Jack answered confidently, “Alibaba is buying Yahoo! China, and we have full management control of the company. And there are a few important things I need to share with you. Number one, Alibaba’s headquarters will stay here in Hangzhou. Number two, we have a provision in the contract that, no matter what, a member of Alibaba’s board will have to be from China. And finally Yahoo! is putting $1 billion into the company. It’s going to really create a great number of jobs here in Hangzhou and help with the mission of making sure Hangzhou becomes China’s Silicon Valley.”
Wang Guoping nodded and smiled as he mulled it over. “Good. Good.” Jack and Wang chatted a little more, and then Secretary Wang concluded the meeting with the words we’d hoped to hear as his assistants transcribed his comments: “I want to say that the Hangzhou government totally supports this special ‘Alibaba merger model.’ Congratulations to Jack Ma and Alibaba!”
With the local government providing its support, we had cleared an important hurdle. But we knew that greater challenges lay ahead.
The China Search Wars
On October 25, 2005, ten rocky weeks after announcing our deal with Yahoo!, we became the legal guardian of our new baby—Yahoo! China. Two weeks later we were back in Beijing at a press conference to announce the reintroduction of Yahoo! China to the national Chinese media. In typical Alibaba form our marketing machine had packed the room with journalists curious to see what we had to unveil.
Before the press conference Jack laid out his strategy—and it was straight out of the playbook from our battle with eBay. “I want to position this as a battle between Yahoo! China and Baidu,” Jack told me. If we could engage Baidu, the local search engine leader, in a war of words, we could drive traffic to Yahoo! China’s search engine.
Although Baidu had a stronger understanding of the local market than eBay did, Baidu in many ways seemed an easier opponent to defeat. Founded by Robin Li, a soft-spoken entrepreneur who’d studied and worked in the US in the 1990s, Baidu had simply followed the Google script in China. Each time Google introduced a new function, Baidu quickly followed suit, offering a similar feature on its own website. Its home page was practically identical to Google’s; Baidu had become the market leader in China by simply pursuing a “fast-follower” strategy: mimicking the Google US model and providing it locally before Google had a chance to bring each feature to the local market. As a competitor Robin Li seemed better at imitation than innovation, and we thought he’d be no match for our more creative team. In the race for the China market Baidu was only a couple strides ahead, with a 37 percent market share of searches, compared to a 32 percent market share for Yahoo! China, and a 19 percent share for Google. Surely we could catch up to Baidu in a few short months.
We had plenty of reasons to be confident. Against all odds we’d survived a war with America’s B2B giants and Alibaba had emerged as the world’s largest B2B marketplace. And despite all the skepticism from outside (and sometimes within) Taobao had pulled ahead in our battle with eBay in China. I’d learned to suspend all doubts and accept that, if Jack said it was possible, it must be possible. He’d never failed us before. So, as Jack stood on the stage of the press conference for the grand unveiling of Yahoo! China, I was feeling good about our prospects.
“From now on in China, Yahoo! means search and search means Yahoo!,” Jack proclaimed. “In six months Yahoo! China has to be the leader in the China market, otherwise the game will be over.” Jack; John Wu, Alibaba’s chief technology officer; and the Yahoo! China team gathered around a mock button on the stage. Pressing the button revealed the new Yahoo! home page on the screen behind them—a stark white page with nothing but the Yahoo! China logo and a search bar in the middle. Gone were the flashing images, links, directory, news, and information found on the previous version of Yahoo! China. The site was no longer a general portal—it was a pure search engine. And the race with Baidu and Google was on.
As 2005 became 2006, the Alibaba marketing machine was in overdrive, promoting Yahoo! China in a major rebranding effort. Our website may have been dry and functional. But the marketing surrounding it was exciting and designed to capture the imagination of China’s Internet users. We sponsored flashy Chinese music awards celebrations with the latest pop stars and paid $1 million to each of three famous film directors to produce television commercials for Yahoo! China. Whereas we had once depended on our zero budget marketing efforts, which simply relied on great user experience and word of mouth, now we were spending millions of dollars to make our big splash.
Yet for all the buzz the traffic data were a source of concern. Since we had stripped the Yahoo! China site of its features and reintroduced it as a straightforward search portal, its traffic had dropped off a cliff, and our market share was slipping quickly. Rather than wait out the storm and see if traffic on the newly simplified home page would stabilize as the search engine improved, Jack abruptly took the Yahoo! China home page back to its original look. But when website traffic didn’t bounce back, it became clear that our shifting strategies had killed off a portion of our customer base. Worse, we had confused the market, appearing erratic as we veered back and forth. To China’s Internet users, the quick reversal smacked of desperation, and the media were quick to pounce on Alibaba for appearing rudderless and abandoning Yahoo! China’s new emphasis on search.
As our strategy careened out of control, I began to wonder whether Jack’s considerable management skills would translate to running a search engine. After managing our Google campaign and visiting the Googleplex as a customer, I had become both a student and an admirer of Google’s. I’d learned that Google’s biggest key to success was its singular focus on first building the best search technology in the world. Google had resisted all distractions, and over time Internet users had rewarded it by migrating to Google’s superior interface and search technology. With this in mind I handed Jack a copy of John Battelle’s in-depth book about Google, The Search. “Jack, this is a great book about how Google became so successful,” I said. “Now that we’ve got Yahoo! China, you might want to take a look. It’s really good.”
