by then PayPal had resolved the AT&T lawsuit and wanted to deploy its own solution, not AFT. Meanwhile, Alibaba hadn’t been standing still, rolling out a steady stream of improvements to Alipay including popular text message notifications to inform customers of successful payments and, working with domestic logistics companies, shipments as well. Alibaba’s “iron triangle” was beginning to take shape.
For Alan Tien, a Stanford-educated engineer working on PayPal’s China efforts since 2004, the AFT/PayPal infighting and the disastrous migration of servers to the United States were the beginning of the end for eBay in China. In a series of internal memos to the head office, he tried to raise attention to the seriousness of the threat from Alibaba and Alipay. In January 2005 he wrote, “Current situation isn’t good. Momentum has shifted away from us. Must execute on get well plan to stay in the fight,” adding, “We cannot afford to deceive ourselves anymore.”
eBay just wouldn’t take Alibaba seriously, questioning the reliability of mounting data that showed Taobao was selling more goods than eBay in China. Taobao now had more listings, but eBay convinced itself that because those listings were free they must be inferior. Jack vigorously rejected that thesis: “The survival and growth of Taobao are not because of free service. 1Pai [the joint venture of Yahoo and Sina] is also free but it is nowhere close to Taobao. Taobao is more eBay than eBay China [because] Taobao pays more attention to user experiences.”
Sensing it was game over, Alan Tien concluded, “Taobao’s product development cycle is much faster. Jack Ma’s right. We cannot fight on his terms.”
Whitman had reached the same conclusion and secretly began to look for a way out of the China morass. The most obvious route was to make an offer to buy Alibaba, and so she sent three senior executives28 from San Jose to Hangzhou, where they met Jack and Joe. The meeting got off to a bad start when eBay senior vice president Bill Cobb talked down Taobao’s achievements and CFO Rajiv Dutta offered a lowball number of $150 million to buy the company. After Jack told the eBay delegation that he was just getting started with Taobao, Joe countered with a sales price of $900 million, at which point the two sides parted company.
Having failed to buy its rival, Meg Whitman announced29 an infusion of an additional $100 million into its China operations. This was prompted out of fear of Taobao, but Whitman spun it to investors as a positive: “The China Internet market is developing more rapidly than anticipated. . . . We see even greater opportunities in China today than we did six months ago.” The $100 million was to be spent upgrading the credit system, hiring personnel, and splashing out a new advertising campaign that soon blanketed billboards in China’s major cities.
This was music to Jack’s ears. He joked to Forbes magazine that eBay had “deep pockets, but we will cut a hole in their pocket.” Talking to Chinese media, he ridiculed the new investment: “When I heard that eBay would spend one hundred million dollars to break into this market, I didn’t think they had any technical skills. If you use money to solve problems, why on earth would the world need businessmen anymore. Businessmen understand how to use the smallest resources to expand.” Even with SoftBank’s backing, Jack didn’t have the resources that eBay could bring to China if it wanted. Dismissing eBay’s approach, he added, “Some say that the power of capital is enormous. Capital does have its power. But the real power is the power of people controlling the capital. People’s power is enormous. Businessmen’s power is inexhaustible.”
Having earlier ignored them, eBay was now paying a lot of attention to Alibaba. Jac
k later commented that he saw this as a decisive moment: “The moment she [Meg Whitman] wanted to use money as her strategy we knew she would lose. First they didn’t consider us as a rival. Then they treated us too seriously as a rival. Neither of them was the right [strategy]. When we say, ‘If you have no enemy in your heart, you will be invincible in the world,’ we mean you have different strategies and tactics. In terms of strategies, you must pay attention—whenever there is a rival emerging you have to study whether it could become your rival, and if so what to do. Whatever is stronger than you, you have to learn not to hate it. . . . When you treat it too seriously as a rival, and intend to kill it, your techniques are completely exposed. . . . Hatred only makes you a shortsighted person.”
In May 2005, Meg Whitman and a number of other key Silicon Valley executives, including Jerry Yang, traveled to Beijing to attend the Fortune Global Forum. There Whitman met up with Jack and Joe. But further talks, which included a proposal for eBay to invest in Taobao, came to nothing.
