Reference no: EM132197683
YAHOO! AND ALIBABA: SEEKING DOMINANCE IN CHINESE CYBERSPACE
People who thought that the internet craze had died during the dot-com bust of the late 1990s may have had groundhog-day feelings in the summer of 2005. Early August 2005, shares of Baidu, a search engine company heralded as China’s answer to Google, went up some 350 percent on the day of its US$4 billion IPO. Then, on August 11, 2005, Yahoo!, the U.S. portal, announced it would pay $1 billion for a 40-percent stake in Alibaba, a Chinese B2B portal, owned by Jack Ma. With 15 million registered users, Alibaba clearly offers great reach. Its two B2B websites generated around $5 billion worth of transactions in 2005. However, the portal had revenues of only $46 million in 2004. Taobao, its online auction website, rapidly became China’s number 2 consumer auction website, behind EachNet, the auction site owned by eBay. The quick market share increase, though, was partly due to Taobao’s free services.
Jack Ma once compared local e-commerce companies such as Alibaba to crocodiles in the Yangtze River. He claimed that foreign “sharks” who swim up from the sea would have a hard time fighting the local crocodiles lurking in the river as “the smell of the water is different.” Such logic must have resonated with Yahoo!. So far, foreign internet players have had little success with their standalone oper- ations. Most of the top players in China’s internet market are homegrown: Sina is the top portal; Baidu dominates the search engine market; Shanda Interactive is the largest gaming company.
Jerry Yang, Yahoo!’s co-founder, said: “We are playing for the long term. We believe the prize is huge.” No doubt, the Chinese internet sector offers great promise. The value of all e-commerce transactions is expected to rise to around $217.5 billion by 2007. Online advertising is predicted to go up from $208 million in 2004 to $1 billion by 2009. AndChina’s online auction market could rise from $425 million in 2004 to $2.7 billion in 2007. However, riches are not guaranteed. Credit card usage, though on the rise, is still very limited. Foreign companies also need to cope with the chal- lenges of cultural and linguistic differences. In addition, the Beijing government exercises strict control over the internet. Policy or regulatory changes are a constant hazard for China’s internet companies. For instance, Communist party officials recently expressed unease over the spread of multiplayer role-playing games.
The Alibaba/Yahoo! deal closely resembles the cooper- ation model that Yahoo! used in Japan and which worked out very well in that market. According to the deal, Alibaba would take control of Yahoo’s assets in China. The diver- sity of Alibaba’s business might prove a clear strength. The company commands a strong position in B2B e-commerce. Other assets include Alipay, an online payment facility sim- ilar to eBay’s PayPal, and Taobao, an eBay-like auction site. The assets thrown in by Yahoo! included its internet portal, its e-mail service, a search engine (3721), and an online auction site (1Pai). The new operation covers almost all major internet areas, except for online gaming.
Skeptics view the diversity as a lack of focus. Some analysts also suggested that Yahoo! overpaid for its 40 percent share of Alibaba. Rival eBay’s aspirations for China most likely triggered the deal. Meg Whitman, eBay’s CEO, declared that China is a “must win” for the company. Rumor had it that eBay was courting Jack Ma.
There are immediate branding considerations on the hori- zon for the newly formed entity. The combination owns a mishmash of brands. Whether the Sino-U.S. marriage will be a success remains to be seen. Yahoo! offered a huge pile of cash and its Chinese brand portfolio. Alibaba already has a critical mass of 15 million registered users. The task for Jack Ma is to turn those eyeballs into profits.
Sources: “Yahoo Search Is Complete: Alibaba Finds a Way to Reap the Riches of Online China,” Financial Times (August 12, 2005): 9; “Crocodile Amid the Pebbles,” Financial Times (August 12, 2005): 9; China Hand, Chapter 12 (December 1, 2005); “Seeking to Dominate Chinese Cyberspace,” Media (December 2, 2005): 20.
DISCUSSION QUESTIONS
1. Was Yahoo! right to outsource its future in China to Alibaba.
2. The case points out that the Alibaba/Yahoo! Combination led to a mishmash of internet brands. How should Alibaba manage this mix of brands?
3. What other marketing actions would you prescribe for the Alibaba/Yahoo! combination to succeed?
4. Do you agree with some of the critics that the new entity lacks focus? What might be some of the advantages that diver-sity offers to internet players in China?