by Duncan Clark
But even after it sold its China business to Alibaba, Yahoo’s image would be tarnished in the United States by the case of imprisoned Chinese journalist Shi Tao. The source of intense personal anguish for Jerry Yang, the affair would illustrate the unpredictable risks that awaited any foreign company planning to build a business in China’s Internet sector.
Shi Tao was an editor and reporter at a newspaper in Changsha, the capital of Hunan Province, called Contemporary Trade News (Dangdai Shang Bao). He was also a customer of Yahoo Mail. On April 20, 2004, Shi participated in an internal editorial meeting, convened by the newspaper’s deputy general editor, to discuss a classified document sent from Beijing with instructions on how to avoid social unrest in the run-up to the fifteenth anniversary of the June 4 Tiananmen Square crackdown. Although copies of the document were not handed out, Shi Tao took notes during the meeting later that evening using a Yahoo China email account,30 then emailed them to a Chinese, prodemocracy website based in New York. Two days later, Yahoo China was requested by the government to hand over details of the account owner,31 which they provided that day.
On November 23, 2004, Shi was detained by the State Security Bureau in Changsha. On December 15 he was arrested and charged with revealing state secrets. After a trial lasting two hours in March 2005, Shi was found guilty and sentenced to ten years’ imprisonment.
Shi’s case was quickly taken up by activist groups32 who accused Yahoo of being a “police informant.” The publicity and appeals, launched by Shi’s journalist friends and his mother, Gao Qinsheng, were unsuccessful in reversing the verdict. After what Amnesty International alleged was intense harassment from the Chinese government, Shi’s wife divorced him.
It was a nightmare for Shi and his family. For Yahoo it was a black eye. For Alibaba, although it now ran the China business, the case had happened on Yahoo’s watch. Jack was asked to comment on the case and said, “As a business, if you cannot change the law, follow the law. . . . Respect the local government. We’re not interested in politics. We’re just focused on e-commerce.”
On September 10, 2005, I attended Alibaba’s Alifest in Hangzhou. The partylike atmosphere was heightened that year by the newly minted $1 billion deal with Yahoo and the growing sense that Taobao would prevail over eBay. Jerry Yang was to appear onstage with Jack as part of the celebrations. The icing on the cake was Jack’s invited keynote speaker that year: former U.S. president Bill Clinton.
Clinton had accepted the invitation to speak in July, but news of the Yahoo connection to Shi Tao’s case emerged only days before the summit, putting Clinton33 in an awkward position. Clinton did not refer to Shi’s case but discussed more generally the economic cost of censorship and the need for China to develop greater tolerance for dissent.
After Clinton left the room with his Secret Service and Chinese government security detail, Jerry Yang took the stage for a Q&A session to talk about the deal with Alibaba. Washington Post reporter Peter S. Goodman asked Jerry Yang directly about Yahoo’s role in handing over the information that led to Shi Tao’s incarceration.
Yang answered, “To be doing business in China, or anywhere else in the world, we have to comply with local law. . . . We don’t know what they want that information for, we’re not told what they look for. If they give us the proper documentation and court orders, we give them things that satisfy both our privacy policy and the local rules.” He added, “I do not like the outcome of what happens with these things. . . . But we have to follow the law.”
The audience, made up mostly of Chinese Internet executives and investors, erupted into applause, what seemed like an inappropriate response given the seriousness of the case, but thanks to the Great Firewall few in the audience had even heard of Shi Tao. Things would get much worse for Jerry Yang after that, culminating in a public skewering in Washington, D.C., in 2007 when he was summoned to appear before Congress34 to answer questions about the case. The committee chairman, California congressman Tom Lantos, opened the session by introducing Shi Tao’s mother. Jerry Yang, wearing a dark suit and tie, bowed solemnly to her three times as she sat behind him sobbing. Lantos lambasted Yahoo for its “inexcusably negligent behavior at best and deliberately deceptive behavior at worst” and concluded, “While technologically and financially you are giants, morally you are pygmies.”
