Alibaba

by Duncan Clark

  In the fall of 1995, Jerry, David, and Yahoo CEO Tim Koogle initiated discussions with new investors, including Eric Hippeau, the CEO of Ziff-Davis Publishing Company, a large publisher of PC and technology magazines. In November, SoftBank acquired Ziff-Davis, and Hippeau introduced Masayoshi Son to Jerry and David. Son and a colleague flew to meet Yahoo’s founders, in their small office in Mountain View, California, just south of Palo Alto. Meeting over a lunch of takeout pizza and sodas, Son and the two founders hit it off. Son agreed to invest $2 million for a 5 percent stake in Yahoo. In March, Son doubled down. In a gutsy move, Son agreed to pay more than $100 million to top up his stake, ending up with over 41 percent of Yahoo, more than Jerry and David, who together held just under 35 percent.

  Jerry recalled, “Most of us thought he was crazy. . . . Putting $100 million into a start-up in March 1996 was very aggressive, but I don’t think it was luck.”

  SoftBank saw the potential for Yahoo in Japan, and the two companies launched their joint venture. Jerry flew to Japan in January 1996 to oversee preparations. The site, run by Son’s deputy, Masahiro Inoue, launched three months later and was an instant success, racking up five million page views per day in January 1997, and hitting 100 million by July 2000.

  On April 12, 1996, Yahoo went public on the Nasdaq, raising $33 million. After a healthy first-day 154 percent gain, investors valued the company at almost $850 million. Yahoo had just $1.4 million in revenues2 and losses of over $600,000. Only a year after incorporating the company, Jerry Yang and David Filo were each worth more than $165 million on paper. Within three years they were billionaires. Their success propelled SoftBank to list in January 1998 on the primary board of the Tokyo Stock Exchange, making Son a billionaire, too.

  Yahoo’s popularity spread quickly around the world. The company rolled out localized sites where the business case was strongest. China was not a high priority, as Jerry indicated on a visit to Hong Kong in 1997: “China is probably the last market we want to address right now. It may be the most important one, but the last sequentially. There’s not enough people using the Internet for us to be spending money over there.”

  Instead, Yahoo started to reach out to other parts of Asia, launching a regional site in Singapore in 1997 targeting Internet users in Southeast Asia. The following year it launched regional sites targeting overseas Chinese users and then users in China itself.3 Consisting of links to ten thousand sites, the Chinese Yahoo was the thirteenth of its “mirror” sites around the world, hosted on servers in the United States and run from its headquarters in Santa Clara, California. Visitors could download free Chinese software to help with different character sets. The site was instantly popular on the mainland. Several hundred thousand visitors a day came to the site, impressive given that China then had less than a million Internet users.

  As the Internet gained in popularity in China, Yahoo started to look at getting more deeply involved in the country. Jerry, who spoke fluent Mandarin, had yet to visit mainland China. In a fateful meeting, in 1997, Jack was his tour guide, assigned to the task while working for the government trade ministry in Beijing. In addition to the business meetings with MOFTEC and others, the trip was an opportunity for Jerry to see the sights. Jack’s skills as a self-appointed tour guide on the shores of West Lake in Hangzhou came in handy when he and Cathy took Jerry, his younger brother Ken, and Yahoo vice president Heather Killen on a trip outside Beijing to see the Great Wall.

  The image of Jerry sitting on the Great Wall is an appropriate metaphor for Yahoo’s China dilemma. The market was growing rapidly, now home to millions and soon tens of millions of Internet users. Yahoo had already managed to become a dominant player in Japan, so why not in China, too? But China presented a quandary: how to deal with a government intent on control at all costs.

  In 1996, speaking in Singapore, Jerry had shared his views: “Why the Internet has grown so fast is because it is not regulated.” There were limits to how much Jerry’s Chinese ethnicity would translate into an inside track for Yahoo in China: “The First Amendment safeguards freedom of speech. I’m more American in terms of my upbringing now.”