Jack turned the book away. “Someone once tried to give me a book about eBay,” he said, “but I didn’t want to read it. I wanted to make sure we didn’t just copy their approach. You should give that to somebody else. I don’t want to get too focused on what they did because it may bias me to follow Google’s approach.”
While I admired Jack’s insistence upon innovating in his own way, it also concerned me. We didn’t need to copy Google. But we could at least learn from them. Jack was a marketing person who knew how to mobilize millions of people to join a community to trade products online. But a search engine was a totally different animal. Searching is not a community activity. The only relationship was between the user and the search engine. People didn’t go on Baidu or Google to make friends and chat; they went to find other websites and move on.
By the time our 2006 strategy meeting arrived, tensions within Yahoo! China were beginning to bubble up. Some of the Yahoo! China managers had already left the company to join Zhou Hongyi in his new venture. And those remaining had little reason to believe that Jack’s vision for a search engine in China would become a reality. Unlike those of us coming from the Alibaba side, the Yahoo! China team had not weathered storms or defeated Internet giants together. They largely saw Jack as most outsiders did—fascinating but unpredictable. And Jack’s management of the Yahoo! China strategy had done little to persuade them otherwise.
During the strategy meeting members of Yahoo! China’s technical team got up to present their ideas for moving the search engine’s strategy forward. They discussed the importance of having the right technology in place and the best algorithms for searches. I could see Jack’s eyes glaze over. He didn’t have time or interest in these technical details. To him technology was secondary to the user experience. And he wasn’t shy about it. “People can’t tell
the difference between one search engine or another,” he argued. “From the user perspective they’re all the same. The most important thing is our marketing strategy.” The team was quiet, obviously not comfortable contradicting their new boss. But with this one comment I realized how fundamentally Jack misunderstood search engines. And my guess was that, unless something changed his mind soon, Yahoo! China would be doomed.
As we executed our poorly defined strategy, Yahoo! China’s performance continued to suffer. Making matters worse, we were receiving phone calls from headhunters claiming to be recruiting staff for Zhou’s new venture, Qihoo.com. Internally, we believed this to be an effort by Qihoo to damage our team’s morale. We made our suspicions public and were quickly sued by Zhou Hongyi on defamation charges.
Meanwhile, Qihoo’s new technology began to get a surprising level of traction, as China’s Internet users downloaded its 360Safe antivirus toolbar and installed it on their computers. Hidden in the toolbar was a feature that blocked Yahoo! China services from the user’s computer, labeling our services as malware. As the number of downloads increased, Yahoo! China’s website traffic continued to taper off.
Zhou Hongyi aired his grievances against Alibaba to the Chinese media and Jack was quick to publicly respond. Over time the public volleys between the two companies grew into an ugly dogfight that made neither party look good. It was a huge distraction, and it meant that 2006 would be about fighting Qihoo, not Baidu. By engaging us in a war of words, Zhou Hongyi had taken a page out of our playbook and managed to get under Jack Ma’s skin. As Yahoo! China’s audience continued to disappear, Jack started to do exactly what he had faulted Meg Whitman for back in the eBay days—he took it too personally. To be sure, Qihoo’s actions were affecting Yahoo! China’s performance. But Jack seemed to be increasingly obsessed with Zhou Hongyi himself, and rather than focusing on building Yahoo! China’s search capabilities into a world-class technology, Jack poured his energy into fighting back. To this end we brought—and immediately got bogged down in—a lawsuit against Qihoo alleging unfair competition. Although we ultimately won the suit, which helped restore some of our team’s pride, the lawsuit had no material effect on Yahoo! China, and Qihoo was required to pay only RMB 30,000 (about $4,000) in damages. As 2006 came to an end, for the first time Alibaba’s senior managers were beginning to ask whether Jack was losing his magic touch. “Jack has lost his way with the Yahoo! strategy,” a senior manager confided in me. I couldn’t help but agree.
Luckily things were looking much brighter on the other side of our company.
Free Is Not a Business Model
While we were failing at becoming the most popular search engine in China, there was one field where no one could beat us—marketplaces. On the B2B front Alibaba.com’s revenue growth continued to shoot toward the stars. And on the consumer front Taobao was growing 50 percent faster than eBay, at last surpassing our US counterpart on the all-important GMV (gross merchandise volume) metric.
After the Yahoo! China deal was announced, Henry Gomez of eBay had told Fortune magazine, “Jack Ma’s strategy is to drive his competitors crazy. Now he’s likely to drive Yahoo crazy as well.” Gomez was right on both counts. Our cowboy style and shifting strategies were creating friction with our new US partner. But Taobao’s relentless growth was driving eBay crazy as well. And we weren’t done yet.