At PayPal China, the mood was darkening, with Alan Tien writing to colleagues: “I think it’s absolutely frightening that eBay doesn’t take these threats more seriously. . . . Taobao/Alipay has grabbed the mantle as the auctions/payments leader in China. We are caught on our heels every time. Yet instead of developing a leapfrog, or even a flanking, strategy we try to match feature-for-feature, six to nine months later.”
While eBay was trying to put on a good face, Whitman was growing increasingly frustrated at the AFT/PayPal infighting, warning that PayPal China “is coming to a town near you, whether you like it or not. Although this may be suboptimal for marketplace, it’s good for eBay Inc. to have two horses in this race.”
Instead of picking AFT or PayPal, eBay had decided to go with both—meaning customers in China would have to navigate not one but two websites when buying online.
Not surprisingly, running two payment systems in parallel in China proved to be a disaster.
Customer complaints flooded in, such as, “My experience on eBay was painful. Can’t fill order information. I’m a 100 percent good feedback user, I was never delinquent, and never broke the rules. The payment systems used to be pretty good.” Another customer vented, “I can’t stand it anymore. Does EachNet call this customer service? They can only scare away more users. Did my two payments totaling 5,000 [yuan] disappear? My confidence in EachNet is once again severely blown.”
One customer even complained that his PayPal check was impounded by the Bank of China in Nanjing under a law to “prevent overseas criminals from money laundering through this method.” By the middle of 2005, Taobao had facilitated online payments for 80 percent of the products on its sites, but eBay barely 20 percent.
In a last-ditch attempt to turn things around, Whitman and a number of key executives relocated temporarily from San Jose to Shanghai for a couple of months. With the concentration of senior executives, Shanghai was quickly dubbed “Shang Jose” within eBay. But its China business was looking increasingly like a lost cause.
eBay shifted its focus to new horizons, including the landmark $2.6 billion acquisition in September 2005 of Skype.30 In China, things went from bad to worse when Taobao reaffirmed its commitment to a no-fee model. Extending its pledge of free services for a further three years, Taobao vowed to create one million jobs in China. eBay’s PR executive, Henry Gomez, fired off a terse press release titled a “Statement from eBay Regarding Taobao’s Pricing Challenge,” which consisted of the following three sentences:
“Free” is not a business model. It speaks volumes about the strength of eBay’s business in China that Taobao today announced that it is unable to charge for its products for the next three years.
We’re very proud that eBay is creating a sustainable business in China, while providing Chinese consumers and entrepreneurs with the safest, most professional, and most exciting global trading environment available today.
Whitman and her COO, Maynard Webb, already knew that the global product wasn’t working in China, so they initiated a new project to launch the best e-commerce site in China from scratch. They called the initiative de nuevo (which means “from scratch” or “anew” in Spanish). After all the talk about being more sensitive to local culture in China, adopting a Spanish name for the project hardly inspired confidence.
By the end of 2005, eBay’s market share had slipped to barely one-third of the market and Taobao was closing in on 60 percent. Just two months after eBay publicly defended its fee-based business model, eBay stopped charging fees altogether. Having talked up China so much to investors, eBay’s struggles there started to weigh on its share price, which dropped dramatically from a high of over $46 in early 2006 to only $24 by August.
Jack didn’t pull any punches: “In China, they’re gone. . . . They have made so many mistakes in China—we’re lucky.”
Having failed to team up with Taobao, Whitman launched discussions to sell eBay’s China business to the Li Ka-shing–backed venture Tom Online, finally abandoning its troubled business by leaving it in a minority-owned joint venture, along with $40 to 50 million in cash. It left a note, in the form of a press release, that, true to form, attempted to spin an obvious negative as a positive. The joint venture, it read, left eBay “even better positioned to participate in this growing market. This agreement is a sign of our continued commitment to delivering the best online buying and selling experiences in China.” The venture quickly faded into obscurity.31
eBay had lost China. But in Jack, China had gained a folk hero. When asked today about the experience, Whitman can only tip her hat to Jack’s achievements.
“If you look at Japan and China, two important markets, it’s where we didn’t strategically, actually do the right thing. But it was not obvious at the time, honestly. So more power to Jack Ma, what a powerful franchise he has built—and it is really in some ways the combination . . . of eBay, PayPal, and Amazon. He’s done a remarkable, remarkable job.”
eBay had lost a few hundred million dollars on its China folly. But this would soon look like small change to Alibaba, thanks to a one-billion-dollar deal that Jack pulled off thanks to another Silicon Valley giant: Yahoo.
