HKU701

JIANGYONG LU ZHIGANG TAO

EBAY’S STRATEGY IN CHINA: ALLIANCE OR ACQUISITION
In December 2006, eBay Inc., a US company that offered e-commerce, e-payments and internet communication services globally, announced its plan to form a joint venture with China-based online portal and wireless operator, TOM Online, in which eBay would have 49% ownership.1 The move reflected the increasing difficulties foreign internet companies were facing in their attempts to snatch a share of the Chinese market amid fierce competition and a changing market environment. eBay first set foot in China in 2002 by acquiring 33% interest in EachNet—a domestic online auction company, followed by a full acquisition in 2003.2,3 In 2005, eBay acquired Skype4 to expand into the online communication sector. While Skype was a wholly owned subsidiary of eBay globally, it operated indirectly in China via a joint venture with TOM Online. Due to this existing relationship between the two companies,5 TOM Online seemed to be a natural choice of partner for eBay’s subsequent decision with regards to its online marketplace business. Recognising TOM Online’s local knowledge and political connections, eBay believed that a joint venture would benefit its failing business in China and help the company further develop its Chinese market.6 Some analysts questioned whether political connections alone were the answer and suggested that eBay focus on its product and service offerings.7
Vara, V. and Chao, L. (20 December 2006) “EBay’s China retreat highlights a tough market”, Wall Street Journal. eBay (Date Unknown) “eBay and EachNet Team Up in China”, Press Release, http://investor.ebay.com/releasedetail.cfm?ReleaseID=74802 (accessed 27 April 2007). 3 After the full acquisition in 2003, eBay operated under the name of eBay EachNet. 4 Skype is a peer-to-peer software program that allows people to make free calls over the internet to anyone who also subscribes to this service. 5 Skype provided peer-to-peer internet telephony service—ie, instant messaging and online telephone service. In 2005, eBay acquired 49% stake in Skype China, with TOM Online owning the rest. Source: Schwankert, S. (20 December 2006) “EBay to replace Chinese auction site with JV”, ITworld.com, http://www.itworld.com/Tech/2403/061220ebay/ (accessed 27 April 2007). 6 Bradsher, K. (22 December 2006) “With TOM Online, eBay gains Chinese clout”, International Herald Tribute. 7 Rein, S. (24 December 2006) “TOM Online Must Focus on Products: Connections Don’t Ensure Success”, SeekingAlpha, http://china.seekingalpha.com/article/22946 (accessed 20 June 2007).
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Isabella Chan prepared this case under the supervision of Prof. Zhigang Tao and Dr Jiangyong Lu for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes. This research was partially supported by a grant from the University Grants Committee of the Hong Kong Special Administrative Region, China (Project No. AoE/H-05/99). © 2007 by Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet)—without the permission of The University of Hong Kong. Ref. 07/364C

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How could eBay leverage the joint venture to its success in China? What alternatives did eBay have for enhancing its strategic position in the Chinese market?

The Dotcom Bubble
The IPOs [initial public offerings] of internet companies emerged with ferocity and frequency, sweeping the nation up in euphoria. Investors were blindly grabbing every new issue without even looking at a business plan to find out, for example, how long the company would take before making a profit, if ever.8 The mid- to late 1990s saw the short life of scores of dotcom companies. Riding on the dotcom hype and eager to push their stock valuations up, many companies invested in the internet with the belief that it would generate handsome profits quickly and help them expand their businesses. The general sentiment at that time was that the internet was more than just a new market sector—it represented a whole new economy. 9 Billions of dollars in venture capital were made available to fund dotcom projects or start-ups of any entrepreneurs with a business idea, even before any sales were made.10 Every investor wanted to be the first one to enter the market and to lead the competition. Dotcom companies sprouted rapidly around the world and valuations of internet stocks soared.11 During the boom, the NASDAQ Composite12 continued to rise, peaking at 5,048.62 on 10 March 2000, after which a bear market set in.13 By May 2000, the NASDAQ had dropped 30% from its March peak. 14 Many dotcom companies closed down and the number of IPOs dwindled to 76 one year later, none of which doubled their stock prices on the first day of trading. By October 2003, the NASDAQ had fallen to 1,114.11, down 78% from its peak.15 The bubble had burst, signalling the end of the dotcom era. Causes for the Dotcom Crash [T]he dotcom boom and bust was a case of too much too fast. Companies that couldn’t decide on their corporate creed were given millions of dollars and told to grow to Microsoft size by tomorrow. 16 Several causes were accountable for the dotcom crash [see Exhibit 1]. The failure of many dotcom companies could be attributed to over- and unrealistic expectations about the internet, offering these companies immense and easy opportunities for wealth. Entrepreneurs were
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Investopedia (n.d.) “Crashes”, http://www.investopedia.com/features/crashes/crashes8.asp (accessed 17 May 2007). Verdin, M. (11 March 2002) “The Virtual Business Got Real”, BBC News Online, http://news.bbc.co.uk/2/hi/business/1849850.stm (accessed 7 May 2007). 10 Schifferes, S. (10 October 2006) “Has the dotcom boom returned?” BBC News Online, http://news.bbc.co.uk/go/pr/fr//2/hi/business/6036337.stm (accessed 14 May 2007). 11 Razi, M.A., Tarn, J.M. and Siddiqui, F.A. (2004) “Exploring the failure and success of DotComs”, Information Management & Computer Security, 12 (3), pp. 228–243. 12 NASDAQ stands for National Association of Securities Dealers Automated Quotations which is the stock market in the US. The NASDAQ Composite is widely recognised as an indicator of the performance of the stocks of technology and growth companies. It is a stock market index comprising of common stocks and similar securities (a total of over 3,000 components), all of which are listed on the NASDAQ stock market. The Index is not exclusively American since both US and non-US companies can be listed on NASDAQ. 13 ZDNet (2005) “From boom to bust and back again”, ZDNet.co.uk, http://www.news.zdnet.co.uk/internet/0,1000000097,39238833,00.htm (accessed 7 May 2007). 14 Elstorm, P. (25 February 2002) “How the Tech Boom Went Bust”, Business Week, Book review, http://www.businessweek.com/print/magazine/content/02_08/b3771039.htm?chan=mz (accessed 7 May 2007). 15 Investopedia (n.d.) op. cit. 16 Ibid.