  Yahoo from the outset was about content, and that would be tricky in China, where all forms of media were tightly controlled. When Yahoo opened its office in Hong Kong, Jerry was asked about the issue of censorship. He replied that Yahoo would “stay within the boundaries of the law and try to stay as free as possible.” He disclosed that Yahoo was in touch with the authorities in China but “to be honest, the policy is not very clear as to what is politically sensitive,” adding that they had been informed that “as long as we’re just listing content and not hosting it then we can just go right ahead.”

  Although Yahoo was initially just a directory of links to websites run by third parties, even the choice of which links to present to the public was a sensitive matter. Furthermore, Yahoo was no longer just about links. Following an early partnership with Reuters the company added news content to its site, then chat rooms and, following an acquisition, Yahoo Mail.

  The expanding scope of Yahoo’s business invited growing scrutiny from regulators on the mainland, who also harbored reservations about the company’s links to Taiwan. On a visit to the island in 1997, Jerry had been treated as a conquering hero, mobbed by the media and received by Vice President Lien Chan. His trip came just after Taiwan’s relations with Beijing had hit a new low. How could Yahoo comfortably serve users both in Taiwan and the mainland? Jerry Yang admitted it was a challenge: “We may or may not be able to get around it, because they [the Chinese government] can shut us off. . . . The point there is to take a very neutral stand. I don’t know if we can get away with it. We are already running into problems.”

  Could Yahoo go it alone in China? Or would it be better to pick a local partner, perhaps buying out one of the portal pioneers, such as Charles Zhang’s Sohu, the original name of which, Sohoo, left no doubt as to its plans to become the “Yahoo of China”?

  Build or buy? Either course had its complications. There were simply no precedents for Yahoo to look to. AOL opted in the summer of 1999 to invest in Hong Kong–based China.com. Even after it returned to Chinese sovereignty in 1997, Hong Kong was exempted4 from the draconian media restrictions that made investing in China so fraught with risk for foreign companies. But China.com was a bit player in China, and even AOL’s Steve Case admitted that Hong Kong was just “a logical staging area for China. We want to launch Hong Kong, and then we’ll see what happens.” (AOL’s subsequent partnership in mainland China, with the computer manufacturer Legend Holdings, never gained traction.)

  In September 1999, Jerry announced in Beijing that Yahoo was going into the mainland in a joint venture with Founder, a Chinese manufacturer of personal computers and software. The choice of partner was uninspiring but safe: The company was a spin-off from Peking University and retained strong ties to the Chinese government. Yahoo was finally in China itself, adding the coveted “.cn” suffix to become www.yahoo.com.cn. The site started as a directory of links to twenty thousand Chinese websites, plus additional content translated from its U.S. website, and Yahoo Mail and instant messenger. COO Jeffrey Mallett acknowledged that China wouldn’t be easy: “We are walking into this with our eyes wide open. The site significantly expands the existing features of a Chinese Yahoo website already online, and it is being hosted in China by government-owned Beijing Telecom.”

  Yahoo’s launch in China came just as the country’s own portal pioneers had been dealt a blow in their efforts to launch an IPO. The announcement from Wu Jichuan, the powerful minister of information industry, appeared to ban all foreign investment in the Internet: “Whether or not it is an ICP [Internet content provider] or ISP [Internet service provider], it is about value-added services. In China, the service area is not open.”

  Yet, in an illustration of the gray area in which the Internet was operating, Minister Wu’s own deputy5 was onstage with Jerry Yang at the launch of Yahoo China, her presenc
e as good a sign as any that Wu had given his tacit blessing to the venture. But an MII official described Yahoo’s business as still being offshore, with Founder merely acting as a trustee: “No company was set up inside China’s border.” This admission revealed that, as with many deals in China, the negotiations only began once an agreement had been signed.

  After the launch ceremony in Beijing, Jerry flew down to Shanghai to attend the Fortune Global Forum. He was one of sixty Fortune 500 CEOs—including AOL’s Steve Case, GE’s Jack Welch, and Viacom’s Sumner Redstone—along with other dignitaries, including Henry Kissinger, who gathered at the new, $100 million international convention center built in the city’s Pudong district, on the right bank of the Huangpu River, directly opposite the city’s iconic Bund. China’s president Jiang Zemin inaugurated the Global Forum: “Set your eyes on China. China welcomes you. China’s modernization needs your participation, and China’s economic development will offer you tremendous opportunities.”

