If Alibaba cannot become a Microsoft or Walmart, I will regret it for the rest of my life,” mused Jack Ma, the founder and chief executive of Alibaba Group, in an interview last year.
Well, there may be something else Ma regrets right now: selling a 40% stake of the parent company Alibaba Group to Yahoo five years ago. The relationship between the two companies has deteriorated so dramatically in recent months that China’s biggest e-commerce company now wants to cut ties with Yahoo altogether.
Alibaba openly declared last week that it had made an offer to Yahoo, its largest shareholder, to buy back the company’s shares. Yahoo quickly rejected the deal, saying that it has no interest in selling its stake, which is estimated to be worth up to $11 billion (Alibaba Group is not listed, meaning the precise value requires some educated guesswork).
With the two sides publicly trading barbs, the souring relationship offers further insight into the rise of China’s internet sector and why the veteran dotcom firm is now at loggerheads with a Chinese internet company.
So why the recent falling out?
The latest spat broke out when a Yahoo executive in Hong Kong spoke last week to the South China Morning Post. He announced that Yahoo’s Hong Kong unit was reaching out to small and medium-sized enterprises in China to place advertisements on Yahoo Hong Kong, one of territory’s most popular portals. Alibaba retaliated by saying that means that Yahoo has broken the rules by encroaching on its home turf. The agreement struck in 2005 gave Alibaba exclusive rights to operate Yahoo’s China businesses. Alibaba reckons that gives it another reason to “re-evaluate” its relationship with the American firm.
It’s not the first time there has been disagreement. In January, Alibaba criticised Yahoo for supporting Google’s unwillingness to censor search results. Alibaba said Yahoo’s position was “reckless”.
Where did it all go wrong?
When the deal was brokered five years ago, it looked to most analysts like a marriage that would last. Alibaba, then a fast growing upstart, negotiated a $1 billion investment from the Silicon Valley blue chip. Yahoo, which had struggled to gain ground against large domestic portals like Sina and Sohu, also handed over its floundering China operations to the mainland firm.
But the idea that Yahoo and Alibaba have a “strategic partnership” has been stretched pretty thin in the ensuing years. Hangzhou-based Alibaba has been on the commercial fast track (running both at ‘China speed’ and on ‘internet time’). It is now a web titan in its own right. The Group spun off Alibaba.com, an online business-to-business platform in 2007, which now has a market value of nearly $10 billion. In addition, the company’s privately-held consumer site Taobao.com has mushroomed into China’s biggest online shopping site, controlling over 80% of that industry’s market share. Alibaba also owns Alipay, China’s PayPal equivalent, which boasts over 300 million users.
Yahoo’s glory days look to be more in the past. The once-visionary company has struggled to compete against Google and Facebook. Its share price has more than halved over the last five years. In fact, analysts think the stake in Alibaba now contributes more than half of Yahoo’s current market value of close to $19 billion.
“Yahoo and Alibaba just don’t have that much in common from a strategic perspective anymore,” says Sarah Lacy at TechCrunch, a Silicon Valley blog on internet technology. “Alibaba has turned out to be a more valuable property than anyone thought. And if Yahoo isn’t adding anything and isn’t appreciating it, you can understand why they’d want that equity freed up.”
Alibaba.com’s chief executive David Wei put it more bluntly in an interview with Bloomberg: “Why do we need a financial investor with no business synergy or technology?” Ouch. And even less diplomatically: “Any idea that Yahoo gives Alibaba a strategic advantage is laughable.”
But the bad blood runs deep…
Industry observers say Yahoo is unhappy at how its China operations have been handled. Some former employees say Ma has given up on investing in Yahoo China altogether. Currently, the Yahoo China site has been rebranded as an entertainment portal. But its share of Chinese search-market revenues have dropped from 21% in 2005 to less than 1%, says research firm Analysys International.
Carol Bartz, Yahoo chief executive, has been accused of doing little to ease tensions. Last week she suggested that she will join the Alibaba board later this year, when Yahoo gets a second seat under its 2005 agreement (Jerry Yang, who stepped down as Yahoo CEO in 2008, is the current representative). That would seem reasonable enough, given the Yahoo shareholding. But probably less so for Alibaba executives irritated by the current state of relations. “She’s displayed the diplomatic skills of a donkey” was the gripe attributed to an anonymous Alibaba source on the Techcrunch blog.
Enter new suitors?
Interestingly enough, eBay could benefit from the escalating feud. As Alibaba and Yahoo have wrangled over the past year, the Chinese firm has grown closer to its US rival. John Donahoe, eBay’s chief executive, recently made an appearance at Alibaba Group’s annual conference in Hangzhou and gushed about his “enormous respect” for founder Ma, said the Wall Street Journal. Ma responded that, although Alibaba and eBay have been competitors in the past, they could work closely together in the future.
How? The two companies now allow users of another of Alibaba’s newly launched e-commerce sites, AliExpress.com, to make payments via eBay’s PayPal, says China Securities Journal. AliExpress allows merchants to purchase small quantities of consumer goods but does not compete directly with eBay.
Alibaba said late last week that it has since “moved on’’ from talks to buy back shares held by Yahoo after the US firm rejected its offer. “We have no intention of raising this issue again,’’ company spokesman John Spelich told Bloomberg.
Besides, industry observers say the US firm is unlikely to consent to a divorce before Alibaba’s most lucrative divisions Taobao and Alipay go public. Yahoo may not have made much progress in building up its own China internet business. But assuming that she plays her cards right as a minority shareholder, Bartz is looking at a huge investment return.
True, that would be a one-off windfall. But in terms of reaping profits from China, Yahoo ironically looks to be in a better position than Facebook (whose site is blocked) or Google (which has spent much of the year in run-ins with the Chinese internet authorities).
In fact, Yahoo now looks like a portfolio investor rather than a strategic partner, and is sitting on a stake in some of the most valuable online real estate in China. 21CN Business Herald agree and goes so far as to conclude that Jerry Yang’s best decision during his tenure as chief executive was the investment in Alibaba Group.
The shifting status of the Alibaba-Yahoo relationship looks like a case study for how Chinese businesses are reviewing their partnership strategies with foreign businesses. In the internet sector, overseas firms are notable largely by their absence. Domestic players have been good at adapting their online offering for the local market. But most of all they have benefited from policies that favour homegrown business models. Firms like Tencent, Baidu and Alibaba dominate in every category, from e-commerce to online search and instant messaging (see Talking Point in issue 59). As the country’s internet audience grows, it generates massive online traffic, and associated revenues. While this continues, mainland firms have little incentive to allow outsiders in on the action.
Yahoo is unusual in at least having a finger in the pie. That annoys Alibaba. But who would have predicted five years ago that it would now regard its Silicon Valley partner so unfavourably?
Asked by the FT how he thinks of his company’s relationship with Yahoo today, Alibaba’s Wei likened it to that of estranged grandson and grandfather. “Chances are the grandfather will pass away,” Wei concluded dismissively.
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