Alibaba: The House That Jack Ma Built

by Duncan Clark

The ant was chosen to symbolize how even the smallest creatures can prevail over their enemies provided they work closely together. The assembled masses then held hands and chanted a song, “True Heroes,” whose lyric “You have to go through a thunderstorm to see a rainbow, and no one can succeed easily” was a reference to the challenge of SARS that they had overcome. This was followed by “The ants that unite can beat an elephant,” after which everyone headed off to a disco, where Jack danced on the bar into the wee hours.

Jack commented to Forbes magazine in 2005, “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.”

On October 18, 2003, just five months after the launch of Taobao, Alibaba rolled out Alipay, its own payment solution. Although it was rudimentary, reminiscent of the early days of Alibaba’s customer log three years earlier, it proved an instant hit with customers.

In the United States, eBay had shelled out $1.4 billion to buy PayPal in 2002. But it was slow to integrate the company and roll it out to China. To be fair to PayPal, regulatory obstacles in China were an important factor in the delay: The country’s banking sector is closely guarded by the government. Also, China’s currency is not freely convertible, meaning that foreign payment providers are banned from facilitating international transactions or offering credit.

Jack vigorously rejected that thesis: “The survival and growth of Taobao are not because of free service. 1Pai [the joint venture of Yahoo and Sina] is also free but it is nowhere close to Taobao. Taobao is more eBay than eBay China [because] Taobao pays more attention to user experiences.”

“When I heard that eBay would spend one hundred million dollars to break into this market, I didn’t think they had any technical skills. If you use money to solve problems, why on earth would the world need businessmen anymore. Businessmen understand how to use the smallest resources to expand.”

Dismissing eBay’s approach, he added, “Some say that the power of capital is enormous. Capital does have its power. But the real power is the power of people controlling the capital. People’s power is enormous. Businessmen’s power is inexhaustible.”

Whatever is stronger than you, you have to learn not to hate it. . . . When you treat it too seriously as a rival, and intend to kill it, your techniques are completely exposed. . . . Hatred only makes you a shortsighted person.”

By the end of 2005, eBay’s market share had slipped to barely one-third of the market and Taobao was closing in on 60 percent. Just two months after eBay publicly defended its fee-based business model, eBay stopped charging fees altogether.

When asked today about the experience, Whitman can only tip her hat to Jack’s achievements. “If you look at Japan and China, two important markets, it’s where we didn’t strategically, actually do the right thing. But it was not obvious at the time, honestly. So more power to Jack Ma, what a powerful franchise he has built—and it is really in some ways the combination . . . of eBay, PayPal, and Amazon. He’s done a remarkable, remarkable job.”

“With the shades drawn tight, the Sun servers generating a ferocious amount of heat, the answering machine going on and off every couple of minutes, golf clubs stashed against the walls, pizza cartons on the floor, and unwashed clothes strewn around . . . it was every mother’s idea of the bedroom she wished her sons never had.”

Known initially as Jerry’s Guide to the World Wide Web, then Jerry and David’s Guide to the World Wide Web, the list consisted at first of a hundred sites categorized manually into relevant headings.

The two engineers never finished their Ph.D.s. Jerry recalled, “When I first told my mom what we were doing, the best way I could talk about it was like a librarian. And she said you know you went through nine years of school to become a librarian. She was kind of shocked to say the least.”

On April 12, 1996, Yahoo went public on the Nasdaq, raising $33 million. After a healthy first-day 154 percent gain, investors valued the company at almost $850 million.

Yahoo was in touch with the authorities in China but “to be honest, the policy is not very clear as to what is politically sensitive,” adding that they had been informed that “as long as we’re just listing content and not hosting it then we can just go right ahead.”

Yahoo was no longer just about links. Following an early partnership with Reuters the company added news content to its site, then chat rooms and, following an acquisition, Yahoo Mail.

“Whether or not it is an ICP [Internet content provider] or ISP [Internet service provider], it is about value-added services. In China, the service area is not open.”

Yahoo China’s content was boring, and Chinese Internet users noticed, being drawn instead to the more compelling offerings of Sina, NetEase, and Sohu. Yahoo was losing the battle to stay relevant in China just as the country’s Internet population was taking off.

Victor Koo, then COO of Sohu,6 recalled that “Yahoo China could not match us in scale, localization, or investment. That was why it lost the China market.” Their IPOs in 2000, facilitated by the VIE investment structure, allowed the three portals to survive the dot-com crash. Within a few years they had become profitable companies for the first time.

But, unbeknownst to them, the era of the China Internet portals was coming to an end, replaced by a new era of the “Three Kingdoms” of t...

Tencent harnessed two trends that would transform the Chinese Internet sector: content delivered to cell phones, and online games played on PCs.

Pony named his company Tencent because the cost of sending a mobile text message at the time was ten Chinese cents (about 1.2 U.S. cents).

