It was true, something we had exploited when making competitive announcements. We knew that making announcements at midday in China would mean eBay was still asleep in the US. Bound by the constraints of being a public company, any response from eBay’s China team would require approval from eBay in California. Putting this sort of full-court press on eBay was the most effective way to make them look slow-footed.
“Well, we do our best,” I replied. “There’s one thing you should know about Jack Ma. He’s easily underestimated. He plays business like a game of chess.”
“So how many people do you have on your PR team?” he asked.
“Oh, just me for international and then one other guy for domestic PR.”
He seemed surprised. I knew they were already working with a large agency in China.
“So one of the things I’ve wondered about,” he continued, “is that you’ve been making a lot of boasts about your data. And, you know, we’ve been through that before with another competitor in Germany. They were faking their data, and ultimately they were exposed and fizzled out.”
I was surprised that he thought we might be faking our data. It showed that he still didn’t quite believe we were catching up with eBay.
“I can tell you that we’re 100 percent clean on our data,” I said. “We take it very seriously. We’re gearing up to be a public company someday, so we follow very strict standards on that.”
“So what do you do about counterfeit products on the site?” he asked. His tone seemed to imply he thought we were not doing enough. And, admittedly, we probably were not. Although we met the US standard for notice and take down of counterfeit goods, operating in China meant there were simply more counterfeiters to contend with and so it was all too easy to find fake products listed by small merchants on Taobao. I had always argued we should be doing more than simply meeting the legal standard. We should be pioneering the solution, I believed.
“We have the same policy as eBay,” I replied. “If we’re notified of fakes on the site, we take them down.” Henry nodded expressionlessly. In the back of my mind I knew that it was a PR issue we were vulnerable on, especially as a Chinese company.
As we wrapped up, he probed one last issue.
“You know, one of the things we’ve noticed is a tone of nationalism in what you guys are saying. And that’s the one thing we don’t think is fair. Neither of us should be playing the nationalism card.”
Could he really be missing the whole point of our PR? I wondered. We weren’t arguing that we’d win because US companies didn’t deserve to win. Our argument was that by arrogantly bringing its US model to the China market, and even sending in international managers from Korea and Germany to run the China operations, eBay was not in a position to build a product that truly fit the local market. I told the story of how Jack had jumped on stage to interrupt Toto after he’d made an inappropriate nationalistic comment.
“Okay, that makes me feel better,” Henry responded. “Let’s all agree that we don’t play the nationalism card.”
“Why don’t we create a hotline, so that if things get too heated, we can be in touch to diffuse the situation?” I suggested.
“Okay, I like that idea,” he said. “Let’s keep in touch.”
We shook hands and parted ways. It had been a cordial conversation but not without an edge. I was curious to see where it would lead.
A few weeks later we got a sense of where things were headed when a number of anti-Japanese postings referencing Softbank’s stake in Alibaba began surfacing on eBay China, Taobao, and other bulletin boards. We suspected eBay had a role in propagating the protests. The postings coincided with nationwide protests in China about a recent diplomatic incident involving China and Japan. The anti-Japanese protests, while initially quietly encouraged by the Chinese government, had spiraled out of hand. And as Chinese took to the streets, the government had started to clamp down. Nevertheless the nastiness posed a risk to Taobao—if Taobao could be labeled as a Japanese company, China’s netizens might decide to abandon us.
At about this time, Henry activated the hotline by sending me a sharply worded email asking about rumors circulating in China that Meg was relocating to Shanghai for six months to run the eBay China business and replace the Chinese leadership team with Americans. Suggesting Alibaba was behind the rumor, he raised a warning: “Given the majority investment in Alibaba of a Japanese company, I think we should avoid going down the nationalism road.”
We, too, had read that Meg was coming to China, but after I checked around inside Alibaba, we were convinced that no one within our team had spread the word. I wrote back to try to calm Henry:
Henry,
Thanks for the email. . . .
As for the rumors, the rumors cited below look so ridiculous I can’t imagine any Chinese or foreign media taking them seriously. . . .
