Alibaba's World (10 page)

Making Taobao free was a key way to differentiate it from eBay, which collected fees from its users. We gambled that eBay would not match our move, since doing so would
expose it to intense pressure from Wall Street investors who expected eBay to quickly capitalize on the $180 million it had already invested in the market. Sure enough, immediately after our press
conference, journalists contacted eBay to ask if it, too, would offer free services. Caught off guard, eBay’s local PR head responded by saying eBay would remain a website that charged, since
charging for product listings and commissions was an important part of maintaining a healthy online marketplace. By the end of the day we had achieved our goal—we had backed eBay into a
position that would be hard for it to change.

Taobao’s “free for three years” marketing push helped attract new users. This was particularly important in China’s low-trust environment, where people wanted to try
something first before they had to pay for it. As our war of words heated up, eBay claimed to have a 95 percent share of the consumer market in China and pointed out to investors and media that
eBay had never lost a market in which it had an established lead—the network effects of an online marketplace were simply too strong to overcome. However, eBay’s 95 percent market share
represented only the ten million Internet users in China who had actually tried e-commerce. Ninety-nine percent of China’s population had yet to try buying anything online. And rather than
try to attract eBay’s sellers at first, we simply focused on everyone else. Because we already had millions of customers using our English-language site and domestic Chinese B2B site, Alibaba
China, we had a ready customer base of sellers who could easily add a new retail business to their thriving wholesale business.

From day one, we recognized that making Taobao free was not enough. Sure, it would get people in the door. But we’d also have to keep them. Jack’s message
to the team was to forget everything about eBay’s business model in the United States. It was more important, he argued, to focus on Chinese consumers and develop what they needed rather than
what had worked in the United States.

The first step was recognizing that the consumer e-commerce model for China would not be an auction model, as at eBay. While eBay had gotten its start with people posting Pez dispensers and
other consumer collectibles they had pulled out of their basements and put online for auction, China’s consumer culture was entirely new. The Chinese did not have a hundred years of consumer
products lying around in basements. After the poverty of the Cultural Revolution, no one had anything to collect, except for a few of Mao’s little red books. What our customers really wanted,
we realized, was simply a storefront for selling their products. Our goal was not to create a marketplace where multiple buyers could bid on one unique product posted online. It was to create a
marketplace where multiple sellers could compete to offer the widest range of products and highest quality service to buyers who might otherwise shop for goods at the millions of small offline
storefronts in China’s nascent retail economy.

Working from this key insight, Taobao was vastly different from eBay China. Afraid that buyers and sellers might circumvent its system and avoid paying eBay’s commissions, eBay went out of
its way to keep buyers and sellers blind to each other and unable to communicate with one another before a purchase. This was a major inhibitor to commerce in an environment
where people were accustomed to building a personal relationship before doing business.

Our approach was exactly the opposite. Because we were entirely free, it didn’t matter to us whether retailers consummated their deals with buyers through our site. In fact, we encouraged
them to call each other, get to know each other, and even meet face to face for large purchases. We were confident that, just as we had found a way for Alibaba.com to make money from its users
without transaction fees, we ultimately would find a way to make money from Taobao if its sellers were able to make money. But first it was important to build a platform that gave them
more
tools than they had offline rather than fewer.

To this end we decided to provide live chat software that would allow buyers to contact sellers directly and communicate with them in real time. China was a nation crazy for chat software, and
we couldn’t imagine commerce in China without it. It would be like telling a retailer in the United States that she couldn’t have a telephone and would simply have to rely on mail to
communicate with her customers. So we introduced a chat product called Wang Wang, complete with cute and flashy emoticons. Buyers and sellers quickly adopted the chat software as a part of the
regular way they did business.

To eBay a service like Wang Wang would have been unthinkable. Allowing buyers and sellers to chat in real time would have torn apart eBay’s entire business model. If people could haggle
and negotiate through chat, they could once again avoid paying for eBay’s product listing and transaction fees. But in a nation where chat was a core part of the way young people used the
Internet, eBay was missing a major point.

Another major differentiation was the method of payment. Although the government had kept a tight rein on news and information domains on the Internet, officials had
always been relatively hands-off about e-commerce. In fact the main rationale for allowing the Internet to expand in China was that it would bring economic benefits. So, as long as e-commerce
companies operated responsibly, the government had been relatively encouraging. The one exception was online payments, which bled into the domain of China’s highly regulated banking sector.
E-commerce payments were very much a gray area, and there were no clear rules about whether and how companies could handle online payments. Jack recognized this problem and explained to me how he
intended to approach it.

“The problem for online payments up until now is that there has not been any true standard for online payment to emerge in China. The reason is because each of the state-backed banks wants
to create their own standard and so they are unwilling to cooperate with one another. But I’ve come up with the solution—we are going to create something called AliPay and then go out
and sign up all the banks as partners.”

He explained that what would make AliPay different from eBay’s PayPal is that it would not provide direct payments between buyer and seller. Rather, it would be an escrow-based payment
system, which would overcome the major barrier to e-commerce in China—lack of trust between buyer and seller. So, for example, after placing an order, a buyer would first send his money to an
AliPay escrow account held by one of the banks. Then the seller would ship the product. Only after the buyer had inspected the product and verified that it arrived as described
would the money be forwarded by AliPay to the seller’s bank account.

“Actually, this wasn’t an entirely new idea,” Jack continued. “eBay once tried it in Korea but gave up on it. But we’re pretty sure it will work here. And once
AliPay grows large enough, we can slip in direct payments. And as our AliPay becomes more popular, someday it has the possibility to become China’s largest bank.”

As always, Jack was dreaming big.