Yahoo later settled out of court a lawsuit filed by Shi’s family, paying an undisclosed amount. Shi Tao was released in September 2013 after serving eight and a half years in prison, his ten-year sentence having been earlier reduced by fifteen months.
Yahoo’s travails proved that for companies dealing with Internet content, China was a highly risky market, as Google would later experience itself before it closed up most of its operations in 2010. Google had launched its search engine on servers hosted in China (as google.cn) in 2006, keeping servers for Gmail and other products that involved personal and confidential information offshore. But in early 2010, in response to an attempt to hack its servers and the cumulative pressure of growing need to censor its search results, Google announced its withdrawal from China. In March 2010, Google stopped censoring search results in China, rerouting traffic to its site in Hong Kong—the other side of the “Great Firewall of China”—and signaling its exit from the market.35
eBay, Yahoo, and Google had all recognized that China’s Internet market would become massive. But as the market grew, so did regulatory barriers and the competitive challenge from entrepreneurial and well-financed companies like Alibaba, Baidu, and Tencent.
Speaking in 2015, Jerry Yang took stock of the China Internet market: “Maybe in the next ten years some American or Western brands will be successful in China. But in that 2000–2010 time frame there just weren’t any.”
Western Internet companies trying to crack the China market came to experience firsthand the old adage that in China “it is better to be a merchant than a missionary.” And the biggest merchant of all was Alibaba.
Chapter Eleven
Growing Pains
If you own a hundred percent of the business that cannot operate, you own a hundred percent of zero.
—Joe Tsai
When eBay exited the China market in 2006, Taobao’s users were 30 million. Within three years they were 170 million, and sales on the Taobao’s platform had grown from $2 billion to $30 billion. With no obvious competitor on the horizon, the outlook for Alibaba looked rosy. The Chinese economy was growing at an unprecedented rate, topping 14 percent in 2007. Anticipation about the 2008 Olympic Games in Beijing set off a massive stock market rally at home. Western capital poured into China and the share prices of the country’s leading Internet players took off. Baidu’s stock trebled in 2007, valuing the company at over $13 billion. Tencent, with more than 740 million QQ instant messaging users and a growing games business, climbed to $13.5 billion. A new wave of China Internet companies prepared to go public. Speculation turned to Alibaba. When would it IPO?
Before raising fresh capital, Alibaba reshaped its management1 in preparation for a new phase, beefing up its team with new executives from Pepsi, Walmart, and KPMG2 and a new head of strategy, Dr. Zeng Ming. Alibaba also appointed a Shanghai-born executive, David Wei (Wei Zhe), with experience in finance and retail, as CEO of the B2B business Alibaba.com. He would serve as CEO of Alibaba.com for more than four years,3 including overseeing Alibaba’s first IPO.
Taobao was wildly popular with consumers, but a commitment to free listings ensured that the business was still loss-making. So, instead, Alibaba decided to list only its original B2B business: Alibaba.com.4 Founded in 1999, these companies were now eight years old. Alibaba.com had more than 25 million registered users in China and overseas. It was a stable and profitable, if unexciting, business.
IPO 1.0
Yet such was the buzz around Jack that the November 2007 IPO of Alibaba.com in Hong Kong generated a frenzy of interest in the stock not seen since the dot-com boom. One analyst slammed the psychology of Hong Kong investors w
ho “trade stocks like they’re playing at the baccarat table.” That was an accurate description of many of the individuals who lined up to buy the shares, such as sixty-five-year-old Lai Ah-yung, who told the Associated Press: “People said buy, so I buy.”
Although the B2B business of Alibaba.com was really a sideshow, excitement about China’s booming Internet—now numbering more than 160 million users—and its vibrant economy meant that few people bothered to make the distinction.
Jack described Alibaba’s business in language that resonated well in Hong Kong, a market obsessed with property speculation: “We’re almost like a real estate developer,” he explained. “We make sure the space is cleared, the pipes are laid, the utilities work. People can come in and put up their buildings on our site.” But there was much more to come, he said, adding that if Alibaba did things right “we have the chance to build a platform that could become the Internet ecosystem for all of China.”
