Alibaba's World (13 page)

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 community, 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.

“P
ORTER, 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 of ten 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 not 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.

Jerry’s Taiwanese roots also helped open doors with the Chinese government. His familiarity with the culture and language provided some assurance to the government that Yahoo! would be a
more accommodating partner than the average Western business. Hailing from Taiwan was not as politically correct as hailing from mainland China, but at least it seemed less foreign. Jerry had been
an inspiration to Chinese entrepreneurs and, despite his company’s struggles, still had the halo of being the first Chinese American to have made it big on the Internet.

But one reason above all led to the deal. “For us this deal is all about search,” Jack explained. “We are going to be the only company in the world that brings B2B
marketplaces, consumer marketplaces, payment, and search engines together in one company.”

If the structure of the deal was ambitious, the scale was staggering. Under the terms that had been drafted, Yahoo! would invest $1 billion in Alibaba Group and hand over its Yahoo! China
operations. In exchange it would receive a 40 percent stake in Alibaba Group, valuing Alibaba at just over $4 billion. It was going to be one of the largest Internet deals in history and put
Alibaba in the global spotlight.

“By the way, your shares are now worth $6.50 per share,” Jack told us at the meeting. The room let out a collective gasp. It was four times what we’d expected the shares to be
worth. “And everyone in the company will have the opportunity to
sell 25 percent of their shares at that price if the deal closes. It means we won’t have an
IPO for a while, but it will at least give everyone a taste of the fruits of their labor.” It was exciting to think we were finally going to have a chance to see the value of our hard work
and that the stock options we had on paper might actually be worth something. Allowing us to sell only 25 percent was a wise move by Jack and Joe Tsai, as it allowed staff members to taste the
potential while leaving enough incentive for them to stay with the company for the long term. For myself, it created a personal milestone as well—five years after I first daydreamed about
becoming a millionaire, it would finally happen. Rather than coming as a result of a long-planned IPO, my millionaire status had arrived when I least expected it. I took a deep breath and thought
about what it would mean for my life.