I
T LOOKED TO
be just another average rainy day in Hangzhou in fall 2004, so when the unexpected email hit my in-box, I instantly perked up. The Google Guys were coming to
China, and they wanted to meet us.

Fresh off their record-shattering IPO the month before, the Google Guys—Larry Page and Sergey Brin—were the new billionaire heroes of the Internet industry. It was almost impossible
to find a magazine that didn’t feature them on the cover. Being called to meet them felt a bit like going to meet the Wizard of Oz, as a mysterious aura preceded them.

Having followed Google’s development closely, we were in awe of them. But our awe was tempered by a healthy dose of fear. The Google Guys’ visiting China could mean only one thing:
Google was turning its attention to the China market. And in our worst nightmares we imagined a room of technicians in lab coats back at Google headquarters flipping an “Alibaba Killer”
switch and—poof! Still, it was clear that when the Google Guys knock on your door, you’d better answer it. If there was any chance to have them on our side, rather than
against us, we’d take it, so we agreed that Jack, Joe Tsai, and I would travel to Shanghai to meet the Google team in a private meeting room at the Grand Hyatt.

As I had ramped up our search advertising on Google, my admiration had only grown. Since my long week in quarantine I’d become obsessed with monitoring and growing our ad campaign. I found
myself glued to the computer day and night, constantly checking Google ad reports to see how many new people we’d brought to the site each day, each hour, each minute. It was pretty amazing
how, from a small apartment in the middle of China, we could coordinate a global marketing campaign. I was addicted to Google, stunned that something so simple could be so powerful.

Within a year our initial $600 budget had grown to $1 million, making us Google’s largest advertiser in China. As our advertising budget grew, so did our relationship with the company, and
in the spring of 2004 a colleague and I were flown to the Googleplex in Silicon Valley to speak to Google’s employees about our experience with advertising on the site.

Traveling from Hangzhou to the Googleplex felt like going on a hajj to Mecca, and we knew it was a once-in-a-lifetime opportunity to see the epicenter of the Internet industry. As we walked
through the sprawling modern campus of glass-and-steel buildings, Googlers played volleyball, Rollerbladed from building to building, and sat outside in shorts and sunglasses while sipping lattes
and brainstorming the next great innovation. This other universe felt both parallel to and distant from China’s rough-and-tumble Internet industry. If Alibaba’s drab Hangzhou offices
were like a broken-down Chevette, the shiny Googleplex was more like a glossy new Porsche. Both were technically cars,
but beyond that there wasn’t much similarity.
I couldn’t help but be impressed by the power contained in one office complex.

And so it was that five months later I found myself waiting in a Shanghai hotel lobby for Sergey and Larry. Joe and Jack were on their way, and, because I’d arrived much too early, I
killed the time by pacing around the hotel lobby, staring out the windows at the Huangpu River, and trying to make out the colonial buildings along the Bund through the dense Shanghai smog. As I
hadn’t met the Google Guys on my trip to the Google headquarters, I was looking forward to finally meeting them and seeing what they were really like.

When Joe and Jack finally arrived, the three of us sat down to hammer out a strategy. The Google people had been vague about the purpose of the meeting, so we could only guess their intentions.
We were privately wondering, perhaps even hoping, that Google was there to propose a major partnership or acquire us for a hefty sum. But we decided to play it safe. “Google called the
meeting, so let’s just go in and listen,” Joe said. “No need to show all our cards.”

We arrived at the meeting room, where we were greeted by some Google staffers and told to have a seat while the rest of the team returned from a break. As we looked around the room, it was clear
that we were not the only people the Google honchos were meeting that day. Chairs were scattered around, and the large table was piled with loose documents and half-eaten snacks. I had envisioned a
formal meeting to discuss potential partnerships, but it felt more like we were walking into an internal Google brainstorming session.

While we waited, we chatted with the staff, a mix of senior executives from international sales and operations. With
the IPO behind them, they told us, they were
turning their attention to international markets. Somewhat unnecessarily they also mentioned the private jet they’d chartered for this round-the-world trip.

Suddenly Larry Page entered the room, shook hands with us, and settled at one end of the table. I had read so much about him that I was expecting a charming, charismatic Internet pioneer, but my
first impression was that he was more the classic tech geek. Hunched in his seat, he tended to look at the Google staffers, rather than us, as he spoke in his high-pitched monotone. His head and
shoulders seemed to move as one fixed unit, making his mannerisms slightly robotic. Even his own colleagues seemed embarrassed by his style, which had an abrasive edge. Although an easy person to
respect, he was a difficult one to warm up to.

Dispelling once and for all the hope that Google was in town to make an acquisition offer, Larry asked, “So what’s Alibaba?”

It was clear that Larry had little idea of what we did, but Jack didn’t seem to mind. He took a few minutes to walk the Google team through Alibaba’s business and history. As always,
Jack beamed with excitement, but the Google team—perhaps having heard the same type of story many times over the years—seemed indifferent.

We were still unclear about Google’s intentions, so we asked for a bit more information about the purpose of the meeting. In response the Googlers embarked on a round of questions about
our operations and revenue model.

“So where are most of your advertisers located? Only in the big cities or are they all around the country?”

“How do you sell to these customers? Do you use agents or sell directly?”

“How many people are on your sales team? How much do you pay them per month? What kind of commission do you provide them?”

At first we tried to answer as politely as possible, but as time went on the purpose of the meeting was becoming clear—we were being Googled. Stripped down and mined for data points to be
fed into the Google machine. As the questions continued, fast and furious, I realized that Alibaba was just one in a series of companies whose executives the Google team was meeting with to suck
out information that they would ultimately use against us.