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Authors: Porter Erisman

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BOOK: Alibaba's World
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But eBay’s dismissal of Taobao as a legitimate competitor only inspired us to reach higher. And we recognized that having a great site that fit the China market was more important than any
PR or marketing strategy. And on this front eBay seemed to be playing right into our hands, appearing to make the kind of blunders that any first-year student at Harvard Business School, Meg
Whitman’s MBA alma mater, could have foreseen.

Upon acquiring the rest of Eachnet, eBay’s first step—and its first colossal mistake—was to link its China platform to its US platform. eBay’s thinking was that in order
to build a global marketplace, it should have every country in the world working from the same platform. To make this transition, eBay froze all local website development in order to prepare for
the migration of its data and technology to the global platform. In doing so, eBay eliminated localized features and functions that Chinese Internet users enjoyed and forced them to use the same
platform that had been popular in the United States and Germany.
Most likely, eBay executives figured that because the platform had thrived in more industrialized
markets, its technology and functionality must be superior to a platform from a developing country. The inherent arrogance was not unlike what I’d seen from the international managers in Hong
Kong who had shunned Alibaba’s website for lacking sophistication.

The response from Eachnet users was instant disaster for eBay. Customers flocked to Taobao, saying that eBay’s new cold minimalist interface lacked Taobao’s more intangible human
feeling, with its cute icons and flashing animations. An additional issue was that, where user names overlapped, eBay had given priority to its international members and forced its China users to
give up their user names and register new accounts. This problem proved to be more common than eBay had anticipated, creating confusion for eBay’s PowerSellers in China, because the online
ratings they had acquired over time were now reset to zero, and their loyal customers could no longer find them online. eBay’s customers in China took to its message boards to complain about
what they perceived as unfair treatment. Finally, eBay had failed to account for the China firewall, which slowed down Internet speeds between the United States and China. Although e-commerce was
considered politically neutral and not censored, the firewall still meant that accessing international websites from China was slower than accessing China-based websites. This was something
we’d encountered with Alibaba.com; to resolve the issue we had set up mirror servers in both the United States and China. eBay’s failure to anticipate the problem had led to poor
website performance.

Aside from the immediate issues, the transition set eBay on a course for long-term problems. This was clear to us because of
our own early mistake of moving our
website operations to Silicon Valley. By making Chinese product developers report to executives in Silicon Valley, any minor bit of customization, such as changing the color of a button, required
approval from California. Given the time difference, which allowed for only one hour of overlap between the working days of the United States and China, we knew that eBay’s decision would
lead to a huge rift between the China team—which wanted to move quickly in a dynamic market—and the US team, which was serving a much more mature platform.

Another important part of our strategy was to stir up eBay’s US investors about its performance. Our “last person standing” strategy had worked for Alibaba. And we knew it
could work against eBay as well. If we could convince Wall Street that eBay was burning through cash while losing ground to Taobao, we could test the patience of eBay’s investors. And we
gambled that eBay would eventually succumb to the pressure to show results instead of playing the long game.

We called up the one journalist who knew Alibaba well enough to actually take our claims about our performance seriously—Justin Doebele, whose July 2000 article had put Alibaba on the
cover of
Forbes
magazine. Justin had seen Jack and Alibaba at its scrappiest and watched as we beat our US B2B competitors despite all sorts of skepticism. So, almost five years after
he’d first visited us in Hangzhou to chronicle our B2B battles, we invited Justin up to Hangzhou, took him out on a boat on the West Lake, and shared all the data about our battle with
eBay.

“We want to be the world’s largest consumer site,” Jack told Justin. “eBay may be a shark in the ocean, but I am a crocodile
in the Yangtze
River. If we fight in the ocean, we lose—but if we fight in the river, we win.” A few weeks later
Forbes
ran Justin’s story, “Standing Up to a
Giant”—the first time a major publication had suggested that eBay was not doing so well in China. We had finally landed a serious body blow and awakened mainstream US investors to the
plight of eBay in China. eBay would soon feel the pressure.