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eager to jump on the bandwagon to snatch a share of what they believed to be a promising dotcom pie, even though many of them lacked experience in terms of strategic decisionmaking, business modelling, finance, marketing, distribution and inventory. Indeed, a lot of these entrepreneurs were computer programmers without any previous business experience and were not able to devise sound business strategies. As a result, many dotcom companies were operating on a poor business model. For instance, some of them offered free services and depended primarily on advertising for revenue, even though advertising should have been secondary, especially at a time when e-commerce was still quite new to many consumers. Also, over-optimism resulted in the mushrooming of dotcom companies, many of which were selling similar products or services, thereby intensifying the competition and reducing their chances of survival.17 Lack of product differentiation was another contributing factor. Many online retailers did not offer products or services that clearly distinguished themselves from traditional brick-nmortar18 or brick-n-click19 retailers or from other e-retailers. Thus, consumers hardly found any distinct advantage in their products or services—they did not have a competitive edge over their competitors. In an attempt to generate sufficient clientele to survive, such companies relied heavily on promotion and competitive pricing that had in turn increased their spending but lowered their profit margins, leading many to close down due to debts. Inadequate marketing and operational strategies had also led to the crash. With the belief that either they would be the first to make it or would not make it at all,20 dotcom companies tended to spend excessively to develop their infrastructure or to market their products or services. Poor financial management had therefore contributed to the failure of many dotcom companies. While the initial stock prices for most dotcom companies were very high during the dotcom frenzy, their return on investment was negative. Indeed, many dotcom companies were losing money or were far below the break-even point even before they paid their overhead costs [see Exhibit 2 and 3]. Vulnerability in their financial structures made it increasingly difficult for these companies to attract additional capital and thus they had to cease operations eventually. Other factors that explained the failure of many dotcom companies included: incompetent use or misuse of funds by managers; poor customer support and after-sales services; promotions launched without the backing of sound market research and intense competition from brick-nmortar companies. 21 Additionally, customers might not have been as enthusiastic about e-commerce as the entrepreneurs themselves. Technology and security standards of the internet were still at their infancy and consumers were wary about their personal data, such as credit card details, being abused by hackers or even by the e-retailers themselves.22 Issues of reliability and trust not only pertained to hackers, but also existed between buyers and sellers in terms of product/service quality, transactions (eg, whether orders would be received after payment) and delivery time etc.23 Other technical factors that contributed to the closedown of dotcom companies included: missed transactions due to web server interruptions, connection
17 18

Razi, M.A., Tarn, J.M. and Siddiqui, F.A. (2004) op. cit. Brick-n-mortar retailers refer to stores that are physically present in the real world. 19 Brick-n-click retailers are businesses that provide both online services and offline ones via traditional retail outlets. 20 Razi, M.A., Tarn, J.M. and Siddiqui, F.A. (2004) op. cit. 21 Ibid. 22 Atif, Y. (2002) “Building Trust in e-Commerce”, IEEE Internet Computing, pp. 18–24. 23 Wilson, S.G. and Abel, I. (2002) “So you want to get involved in E-commerce”, Industrial Marketing Management, 31 (2), pp. 85–94.