On nationalism—as I mentioned it is against our policy to play any nationalism card. But there are very good business arguments for why Chinese management and a Chinese company have advantages in understanding customers on a Chinese-language website. No American Internet company is in the lead in China (although you may disagree). This has more to do with product localization and speed to market than anything—reporting back to the US usually slows things down, as you mentioned in our lunch. We always keep it to a business rationale rather than something very base like “Don’t use eBay because it is American.” We’d never say that.
Japan—I didn’t really mention this at our lunch, but we have seen lots of Japan-related postings on Taobao, even posted on the eBay China website. We have some guesses where many of these are coming from. . . . I’m sure you’ll agree that “nationalism” has more to do with raising political or cultural issues and playing up anti-whoever sentiment. I can assure you we don’t go there.
If I was really sneaky I’d encourage you to play up the Japan issue. As you may already know, the Chinese government banned anti-Japan bulletin boards, boycott efforts, etc. after the recent protests in China. There was even a huge crackdown on Internet sites. I’m not sure how the Chinese government would take to any internet company supporting efforts against Japan. We stay away from these political winds because they change too quickly in China.
Henry—we have a lot of fun competition coming up. I look forward to it.
Cheers,
Porter
Henry responded with a sterner email, warning us that while China was calling for restraint against anti-Japan protests: “Chinese consumers might still want to know more about the origins of your company. . . . There’s always a way to get the message out.” He finished with a boast: “It’s going to be fun solidifying our #1 position in the market. We have $100 million worth of excitement and a few more surprises coming right at you. I hope Jack’s investors are ready to cough up more cash, again! :-)”
It was a not-so-veiled threat, along with some sophomoric chest thumping. It deserved nothing more than sophomoric trash talk in return. So I wrote him back with a recommendation for two books he might find useful for his summer reading: The Search for Modern China and Building a Website for Dummies. I never heard back.
Although we hadn’t started the rumor about Meg’s spending six months in China, it soon became clear that there was a degree of truth to it as Meg and Henry were spending more time in Shanghai, trying to fix their China problem. And if Meg and Henry were bringing the fight to us on our home turf in Shanghai, we had only one choice—to take the fight to eBay in its home town of San Jose. As we planned our offensive, the timing couldn’t have been better. eBay was set to host its ten-year anniversary party for all its customers and employees at its annual eBay Live! event. Alibaba would be represented; earlier in the year eBay had approved a booth for Alibaba.com in the vendor services section of eBay Live!. With an expected attendance of more than 10,000 members of the eBay comm
unity, it was a great chance for us to both market Alibaba.com’s services to eBay’s PowerSellers and pressure eBay to sweeten its offer for Taobao. To achieve both goals we had to find a way to create a buzz about Taobao among eBay’s members in the US.
eBay’s decision to allow Alibaba.com a booth at eBay Live! was a welcome goodwill gesture, and Alibaba.com’s presence there would have made sense for both companies. Although Taobao and eBay China were in an intense battle in China, Alibaba.com and eBay were actually quite complementary businesses in the US. Alibaba’s marketplace hosted tens of thousands of Chinese wholesalers who sold products that America’s consumers wanted. eBay’s PowerSellers were constantly looking for new products to offer to their customers. Theoretically the idea of “buy on Alibaba, sell on eBay” made sense. Hooking Alibaba’s wholesalers up with eBay’s PowerSellers would have generated more transactions on eBay’s marketplaces, driving eBay’s revenues even higher.
But in order to hurt Alibaba, eBay was willing to suffer. At the eleventh hour eBay reversed its decision and said Alibaba could not have a booth at the event. Then eBay took it one step further and gave the booth space to Alibaba’s B2B archnemesis, Global Sources, and announced that the two companies had formed a simple partnership, which immediately sent Global Sources’ stock up 50 percent. With Global Sources its new partner, eBay said there was no room for an Alibaba booth at the event.