Tencent’s breakthrough product was its OICQ instant messaging client, installed on desktop computers, which was essentially a clone of the ICQ (“I seek you”) product developed by Israeli company Mirabilis.

Facing the threat of a lawsuit, Tencent rebranded its service as “QQ,” the letters chosen to ap...

Tencent has been the leading player in China’s mobile social networking market ever since. But mobile messaging alone doesn’t explain its meteoric rise. The company’s biggest business today is online games.

Tencent’s success in QQ, games, and later with WeChat would propel its market capitalization in 2015 to exceed $200 billion, surpassing at times Alibaba, and generating a gold mine of tens of billions of dollars for the South African media company Naspers.

Baidu was founded in Beijing in 2000 by Robin Li (Li Yanhong) and his friend Dr. Eric Xu (Xu Yong). Born in November 1968, Robin was one of five children of factory workers in Shanxi, a gritty province in central China.

Robin then moved to California to work for the search company Infoseek, before raising $1.2 million in start-up funding and returning to China in January 2000 to found Baidu.

Robin Li, CEO, recalled, “I wanted to continue to improve the search experience, but the portals didn’t want to pay for it. . . . That’s when I knew we needed our own branded service.”

Robin Li has remained closely involved in Baidu’s technology development.

Li would often sleep in the office, and meetings doubled in frequency until the project was completed.

“Once you find out what you should do, then you need to stay focused. That’s what we did during the difficult times back in year 2000, 2001, 2002. Many people think search was a done deal. It’s boring. Everyone has figured that out in terms of technology and product, but we thought we could do a better job. We resisted all kinds of temptations from being a portal, being an SMS player, online games, developing all kinds of things that could make money in the short term. We really, really focused on Chinese search. That’s how we got here.”

Baidu’s shares rose more than 350 percent on the first day of trading. As it became apparent that Baidu was now its chief rival in China, Google sold its stake the following summer for $60 million. Baidu would emerge as China’s largest search engine.

Although worth around $70 billion, it remains a much smaller company than Alibaba and Tencent, two companies that, interestingly, enjoy a better relationship with each other than they do with Baidu.

The company 3721 allowed the millions of new users coming online in China to search using Chinese characters thanks to a special toolbar that would then link the Chinese characters input to the corresponding website.

Whatever their differences in personality, Jerry Yang saw in Zhou Hongyi’s firm the opportunity to boost Yahoo China’s revenues.

Baidu.” Zhou became frustrated by the managers at Yahoo headquarters: “They were unwilling to invest in the company’s future. It is like farming. If you only care about harvesting, but not fertilizing or cultivating, eventually the land will lose its vitality.”

China was the least of Yahoo’s worries. In the United States, the company was being eclipsed by Google, whose algorithmic search engine was outgunning Yahoo’s directory-based design. Yahoo was slow to recognize the threat posed by Google, a company like Yahoo founded by two Stanford Ph.D. candidates.

In July 2005, six months before the end of his two-year earn-out, Zhou announced he was quitting Yahoo China. Within two months he had set up his own company, Qihoo 360 Technology. Here he would adopt the same aggressive tactics15 that he’d used at 3721.

Whether it is spiritual leader Jerry Yang or former CEO [Terry] Semel, they are good people, but [they] are not geniuses. They lack true leadership qualities.

After years of frustration, Jerry Yang made a bold decision. He handed Jack $1 billion, and the keys to Yahoo China’s business, in exchange for a 40 percent stake in Alibaba.

Alibaba gained the ammunition to finish off eBay in China, and to build Taobao and Alipay into the behemoths that they are today.

A deal with Alibaba was attractive on a number of levels. It was a private company, and this meant a deal could be struck quickly.

Although Yahoo conducted extensive analysis on the underlying business, Jack’s charisma and vision for Alibaba also played an important role, as Jerry recalled, “It was probably in retrospect a big bet, but if you met Jack, and having got to know him and seeing what his vision was, you certainly thought it was worth it. And he really had an inside track on being a very dominant commerce platform in China, so that really gave us a lot of comfort.”

For Alibaba, the deal immediately delivered the cash it needed to support Taobao, still unprofitable, in its fights with eBay. Yahoo and SoftBank already had a profitable relationship stretching back almost a decade.

The final ownership of Alibaba would be Yahoo, 40 percent; SoftBank, 30 percent; and existing management, 30 percent.

In 1999, Jack had sold a 50 percent stake in Alibaba to Goldman Sachs and other investors—something he had joked was the worst deal he ever made.

“I asked for one billion dollars, and they gave us one billion dollars. I thought the war between Taobao and eBay would last for a long time, so we needed enough cash to fight.” In the end, $1 billion was enough to scare off eBay.

Jack said he would do the Yahoo deal again but “in a better, smarter way,” adding, “Nobody knows the future. You can only create the future.”