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problems or technical failures, and poor webpage design (eg, slow loading time, clumsy navigation, pop-up distractions, incompatibility with users’ computers etc). 24 In addition, disparity between customers’ expectations and actual performance of the companies in terms of delivery of products, among other things, coupled with the need to pay additional shipping and handling fees, contributed to the reduced interest in online purchases, particularly during the early stages of e-commerce when it was still a novel and unproven means of transaction for both customers and businesses. Due to their lack of experience, many e-retailers were too slow to respond to changes in demands or in the market. Nor had they set up adequate distribution channels to ensure products were delivered in a reasonable time period. Wrong delivery and the hassle thus caused––things like arrangement for redelivery and prolonged wait––explained why customers did not return. All the above reasons served to discourage consumers from purchasing online.

eBay Marketplaces25
Despite the failure of countless dotcom companies, a few survived. Indeed, they had prospered through the crash and even expanded globally. Companies like eBay were often cited as role models of success.26 Company Background and Development eBay is The World’s Online Marketplace, enabling trade on a local, national and international basis. With a diverse and passionate community of individuals and small businesses, eBay offers an online platform where millions of items are traded each day.27 Founded by Pierre Omidyar in his living room in San Jose, California in September 1995,28 eBay had been successful in offering a virtual trading platform to individuals. In 1996, the company recruited Stanford graduate Jeff Skoll to manage the business while Omidyar focused on technology. In June 1997, Benchmark Capital, a venture capital company, invested US$6.7 million in eBay for a 22% stake in the company.29 In 1998, Meg Whitman, a Harvard MBA graduate, was brought in as president and CEO for her expertise in global marketing, brand management and consumer technology experience earned from her previous roles in companies such as Hasbro, Disney, Bain & Company, and Proctor & Gamble.30 She then invited her former staff to join her, including Howard Schultz (CEO of Starbucks) and Scott Cook (chairman of Intuit) and formed a management team that had 20 years of business experience on average. Whitman also helped push forward eBay’s public listing (NASDAQ: EBAY). On 24 September 1998, eBay launched its IPO, offering 4.025 million shares at US$18 per share and closing at US$47 per share.31 The IPO helped raise US$66 million for eBay.32
Razi, M.A., Tarn, J.M. and Siddiqui, F.A. (2004) op. cit. eBay Marketplaces consisted of eBay.com (core platform), Shopping.com, Rent.com as well as classified websites like Kijiji, Gumtree.com, LoQUo.com, Intoko, Marktplaats.nl, mobile.de and craigslist.com. The focus of this case will be on eBay.com only. Source: eBay (2006) “Annual Report”. 26 Other examples were Yahoo! and Amazon. 27 See eBay’s worldwide website: http://www.ebay.com/. 28 eBay was incorporated in May 1996 in California and re-incorporated in April 1998 in Delaware. 29 Rivlin, G. (23 August 2004) “Google Is One for the Books, Leaving Some with Regrets”, New York Times, http://query.nytimes.com/gst/fullpage.html?res=9907E2D8173EF930A1575BC0A9629C8B63&sec=technology&spon=&pagew anted=print (accessed 28 May 2007). 30 See eBay Worldwide’s website: http://www.ebay.com/. 31 eBay (1998) Annual Report. 32 Ibid.
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Despite starting small, eBay developed rapidly [see Exhibit 4 for eBay’s global net revenues] and was one of the few dotcom companies that became profitable after just one month of operations. 33 It had successfully evolved from a trading place for collectibles to a vibrant community where almost anything could be traded and had become a mainstream shopping destination for many. Millions of items in a wide variety of categories were listed for sale on any given day [see Exhibit 5 and 6]. eBay’s Growth and Global Expansion We will continue to grow our core Marketplaces business by enhancing our products, improving Trust and Safety and extending our product offerings into new formats, categories and geographies. Our product enhancements are focused on improving the user experience to increase buyer satisfaction and activity levels which we believe will improve our conversion rates and, in turn, lead to higher [gross merchandise volume].34 Throughout its history, eBay had adopted various expansion strategies, both locally in the US and globally in new international markets, all of which were designed under the overarching goal of localisation, achieved through the following methods [see Exhibit 7]: • • • • Building new user communities solely through internal efforts by launching regional sites in the US or localised, global sites, all of which were managed by local management teams and supported by grassroots and online marketing programs Acquisitions Alliances Joint ventures.

eBay’s international operations became profitable in the fourth quarter of 2001, after which they became more significant for eBay’s business in general. In 2001, international markets accounted for 18% of the company’s total net revenues––more than a two-fold increase from 7% in 2000.35 Nevertheless, eBay’s global expansion plan was not without obstacles. In 2002, the company had to retreat from the Japanese market because of competition from Yahoo, which had only entered Japan five months ahead of eBay but had since taken over the market.36 By 2006, eBay had expanded into 35 global markets across North and Latin America, Europe, and Asia Pacific [see Exhibit 8 and 9], with 27 international sites while the rest were affiliated websites launched in Latin America through investments in MercadoLibre––a Latin American online auction site.37 By 2006, eBay had 221.6 million registered users worldwide38 [see Exhibit 10]. Its net revenues were US$2.2 billion domestically and US$2.1 billion internationally; the latter amounted to 49% of the aggregate net revenues for eBay

