TECH TALK: Internet Tea Leaves: Alibaba and Yahoo

Yahoo invested a billion dollars and handed over its Chinese operations to the local Alibaba management in return for a 40% stake in Alibaba. The deal valued Alibaba at $4 billion. Alibabas flagship site is a marketplace for SMEs helping Chinese SMEs sell to others in China and globally. It had revenues of $46 million last year. (By contrast, Baidus 2005 revenues are expected to be about $30 million.) Alibaba also operates two other sites: Taobao is a consumer auctions sites (in direct competition with eBay in China), and AliPay, which is a payments and settlement service along the lines of PayPal.

The Wall Street Journal wrote about the deal: The deal marks a supreme vote of confidence in [Alibaba CEO Mr. Jack] Ma, whose knack for bold statements and charismatic leadership has helped build his company but has rankled local and foreign competitors along the way. The Yahoo connection will cement the 40-year-old as one of the most prominent public faces of China’s new entrepreneurial culture and give him a much larger platform from which to pursue his ample aspirationsThe tie-up will create a company with a formidable presence across all major segments of the Internet industry in China, combining Alibaba’s existing business-to-business and consumer-auction sites with Yahoo’s stable of Chinese search engines and communications services.

Bill Bishop added: “No question this creates a monster in the China Internet. It will have a powerful combination of search, communications, commerce and auctions. All they need is a game component and they could have a shot at becoming number one…This deal is potentially disastrous for Ebay in China.”

An article a few months ago in Knowledge@Wharton outlined why Alibaba is so important:

Alibaba has been successful because it recognized it could fill a gaping market need: China has virtually no printed directories or electronic databases that allow companies to describe their products and help buyers and sellers find one another while providing a certain level of comfort that the firms are on the up and up. Moreover, Alibaba focuses on mom-and-pop businesses in China, of which there are untold numbers, rather than trying to facilitate transactions between multinationals, which often have their own web-based systems for dealing with suppliers, and other big companies.

Alibaba “offered a platform where China manufacturers can reach world exporters and vice versa,” says Safa Rashtchy, an e-commerce analyst with the investment firm Piper Jaffray. “It’s a pretty inefficient system [in China] right now. The company figured if it signed up all the manufacturers in China and carefully listed their products and made them available to the U.S., Europe or wherever, it could extract good revenue. That’s what they’re doing.”

I have followed the fortunes of Alibaba since its early days. I liked the idea of an SME marketplace very much. At that time, Global Sources was the leader in the print media in helping connect SMEs. Alibaba raised a lot of money and went through many ups and downs in its journey. (There are two Harvard Business School case studies on Alibabas early days.) Alibaba has crossed one mountain another lies just ahead.

Tomorrow: China Internet Potential

TECH TALK Internet Tea Leaves+T

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Rajesh Jain

An Entrepreneur based in Mumbai, India.