But uninviting us to eBay’s party only strengthened our resolve to make our presence known to eBay’s customers at eBay Live!. We spent weeks quietly preparing for the event. First we booked presidential suites at two hotels adjoining the McEnery Convention Center, the venue for eBay Live!. Next we ordered thousands of huge bright-orange swag bags emblazoned with the Alibaba logo. Finally, we bought ads on popular blogs read by eBay’s PowerSellers.
On the day of the event we caught eBay completely off guard. As thousands of eBay users poured into the venue, they received their bright-orange Alibaba bags, creating a sea of bright Alibaba orange inside the arena. eBay’s staff called security to try to shut down the operation, but eBay could do nothing to stem the tide of orange because Alibaba’s staff had made sure to distribute the bags just outside the perimeter of the convention center, on public land. Meanwhile we made sure that the bloggers who followed eBay were well aware of eBay’s strong-arm tactics. As word of the conflict reached conference attendees, eBay learned the hard way that the only relationship stronger than the relationship between eBay and its customers was the relationship that its customers had with each other. eBay’s efforts to lock Alibaba out of its event fed into a growing resentment among its customers at eBay’s efforts to keep its entire ecosystem closed to outsiders. “Why keep out a service that can only help eBay customers?” the chorus went. Sympathetic to Alibaba’s cause, eBay Live! attendees encouraged each other to attend the Alibaba seminars at our hotel suites. If eBay had simply allowed us to participate with a booth as originally planned, we would not have ramped up our marketing efforts, and they would not have had nearly as much impact. But as it turned out, eBay helped promote Alibaba while creating a minirevolt within its own community.
eBay’s frustration was evident when it held its annual shareholder meeting ten minutes away in Santa Clara, shortly after the eBay Live! event. When asked by an attendee about her view of Alibaba, Meg Whitman sniped that Alibaba had a serious problem with counterfeit goods. But the remark failed to hurt Alibaba and instead was regarded as a hypocritical cheap shot, with the prominent eBay watcher Ina Steiner calling the comment “ironic given eBay suffers from that problem too”1 and had been sued by Tiffany & Company over the problem of counterfeit goods.
Our US offensive had paid off. To all of eBay’s key audience—media, analysts, investors, and customers—Meg Whitman was losing control of the story. Not only was eBay’s status in China sinking, but the damage was beginning to find its way back to the company’s home turf. To stop the bleeding eBay came back to the bargaining table with a sweetened offer for Taobao. But Jack had a move that eBay had not anticipated.
Yahoo!
“Porter, there’s an urgent meeting downstairs that Jack needs you to attend,” Jack’s assistant told me as we entered the summer of 2005.
“What’s it about?” I asked.
“He’ll tell you at the meeting. But all of the senior managers need to be there. You should go downstairs right away.”
At the meeting room I found the entire senior management team sitting around a table. A sudden meeting such as this could mean only one of two things—very good news or very bad news.
Jack walked in, put his hands on the table, and got straight to the point.
“I’ve got a big announcement everyone—we’re buying Yahoo! China.”
The team was surprised. Shocked, even. We hadn’t seen that coming. And if we hadn’t seen it, one thing was for sure—neither would eBay.
Jack explained how the deal had come about. “A few weeks ago I was at a conference in Pebble Beach, and I started chatting with Jerry Yang. We started talking about what we could do together in China. I told him that if he really wanted Yahoo! to win in China, he should let us run it. After talking with them for a few weeks, we agreed in principle to a deal, and now we’re finalizing it. Yahoo!’s going to invest $1 billion in Alibaba and we’re going to take over Yahoo! China.”
Yahoo! wasn’t the most obvious choice for a partner, but the more Jack explained the rationale for the deal, the more sense it made. Since becoming the first US Internet company to enter the China market in 1999, Yahoo! had struggled through a series of partnerships, none of which had worked out. But its early entrance into China had given Yahoo! an advantage—its executives had learned from their six years of mistakes. Chief among these lessons was that they could not simply apply their US model to the China market. They quickly found that translating international content for the China market didn’t satisfy the needs of local consumers, and Yahoo!’s growth had failed to keep pace with that of local rivals who had developed features and content that better fit the China market.