  The American host for the event was Gerald M. “Jerry” Levin, CEO of Time Warner, the publisher of Fortune magazine. Burnishing his credentials as an insider in China, Levin introduced the president of China onstage as “my good friend Jiang Zemin.” The forum was a frenzy of China and Internet-infused deal making that soon swept up Jerry Levin himself. Soon afterward he inked Time Warner’s $165 billion merger with AOL, a deal that became notorious as “the worst merger in history.”

  Unlike that deal, Yahoo’s partnership with Founder in China ended up having little consequence. Founder was not the gatekeeper to China that Jerry Yang had hoped. The company’s links to the Chinese government, which Yahoo had looked to as a shield from regulatory uncertainty, also prevented an entrepreneurial culture from ever taking root. Yahoo China’s content was boring, and Chinese Internet users noticed, being drawn instead to the more compelling offerings of Sina, NetEase, and Sohu. Yahoo was losing the battle to stay relevant in China just as the country’s Internet population was taking off.

  Victor Koo, then COO of Sohu,6 recalled that “Yahoo China could not match us in scale, localization, or investment. That was why it lost the China market.” Their IPOs in 2000, facilitated by the VIE investment structure, allowed the three portals to survive the dot-com crash. Within a few years they had become profitable companies for the first time.

  But, unbeknownst to them, the era of the China Internet portals was coming to an end, replaced by a new era of the “Three Kingdoms” of the “BAT”: Baidu, Alibaba, and Tencent.

  Yahoo’s struggles, and backing, were to provide Alibaba its entry ticket to this exclusive club. Here’s how.

  Tencent

  Tencent harnessed two trends that would transform the Chinese Internet sector: content delivered to cell phones, and online games played on PCs. Founded a few months before Alibaba, Tencent (tengxun in Chinese) was launched in late 1998 by two twenty-seven-year-old computer scientists who had met at Shenzhen University. Pony Ma (Ma Huateng) later became chairman and CEO of the company and is today one of China’s richest men. Although no relation to Jack, Pony’s last name, Ma, is the same as Jack’s, his English name chosen as a joke since “Ma” means horse in Chinese.

  Like Jack, Pony came from a modest background, and although he is much shyer than Jack he could also claim to be “one hundred percent Made in China.” He was born in the coastal city of Shantou, Guangdong Province. His father worked as a port manager in Shenzhen, adjacent to Hong Kong.

  After graduation, Pony took a job developing software for mobile pagers, a key entry point to the exploding market for cellular communications that would make his fortune. Time magazine anointed him as “China’s Mobile Mogul.” Pony named his company Tencent because the cost of sending a mobile text message at the time was ten Chinese cents (about 1.2 U.S. cents). Tencent’s breakthrough product was its OICQ instant messaging client, installed on desktop computers, which was essentially a clone of the ICQ (“I seek you”) product developed by Israeli company Mirabilis.7 Facing the threat of a lawsuit, Tencent rebranded its service as “QQ,” the letters chosen to approximate “cute” in Chinese. With a cuddly penguin in a red scarf for a mascot, the service became a big hit with young Chinese Internet users, initially on PCs, then on cell phones. When China’s telecom operators began offering revenue-sharing partnerships with Internet players, Tencent’s mobile business really took off. The partnerships, modeled on NTT DoCoMo’s iMode in Japan, offered up to 85 percent of the new revenues generated. As mentioned earlier, when SARS hit the country many Chinese turned to mobile text messaging to gather or spread information about the outbreak.