Chapter Ten
Yahoo’s Billion-Dollar Bet
Nobody knows the future. You can only create the future.
—Jack Ma
Alibaba put paid to eBay’s ambitions in China. But eBay was not the first Silicon Valley company to run into problems there, nor would it be the last. Despite being one of the most popular sites in China when people first logged on to the Internet, Yahoo would quickly fall behind—until a billion-dollar deal with Alibaba changed everything.
Jerry Yang
Yahoo’s early success in the United States and Jerry Yang’s ethnicity set up high expectations for the company in China. Known in mainland China as Yang Zhiyuan (Yang Chih-yuan in his native Taiwan), Jerry and the company he cofounded1 served as an inspiration for the founders of Sohu, Sina, and NetEase. His appeal went far beyond the tech community. People in China were fascinated with how a young software engineer born in Taiwan came to found such an iconic American company and become so wealthy at such a young age.
Born in Taiwan in 1968, Yang took the name Jerry after he moved to the United States in 1978 with his mother, Lily, and younger brother, Ken. His father, born in mainland China, had died from a pulmonary disease when Jerry was just two years old. In Taiwan his mother had been a teacher, of English and drama, and in California she took a job teaching English to other immigrants. The family settled in a modest one-story home off Hostetter Road in a suburb of San Jose. Jerry’s longtime neighbor Bill Otto remembers him as a “very congenial” young boy, playing with his husky dog Bodie in the front yard and lugging a large backpack off to Sierramont Middle School.
Jerry came to the United States with just one word of English—“shoe”: “We got made fun of a lot at first. I didn’t even know who the faces were on the paper money.”
Struggling a
t first with English, he spent his first two years in the United States in remedial classes. But Jerry excelled in math and science. At Piedmont Hills High School he played on the Pirates tennis team and was elected student council president, finishing his senior year as valedictorian and winning a full scholarship to Stanford. A member of the class of 1990, Jerry completed both his bachelor’s and master’s degrees in electrical engineering, and between rounds of golf continued his studies in pursuit of a Ph.D. For one of his classes, Jerry’s teaching assistant at Stanford was David Filo, two years his elder. David, known for his shyness and reserve, had come to Stanford after an undergraduate degree in computer engineering at Tulane University in New Orleans. Born in Wisconsin, his family moved to Louisiana when he was six and he grew up on a commune in Moss Bluff. Jerry and David had worked in the same design automation software research group, and while teaching at the Stanford campus in Kyoto, Japan, had become close friends, sharing an interest in watching sumo wrestling.
Returning to Stanford, they took adjacent cubicles in a Stanford trailer, where they launched what would become Yahoo on two servers: “Akebono” and “Konishiki,” both names of Hawaii-born sumo wrestlers who had excelled in Japan.
Like the messy Lakeside apartment in Hangzhou where Jack launched Alibaba five years later, the trailer where Jerry and David launched Yahoo was not a pretty site. The company’s first investor, Michael Moritz of Sequoia Capital, recalled, “With the shades drawn tight, the Sun servers generating a ferocious amount of heat, the answering machine going on and off every couple of minutes, golf clubs stashed against the walls, pizza cartons on the floor, and unwashed clothes strewn around . . . it was every mother’s idea of the bedroom she wished her sons never had.”
Yahoo began as a list of other sites that Jerry and David had bookmarked using Marc Andreessen’s recently launched Mosaic browser. Known initially as Jerry’s Guide to the World Wide Web, then Jerry and David’s Guide to the World Wide Web, the list consisted at first of a hundred sites categorized manually into relevant headings. At first, traffic on the site was a thousand or so visitors each week. But by early 1995, traffic had grown to millions of hits a day. Stanford told them to move the site to their own servers. Jerry and David needed to raise funds to pay for them. Registered as Yahoo.com in January 1995, the company was incorporated in March 1995, and the following month, Sequoia invested $2 million, taking a 25 percent share of the company. The two engineers never finished their Ph.D.s. Jerry recalled, “When I first told my mom what we were doing, the best way I could talk about it was like a librarian. And she said you know you went through nine years of school to become a librarian. She was kind of shocked to say the least.”