The Google team appeared sullen. Self-censoring content was clearly a tough idea for them to accept. Google’s stated mission was “to organize the world’s information and make it universally accessible and useful.” Inherent in this mission was the idea that making information universally accessible would bring economic, social, and even political power to people at a grassroots level.
For a few moments the room was silent as the Google team mulled the options. The silence was broken when a Google staffer let us know the time was up. As we shook hands, I realized that it would probably take a while before Google worked through the ethical issues involved in doing business in China. But I also knew they’d find a way eventually, and when they did, we’d better be ready.
Crocodile in the Yangtze
Military helicopters buzzed overhead as a row of tanks clinked across the battlefield, destroying everything in sight. A team of elite soldiers weaved and dodged past explosions and enemy fire while advancing toward the enemy stronghold.
“The enemy is within our sights,” came a voice over the loudspeaker. “Fire when ready!”
With a flash a helicopter missile streamed through the air, leaving a smoky plume behind it as it headed toward the enemy compound.
Boom! Crash! Rat-a-tat-tat. The enemy compound burst into flames.
“Enemy destroyed! The Taobao militia has seized a strategic new beachhead,” bellowed the narrator. “Taobao’s advance is unstoppable!”
The video ended and triumphant military music filled the auditorium as the lights came on. The audience clapped and cheered, filled with the sense that, as Alibaba entered 2005, we had the winds of victory at our backs. It was our annual all-hands kickoff meeting, and we had plenty of reason to cheer for the Year of the Rooster.
Taobao had had a phenomenal year in 2004, and we’d made significant headway against eBay in China. Our strategy to engage eBay in a war of words had created a lot of media buzz within China. Positioning ourselves as a local David fighting the US Goliath, we intended to educate the market about e-commerce and attract people to Taobao to give consumer e-commerce a chance.
We’d overcome some major challenges from eBay’s superior firepower and resources. Hoping to lock Taobao out of the market, eBay had negotiated exclusive advertising deals with all of the major Internet portals in China. But to do this, they’d paid a premium to have Taobao excluded from advertising on the portals. To overcome this direct attack, we’d taken the guerilla approach of negotiating tiny advertising deals with hundreds of small websites throughout China who were more than happy to provide a price discount to the prevailing online advertising rates in China. They were simply grateful to have any advertiser at all. This, along with some aerial assaults in the form of television advertising and outdoor display ad campaigns, had been showing great results at only a fraction of the amount that eBay was spending.
Taobao was growing quickly on all metrics. While eBay charged for product listings, Taobao had kept its website free. The result: Taobao surpassed eBay’s product listing numbers. With more products on the site for customers to browse, Taobao’s website traffic had increased beyond eBay’s. And as Taobao’s traffic increased, eBay PowerSellers (high-volume sellers with top reputations), who had initially resisted moving to Taobao, had no choice but to open a second shop on Taobao. On nearly all metrics, Taobao was surpassing eBay, giving us the right to boast that Taobao was “China’s largest online consumer marketplace” and build even greater momentum with customers.
Admittedly this marketing-speak hid one important fact. By the end of 2004 we were still trailing eBay on the key metric by which media and analysts measured marketplaces: gross merchandise volume (GMV), or the total sales carried out on the site. But even here the numbers looked promising. Although we had begun 2004 with a 9 percent market share of GMV versus eBay’s 90 percent, we ended 2004 with a 41 percent market share versus eBay’s 53 percent. While media and analysts outside China were still favoring eBay to prevail, we had gained enough confidence internally to feel we were on the right track.
With the kickoff meeting audience at full tilt, Jack took the stage.
“2004 was a great year for us all, and we should be really proud of what we achieved so far. There are only two companies in the world who truly understand how to build an e-commerce marketplace—Alibaba and eBay. And last year we showed the market that we understand China much better than eBay does. But as we say at Alibaba, last year’s result is next year’s minimum level of achievement. And don’t forget: we don’t want Taobao to be just the largest consumer marketplace in China. We want it to be the largest in the world!”
The crowd applauded wildly as Jack stepped off the stage and handed the microphone to Toto Sun, the head of Taobao.
“Thanks, Jack, for giving us all your support. And Jack’s right, because we are going to beat eBay. Because I know one thing: when the foreign devils come to China, they will definitely be killed!”
I stood at the back of the auditorium and smiled as the crowd laughed and clapped. I recognized the old Red Army rallying cry, and I knew it was meant as a harmless joke. But moments like that did make me wonder whether this kind of ironic distance could become harmful in the long term. So I was relieved when Jack immediately jumped on stage and took the microphone back from Toto.
“There’s one thing I want to be clear about here,” Jack said. “Our war is just a fun competition with eBay, and this is nothing about nationality. Alibaba is a global company, and we have international staff here from America, Europe, and other places. So I don’t want to hear any kind of nationalistic talk. This is a game. It’s a sport. We are lucky to have a big competitor like eBay. It’s like we have the chance to play basketball against Michael Jordan.”
Having made his point, Jack handed the microphone back to Toto. Humbled, Toto resumed his speech. I was pleased that Jack had stepped in to rein in the rhetoric before it got out of hand, even at the expense of a senior manager’s pride (no small thing in Chinese culture). Toto was a great colleague and friend, but his words could easily have taken on a life of their own. And I’d always been proud that Alibaba’s success was based on innovation and merit rather than nationalistic rhetoric.
We in China knew the incredible progress Taobao was making, but halfway around the world eBay had the media and its investors convinced that it was still the leading marketplace in China. Small wonder—the notion that the world’s largest e-commerce company could be successfully challenged by a local Chinese upstart would have sounded ludicrous to the media and analysts covering eBay at the time. eBay kicked off 2005 with a day of wooing analysts; Meg Whitman used the annual Analyst Day to put a positive spin on eBay’s growth in China while explaining the additional investment of $100 million they had recently made in the market:
“Today eBay Eachnet is by far the number one e-commerce site in China. We’re helping China to define its e-commerce future, and it gives me tremendous satisfaction to see eBay Eachnet helping so many young Chinese taste entrepreneurship for the first time.
“Now, like in the early days of the Net in the United States and other countries, there are a bunch of small competitors in China nipping at our heels, and I don’t blame them. They see the opportunity too, but guess what? We love competition. Absolutely love it. We have from the earliest days. It motivates us. It makes us hungry. It makes us stronger, and it makes us very, very determined. We are on a tear to be the undisputed winner in China, and the additional $100 million investment we announced last month should be a sign of an unmistakable commitment and an unstoppable determination to win that market. . . . Just as we pulled ahead of able competitors in the US and Germany in 1999 and 2000, we’re pulling farther ahead in China today . . . The share of e-commerce in China is likely to be the defining measure of business success on the net.”1
Despite her positive spin on eBay’s position in China
, behind the scenes we heard that eBay truly was becoming concerned about Eachnet’s performance. Someone who had attended one of eBay’s board meetings told us that eBay’s market research was showing that, on a head-to-head comparison, eBay was falling behind Taobao on nearly every metric. When it came to customer service, user satisfaction, renewal rates, and other important metrics, eBay ranked higher only on its number of registered users. And Taobao was quickly gaining ground. eBay’s growth story in China was central to its investor presentations, and the company must have been concerned that Eachnet would be revealed as a paper tiger if eBay didn’t move quickly to shore up its market position in China. By committing an additional $100 million to the China market, mostly earmarked for advertising, eBay was doubling down in an attempt to both demonstrate its commitment to China and intimidate us.
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
On 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 b
y 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.”
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