THE EBAY-ALIBABA HOTLINE

O
N AN UNUSUALLY
clear day in May 2005 the Fortune Global Forum kicked off at the Diaoyutai State Guesthouse in Beijing. The bright sun bounced off the glossy red pillars, green
trim, and golden tile roof of the Chinese hotel as guests filtered into the main hall. When it opened in 1959, the Diaoyutai’s guests were diplomats and heads of state of Mao’s
Communist allies. But times had changed, and it was now host to the world’s leading capitalists, who had descended upon Beijing to network and curry favor with government leaders, including
China’s president, Hu Jintao, who was delivering the keynote address.

Among those capitalists were Jack Ma and Meg Whitman. It was the first time they had appeared at a conference together in China, and the media were waiting to see whether sparks would fly
between the two rivals.

As I strolled into the venue with Jack, he let me in on a secret.

“Porter, tomorrow night Joe and I are going to be having a private dinner with Meg Whitman and her communications chief, Henry Gomez. I haven’t told you
this, but eBay has expressed an interest in buying Taobao.”

My eyes lit up. eBay acquiring Taobao? This could be huge.

“So what have they said so far?”

“They contacted us last year and wanted to meet with us. So we visited eBay’s offices to get a feel for each other. As I walked around, there were a few Chinese engineers who
recognized me. But so far nobody else knows. They gave us an initial offer, but it was way too low for us to even consider. So we’re meeting with them again tomorrow night to hear what they
have to say this time.”

This is getting interesting,
I thought.
eBay must really be starting to get nervous.

“Should we go and have a look at the venue?” Jack asked. “I want to know what to expect.”

Jack and I walked over to the conference hall for Jack’s speech and instantly spotted Meg Whitman. Tall, confident, and with a big smile, she walked over.

“Hi, Jack. Great to see you again. We came a bit early so that we could hear your speech.”

“Oh, hi, Meg,” Jack responded. “Welcome to Beijing. I’m looking forward to hearing your speech as well.”

Laughing and chatting, the two seemed like good friends reuniting. There was no sense of bad blood, despite our highly public battle.

Jack introduced me. “This is Porter. He’s in charge of our international PR.” I shook hands with Meg and exchanged a few friendly words. Standing next to her and dwarfed by her
height
was eBay’s communications chief, Henry Gomez. I introduced myself to Henry and we did our best to banter politely. We were interrupted when a photographer
wandered over, having spied Meg and Jack standing together. Before the photographer could take a shot, Henry slid between the two CEOs. I could only assume he wanted to prevent any public
speculation that eBay and Alibaba might be discussing a partnership.

Jack took the stage and gave an uncharacteristically flat talk. I had expected him to deliver a home run, but I guess he was distracted by having Meg in the audience. After all, even if Taobao
was drawing neck and neck with eBay in China, we were still very much in its shadow on the world stage.

After Jack’s talk we exchanged some more pleasantries, and Henry and I exchanged cards.

“We should go to lunch while you’re here,” I suggested.

“Sure, how about tomorrow at my hotel?” Henry replied. And our date was set.

The next day I met Henry in the lobby of the St. Regis. I was both nervous and excited. It felt a bit like the head propagandists of the United States and Soviet Union were sitting down for a
secret meal at the peak of the Cold War.

I hadn’t quite decided on how to approach the lunch. On the one hand, eBay was our mortal enemy. On the other hand, if we got acquired, there was a good chance that I might be working
closely with Henry.
Better not to be too antagonistic,
I thought.
I’ll keep it friendly.

“I have to hand it to you. You guys have done a good job of making our life difficult lately,” Henry began. “We’re at a bit of a disadvantage in China because of the time
zone difference and the fact that we’re a publicly listed company. We can’t
just instantly respond whenever a journalist comes to us with a
question.”

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

BOOK: Alibaba's World
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