The week that Yahoo!’s $1 billion hit Alibaba’s bank account coincided with eBay’s quarterly earnings announcement. With our war chest fully funded, we had the confidence to deliver the knockout blow. Just as eBay prepared to release its earnings report, we issued a press release targeting the US media and eBay’s investors. The announcement was a direct strike at eBay:
Taobao.com to Be Free of Charge for Three More Years
China’s Leading Consumer Auction Site to Invest US $120 million in China Market to Grow e-Commerce and Create One Million Jobs
Alibaba.com announced today that its Taobao.com Chinese-language consumer auction site will remain free for buyers and sellers for three more years. . . . In addition, Alibaba.com will invest US$120 million to further grow Taobao.com’s trusted e-commerce marketplace with the goal of creating one million jobs for entrepreneurs in China.
“Taobao.com is committed to fostering the development of e-commerce in China while building China’s largest and most trusted online consumer marketplace,” said Alibaba.com CEO Jack Ma. . . .
Since its 2003 launch, Taobao.com has pioneered an e-commerce model truly tailored for the China consumer. Being free has allowed Taobao.com to grow its user base while encouraging [the] online community as the company listens to customers to understand the unique needs of buyers and sellers in China.
The message appealed to our audiences on several levels. First, it sent a message to eBay’s investors that we were serious about keeping our services free, ensuring that eBay would face pricing pressure for the next several years. It also gave our customers in China confidence that if they stuck with Taobao for another three years, they could continue to grow their businesses before having to cough up fees. And then we added the kicker:
A Call to eBay
In addition to its pledge to make Taobao free until October 2008, Taobao.com called on eBay to join Taobao in making its services free for Chinese users. “We call on eBay to do what’s right for this phase of China’s e-commerce development and make your services free for buyers and sellers in China,” said Jack Ma. . . . “Cutting prices is not enough—it’s time to make your services free and affordable for all of China’s entrepreneurs and consumers.”
It was a bold taunt, designed to provoke a reaction. Although we didn’t expect eBay to respond, it would at least make it harder for Meg Whitman to cut eBay’s prices without losing face in China. Finally, just to show we weren’t entirely crazy, we included in the press release the rationale for our strategy to demonstrate that, yes, we did have a long-term plan to charge for our services:
The Alibaba Precedent—First Free, Then Profitable
“Free is the right business model for China’s current conditions,” said Jack Ma. “But Taobao.com is a business, and like any serious business we have a solid plan for profitability. With Alibaba and Taobao, our theory has always been, only after our members make money using our marketplaces should we make money.” Alibaba.com’s business-to-business marketplaces, Alibaba International and Alibaba China, started free for members and then matured into highly profitable businesses, generating US$68 million in cash revenues in 2004 with revenue growth doubling year-on-year.
The reaction from Wall Street was instantaneous—eBay’s stock dropped 6 percent. In a knee-jerk reaction Henry Gomez issued a public response from eBay:
Statement from eBay Regarding Taobao’s Pricing Challenge
“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.
eBay
Henry Gomez
Hani Durzy
We couldn’t help but chuckle when we saw that. We’d officially brought eBay down to our level. Our public call to eBay may have been appropriate for a scrappy David who was taking a swing at a Goliath. But we felt that what seemed such an emotional response from the world’s largest e-commerce company made it look weak and foolish, and eBay was promptly criticized in the media and blogosphere.
To coincide with our announcement we’d invited a number of local reporters to a small press conference in our office, where we handed out eBay’s statement along with our own. I smiled to myself about what we were doing.
Jack explained to
the reporters why Taobao was on track to win the race for consumers in China. “The business model for charging is already proven in the States. You don’t have to prove the model, you have to prove how big the market is. You have to prove that you can create value in this market, but they just did not listen. Free is still a good word for C2C [consumer to consumer] because it’s so premature in this market. Only 8 percent of Internet users here have tried online shopping. So among one hundred people, 92 people have not tried it.”
“Do you think eBay’s time is over?” Jack was asked.
“Almost over. It’s too late for them. Unless they do something really meaningful. Business is fun, competition is fun, but don’t take it too seriously,” Jack continued. “They took it too seriously in China, for competition. Not on creating real value for the Chinese market and Chinese consumers. That’s the main reason they’ll lose. Just watch—soon we’ll be the only ones left. eBay’s days are numbered.”
Having lured eBay from its lair, we spent the next few months upping the pressure on eBay, showing that eBay’s argument was not logical. If “free is not a business model,” we wondered to all who would listen, then why was its newly acquired Skype service free? Why was PayPal free? And why was Craigslist, in which eBay owned a stake, free?
As we continued our taunts, public opinion began to move in our favor. eBay was in trouble, and the media and analysts knew it. In late 2005 eBay’s market share slipped to 34 percent, compared to Taobao’s 57 percent. Seeing its market slipping away, eBay finally decided to eliminate transaction fees on its China websites. On January 19, 2006, as news broke that eBay was eliminating fees in China, its stock went into freefall. Rather than embracing the move, foreign and local publications responded by mocking eBay, with headlines like “eBay Decides ‘Free’ Is a Business Model.” It was clear that eBay had lost the confidence of investors, as its stock dropped nearly 50 percent during the next six months. eBay was in serious trouble.
Alibaba's World Page 13