Alibaba's World (17 page)

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.

W
HILE 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:

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:

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 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:

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.

As eBay China drifted into irrelevance, Jack addressed Taobao’s employees at a team event to celebrate Taobao’s three-year anniversary. Jack reminded the team to focus on the big
picture:

It was an important reminder to the team. Yes, we’d had a number of corporate battles with eBay. But more important than any of the marketing or PR tactics was
that we were building a real infrastructure for consumer commerce in China. Building a marketplace that truly empowered entrepreneurs was what had gotten us this far. And if we were to continue to
succeed, we couldn’t lose sight of this purpose.

During the next several months the volume of eBay’s marketing and PR campaigns fell to a whisper in China, and we began to hear rumors that its executives were looking for a face-saving
way to exit the market. So we weren’t surprised when, at the end of 2006, eBay announced that it was shutting down its China website and handing its China operations over to a new joint
venture partner, Tom Online. Although it was backed by the Hong Kong billionaire Li Ka-shing, Tom Online was mostly a nonfactor in the China market.

The announcement came during the Christmas season, no doubt timed to hit in the midst of a slow news cycle with journalists more focused on holidays than the latest tech news from China.
eBay’s spin on the announcement was that it was doubling down in China and backing a local partner, in the same way that Yahoo! had done with us. But the eBay-Tom partnership was widely
recognized for what it was—a de facto withdrawal from the China market. Given that Tom Online only had to put up $20 million for a 51 percent stake in their newly formed joint venture with
eBay while taking over eBay China’s operations, it felt like a fire sale.

When eBay’s announcement hit our in-boxes, the reaction inside Alibaba’s offices was subdued. There were no cheers or high fives. Just a calm acceptance and sense of satisfaction at
what by that time was a foregone conclusion. As I boarded a plane home for Christmas, I picked up a copy of the
Wall Street Journal
and read the headline,
“EBay Steps Back from Asia, Will Shutter China Site.” When I changed planes in San Francisco, I picked up the
New York Times
and found its story: “EBay Is Expected to
Close Its Auction Site in China.”

We had done it, I thought. We had actually beaten eBay. David had beaten Goliath.

Part of me would miss having such a mighty competitor. But with eBay out of the picture and no real competition in sight, the doors were open for something that Jack had postponed for five
years.

A
FLURRY OF
flashes lit up the crowded room, and the clicking and whirring of cameras hit a crescendo. Security cleared a path through the middle of the crowd, giving the 20
photographers, restrained by a rope line, a direct shot of Jack as he jumped on stage. Jack turned to the cameras and triumphantly held two thumbs up amid cheers and applause from the crowd.
“Jack! Jack! Over here, Jack!” the photographers called out as the lights illuminated his face and its ear-to-ear smile.