  Tencent has been the leading player in China’s mobile social networking market ever since. But mobile messaging alone doesn’t explain its meteoric rise. The company’s biggest business today is online games.8 Tencent’s success in offering MMORPG (massively multiplayer online role playing games) titles such as The Legend of Mir 2 and Lineage, pioneered in South Korea, unlocked the largest revenue streams in China’s Internet sector.9 Tencent’s success in QQ, games, and later with WeChat would propel its market capitalization in 2015 to exceed $200 billion, surpassing at times Alibaba, and generating a gold mine of tens of billions of dollars for the South African media company Naspers. In 2001, Naspers made one of the best investments in China, in any sector, ever—acquiring a 46.5 percent stake, three times that of founder Pony Ma, in the company for a mere $32 million from investors, including Richard Li, the son of Hong Kong tycoon Li Ka-shing.

  Baidu

  Baidu was founded in Beijing in 2000 by Robin Li (Li Yanhong) and his friend Dr. Eric Xu (Xu Yong). Born in November 1968, Robin was one of five children of factory workers in Shanxi, a gritty province in central China. His smarts won him entry to Peking University to study information science. After June 4, 1989, he was keen to head overseas: “China was a depressing place. . . . I thought there was no hope.”

  Rejected from the top three U.S. schools he had applied to, Robin won a full scholarship in 1991 for a master’s degree in computer science at the State University of New York (SUNY) at Buffalo. There he joined a computer lab focused on designing automation technologies, funded by a grant from the U.S. Postal Service. His professor, Sargur N. Srihari, recalled that “he started doing information retrieval here at Buffalo, and we were well ahead of the game in terms of the importance of search engines.”

  After SUNY, Robin worked for a subsidiary of Dow Jones in New York. Visitors today to Baidu’s one-million-square-foot campus in Beijing are shown a copy of Robin’s patent filing from February 5, 1997—when he still worked for Dow Jones—for a search mechanism he called “hypertext document retrieval” that determined the popularity of a website based on the number of other websites that had linked to it. Robin then moved to California to work for the search company Infoseek, before raising $1.2 million in start-up funding and returning to China in January 2000 to found Baidu. The company first operated out of a hotel room near his alma mater, Peking University, its business starting as a third-party supplier of Chinese language search engines to other websites.10 Although it quickly gained the bulk of the market, Baidu wasn’t profitable.

  Robin Li, CEO, recalled, “I wanted to continue to improve the search experience, but the portals didn’t want to pay for it. . . . That’s when I knew we needed our own branded service.” Baidu’s stand-alone search website was launched in October 2001.

  Robin Li has remained closely involved in Baidu’s technology development. To ensure that its search engine was cutting-edge, in late 2001, Li temporarily set aside his role as CEO to drive a new development project called “Project Blitzen,” recalled by the company’s engineering team as a “Great Leap Forward” effort. Li would often sleep in the office, and meetings doubled in frequency until the project was completed.

  Looking back, Li said, “Once you find out what you should do, then you need to stay focused. That’s what we did during the difficult times back in year 2000, 2001, 2002. Many people think search
was a done deal. It’s boring. Everyone has figured that out in terms of technology and product, but we thought we could do a better job. We resisted all kinds of temptations from being a portal, being an SMS player, online games, developing all kinds of things that could make money in the short term. We really, really focused on Chinese search. That’s how we got here.”

  In 2002, Baidu’s Chinese index of searchable sites was 50 percent greater than its nearest rival’s. By 2003 it had become the number one search engine in China. Prior to Baidu’s August 2005 IPO on Nasdaq, even Google invested $5 million in it. Baidu’s shares rose more than 350 percent on the first day of trading. As it became apparent that Baidu was now its chief rival in China, Google sold its stake the following summer for $60 million.

  Baidu would emerge as China’s largest search engine.11 Although worth around $70 billion, it remains a much smaller company than Alibaba and Tencent, two companies that, interestingly, enjoy a better relationship with each other than they do with Baidu.

  Yahoo and “AK47”

  But back in 2003, there was little sign of the emergence of the “BAT.” Yahoo thought it still had a shot at cracking the China market. In search, Yahoo partnered with Baidu. To take on eBay, Yahoo launched an online auction venture with Sina. But, like the Founder partnership, neither deal made a difference.