The bulk of the shares were sold to institutional investors in an exhausting, ten-day global road show that finished up in San Francisco. The schedule was so packed that David Wei had no time to eat. Jack unexpectedly ducked out of their last investor meeting, calling David soon after to invite him to an airport restaurant where he’d ordered all the noodle dishes on the menu.
When they landed back in Hong Kong, they already knew from their road show that the offering would be a blowout success. The stock market there had already rallied 40 percent in the previous three months, but to ensure a strong start Yahoo had committed to buy5 10 percent of the offering, along with seven other “cornerstone” investors, including local real estate tycoons.6
The offering of Alibaba.com, listing under the lucky number stock ticker “1688,” sold 19 percent of the company for $1.7 billion. It was the largest Internet IPO since Google in 2004, and valued7 the company at almost $9 billion.
Demand from individual investors, who were allocated 25 percent of the total, outstripped supply by 257 to 1. Those lucky enough to secure an allocation of shares saw them triple on the first day from the HK$13.5 offer price, closing at HK$39.5. Alibaba’s B2B business was valued at $26 billion, a multiple of 300 times its earnings.
But the luckiest investors were those who sold right away, since the share price fell 17 percent the next day.
The buzz around Alibaba was focused on Jack and the other high-growth businesses like Taobao and Alipay. But these assets weren’t part of the IPO; in fact most of the shares released in the IPO were from Alibaba.com’s parent, Alibaba Group, which needed to raise cash to support them.
David Wei later looked back on the IPO and said, “Taobao was still burning money.” From Yahoo’s 2005 investment, Alibaba still had “maybe $300 to $400 million, but that was not enough. We still didn’t know how to monetize Taobao.” Of the $1.7 billion raised in Hong Kong, only $300 million went to the B2B business. Alibaba had topped up its coffers with the remaining $1.4 billion, giving it reserves of almost $1.8 billion. “That’s an enormous war chest,” David recalled, “and would last us a very long time to support Taobao. At that time Alipay was still burning money as well.”
The former Alibaba.com CEO added that the 2007 IPO gave him two insights into Jack’s approach. The first was something that Jack had often told him: “Raise money when we don’t need it. When you need it don’t go out to raise money, it’s too late.” The second was that the IPO allowed Alibaba to take care of its employees: “Jack understands people more than any business. He knows business well, but if you ask me the three skills Jack has amongst people, business, or IT? IT is the worst. Business second. First is people.” Alibaba’s B2B business was eight years old. Jack knew that he needed to give his employees an opportunity to cash in their shares. David remembers Jack telling his employees, “You need to buy a house. You need to buy a car. You can’t wait to sell the stock to get married, to have a baby. Selling the stock doesn’t mean you don’t like the business. I encourage you to sell some, to build your life, to give a reward to your family. Because you have been working too hard, you’ve been away from your family. They need some reward.”
Jack himself didn’t sell shares for the first two years. But when he did sell, some $35 million worth, he explained to his colleagues he wanted to give his family “a little sense of accomplishment.” But Jack didn’t wait to buy himself a $36 million home8 in Hong Kong.
Jack’s fame was cemented with the Alibaba.com IPO: Jack’s Australian pen pal, David Morley, at the Hangzhou Airport, 2008. David Morley and Grit Kaeding
The IPO prospectus listed Jack’s home address as the small Lakeside Gardens apartment where it had all started. But now he would trade up to deluxe apartment in the sky, atop the Mid-Levels district on the hillside of Hong Kong’s famous Victoria Peak.
Jack had become a billionaire (based on the value of his stock), but the IPO prospectus illustrated—thanks to the three big investment rounds led by Goldman Sachs, then SoftBank and Yahoo—how much smaller a stake he held in his company than many of his peers. At their IPOs, William Ding held a 59 percent stake in NetEase and Robin Li a 25 percent stake in Baidu.