In 2003 Yahoo! attempted to rectify the problem by acquiring local search engine leader 3721, led by the feisty entrepreneur Zhou Hongyi. The main driver of 3721’s growth was controversial antivirus software Zhou had created that, once downloaded, also installed a search toolbar on the computers of Internet users that defaulted to the 3721 search engine. Within the industry the 3721 software was widely regarded as a “hooligan application,” since it often installed without the user’s being fully aware and was quite difficult to uninstall. Nevertheless Zhou’s aggressive tactics worked; 3721 quickly became the second-largest search engine in China, and in 2003 Yahoo! bought it, keeping Zhou on to head Yahoo! China’s business. Over time, however, a rift grew between Zhou Hongyi and Yahoo’s US management, and Yahoo! began to look for alternatives for doing business in China.
In the process Yahoo! looked to the example of Yahoo! Japan, where the company had partnered with Alibaba’s main investor, Softbank. Japan was the one market in which Yahoo! didn’t actually control its local business. Instead it owned a minority share and let Softbank run Yahoo! Japan through a licensing arrangement. Yahoo!’s decision to put a local partner in charge of Yahoo! Japan had allowed Yahoo! Japan to thrive by generating localized content that better fit Japan’s unique local conditions, leading Yahoo! Japan into a solid market leadership position.
Yahoo! Japan also had the distinction of being the only company to have beaten eBay in a major market. eBay had entered the market after Yahoo! Japan and withdrew from the Japanese market in 2002. So from Yahoo!’s perspective, striking a deal with us meant it could solve its China management problem and gain a foothold in China’s growing e-commerce space, backing a team that had a chance of beating eBay in China, just as Softbank’s Yahoo! Japan had won the auction market in Japan.
From Alibaba’s perspective the upside was no
t as clear. On paper eBay seemed like the more logical partner, with marketplace models that clearly complemented ours. Plugging Taobao into eBay’s global portfolio would have fit the Chinese market snugly into eBay’s global embrace, leaving only Japan out of its worldwide network. And Alibaba’s B2B businesses would have been the last piece of the puzzle, connecting the world’s manufacturers, trading companies, and wholesalers with eBay’s PowerSellers.
On the other hand, Alibaba partnering with a search engine leader would create an entirely new business model, one that combined marketplaces and a search engine under one roof. In US terms it would be like combining eBay, PayPal, Yahoo!, and Google in one entity. Partnering with Yahoo! would safeguard us against the rise of search engine advertising, which we feared would siphon ad revenue from Alibaba and Taobao as Internet users became more savvy and abandoned our platforms to create their own websites which they’d then promote on search engines. We were already losing some of our customers’ advertising dollars to Google and Baidu, the major Chinese search engine. And we knew from our meeting with the Google founders that they probably would be making an aggressive push into China soon. Why compete against search engines, Jack thought, when you can own one yourself?
The decision came down to Jack’s desire to take on the bigger challenge. Nine times out of ten, an entrepreneur would have gone with eBay, just as Eachnet’s founder, Shao Yibo, had done. But to Jack joining eBay seemed almost too simple, too predictable. On the other hand, buying a search engine and entering the hottest growth area of the Internet? That was a move no one would expect.
It also helped that Yahoo! gave us a partner who spoke the same language—literally. While Jack liked Meg Whitman personally, he believed she simply wanted to buy the Chinese market rather than build something that would truly benefit entrepreneurs in China over the long term. But the cofounder of Yahoo!, the Taiwanese American Jerry Yang, had a great working relationship with Jack. With common language and cultural roots, the two hit it off the first time they met, back in 1997, when Jack was still working for the government in Beijing. Jack had been assigned to show Jerry around, and they visited the Great Wall together. According to Jack, Jerry had even suggested Jack should join Yahoo! as the head of its China operations.
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