Global Financial Crisis: Silver Lining
But storm clouds were gathering that would send the company’s shares into a tailspin. Alibaba.com depended on foreign trade, but the U.S. economy was weakening, hitting the business of the China exporters who made up the backbone of the B2B business. Alibaba’s shares started to slide, dipping below the IPO price in March. When the global financial crisis gathered pace in September 2008, triggering the collapse of Lehman Brothers, Alibaba’s shares plummeted, hitting a low of only one-third of its IPO price the following month. Only weeks after Beijing had staged the Olympic Games, it was facing a crisis as global trade volumes plummeted by 40 percent.
Alibaba’s B2B business was vulnerable. It had an impressive sounding 25 million registered users, but only a handful paid to use the website. Just 22,000 subscribers of its Gold Supplier service accounted for 70 percent of total revenues.9
As CEO of Alibaba.com, David Wei was expecting the falling share price would trigger a lot of pressure from Jack. But, he remembers, “Jack never picked up the phone or came to see me about the share price. Never once. He never talked about profit growth.” But there was one occasion when he did experience Jack’s wrath. “The only time he ever called me after midnight was when our team changed the website a little bit. He was shouting, the only time he ever shouted at me. I had never heard him so angry. ‘Are you crazy?’” Jack wasn’t yelling at him about the stock price. He was angry about downgrading in prominence a long-standing discussion forum set up for traders to chat with one another. Jack demanded David move it back the next day. David pushed back, saying that Alibaba needed to focus on transactions, not discussions, adding that the space on the home page was very valuable for advertisers. But Jack was emphatic: “We are a B2B marketplace. Nobody comes to trade every day. We are more important a community than our marketplace. The same for Taobao; nobody comes to shop every day. If you downgrade this forum you are focusing too much on profits. Switch it back to a non-revenue-generating entry point to the business community.”
Although its share price took a beating, Alibaba would survive the global financial crisis. And, as with SARS five years earlier, the crisis created some unexpected dividends for the company.
First, Jack realized that the downturn gave him a way to increase the loyalty of his paying customers. He initiated a dramatic reduction in the cost of their subscriptions, telling David, “Let’s be responsible to our customers. They are paying fifty thousand yuan; we can give them thirty thousand yuan back.”
“The stock market went crazy,” David recalled, as investors called him up to complain, “What? You’re losing sixty percent of your revenue.” But there was a method to Jack’s madness. Jack was serious about putting the customer first, but David emphasized Jack was not espousing “an ideology of ‘let’s give everything for free.’” Instead, Jack was “always tryi
ng to understand how to get the money back later. He’s just not greedy about getting the money first.” Looking back on the price cut, David concluded that the move was well timed. “Revenues didn’t drop at all. Customer volume growth offset the price drop completely. And after the financial crisis was over we didn’t raise the prices. We created an opportunity to sell them more value-added services, more of an Internet-style model. Jack actually told me he wanted to change it anyway. The crisis gave him the opportunity.”
The second dividend was that the collapse in their traditional export markets forced China’s factory owners to prioritize consumers at home instead. Increasingly goods “Made in China” for export would be “Sold in China” too. Taobao was perfectly positioned to benefit from this switch. Jonathan Lu, then president of Taobao, commented, “More and more consumers are flocking to the Internet in search of cheaper goods amid the economic slowdown, while many others choose to open online shops as secondary jobs.” By the end of 2009, Taobao’s market share had climbed to nearly 80 percent.
Finally, Taobao started to generate meaningful revenues, selling merchants advertising space10 to help them promote their goods to the surging number of online shoppers.11
By September 2009, Alibaba was on a roll. At Alibaba’s tenth anniversary celebration Bill Clinton was back in Hangzhou as a keynote speaker, but this time with iconic figures for China’s new consumer wave, such as Nike-wearing NBA player Kobe Bryant and the CEO of Starbucks, Howard Schultz. At the celebration, Alibaba also launched its new cloud computing subsidiary, Aliyun.
As Taobao gained momentum, it was becoming Alibaba’s main focus. Consumer e-commerce was outshining the company’s legacy B2B business—which Alibaba was to later delist12 from the Hong Kong stock market—and the fading Yahoo China portal asset.
Kobe Bryant presents Jack with a pair of his Nike sneakers in Hangzhou, September 2009. Alibaba