Innovate (April 2006) “eBay: The Global Electronic Souk”, http://www.korekalibre.com/index.php?option=com_magazine&task=show_magazine_article&magazine_id=11 (accessed 31 May 2007). 34 eBay (2006) Annual Report. 35 eBay (2001) Annual Report. 36 Schonfeld, E. (1 January 2005) “The World According to eBay”, CNN.com, http://money.cnn.com/magazines/business2/business2_archive/2005/01/01/8250238/index.htm (accessed 28 May 2007). 37 See eBay Worldwide’s corporate website: http://www.ebay.com/. 38 The number referred to total registered users, some of whom might not be actively involved in trading on eBay. Source: eBay (2006) Annual Report.

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marketplaces [see Exhibit 11].39 By the end of 2006, eBay was boasting 14% market share in the e-commerce market globally.40 Business Model and Product/Service Offerings [L]arge markets with broad buyer and seller bases, wide product ranges, and moderate shipping costs have been successful on our Marketplaces platforms. Generally speaking, our marketplaces are [the] most effective, relative to available alternatives, at addressing markets of new and scarce goods, endof-life products and used and vintage items.41 Through eBay, sellers could list products or services for sale while buyers could browse through these items and bid on those that interested them [see Exhibit 12 and 13]. All this was done without eBay’s mediation. The company only informed the seller and the successful bidder by e-mail when a bid exceeded the seller’s reserve price (ie, minimum price at which the seller was willing to sell) or at the end of the auction period. 42 At no point in the transaction did eBay take possession of the items being sold or handle the exchange of goods or services, nor did it authenticate them.43 Unlike traditional auction houses which acted as agents for the sellers and thus were responsible for helping the latter obtain the best prices, eBay only facilitated person-to-person transactions between buyers and sellers—customer-tocustomer (“C2C”) e-commerce.44 Hence, the binding contract was between the seller and the winning bidder while eBay assumed no liability for the sale, thereby reducing its business risks tremendously. Risks and costs were further reduced because eBay did not need to invest in inventory since the items auctioned on the site remained the property of the sellers. 45 Another advantage for eBay was that the number of transactions it could handle at any given moment could be infinite, due to its online nature, whereas traditional auction houses were limited by staff and space constraints (eg, availability of auction rooms).46 In order to trade on eBay, sellers were charged an Insertion Fee when they listed an item for sale. This was non-refundable and ranged from US$0.30 to US$3.30, depending on the opening bid. Sellers could opt for additional features, such as highlight or bolded font, to promote their items for which an Optional Features Fee was added. Once they successfully sold an item, they also needed to pay a percentage of the final selling price to eBay (Final Value Fee), generally ranging from 1.25% to 5%. According to eBay, such fees were still lower than traditional intermediaries. On the other hand, services were offered free to buyers, unlike traditional auction houses.47

Devitt, S. (20 April 2006) “Sell-Side Reaction to eBay Earnings”, SeekingAlpha, http://internet.seekingalpha.com/article/9257 (accessed 3 June 2007). Ibid. 41 eBay (2006) Annual Report. 42 Sellers who had reached certain feedback ratings might also sell in a “Multiple Item Auction” format whereby they could sell more than one identical item to the highest bidders. 43 The only control eBay had over the items put up for sale was in terms of their legitimacy. For instance, illegal items such as pirated CDs or copied designer bags were prohibited. 44 According to iResearch Consulting Group, a C2C e-commerce business model refers to an online transaction mode whereby buyers and sellers, who are mainly individuals, gather and trade independently, although some rules may be applied. In a typical C2C marketplace, countless participants congregate at an online platform that covers a potentially infinite range of items in limitless quantities and bid or bargain in a flexible manner. 45 Innovate (April 2006) “eBay: The Global Electronic Souk”, http://www.korekalibre.com/index.php?option=com_magazine&task=show_magazine_article&magazine_id=11 (accessed 31 May 2007). 46 eBay (2006) Annual Report. 47 Bjornsson, M. (2001) “eBay: A Concise Analysis”, http://www.cs.brandeis.edu/~magnus/ief248a/eBay/ (accessed 3 May 2007).
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Additionally, items could be listed and traded on a fixed-price basis through the Buy-It-Now feature or eBay Express, allowing for a speedier selling and buying experience since transactions could be completed without waiting for the auction period to expire.48 In addition, eBay Stores were also available where sellers could run their own online businesses by listing items on customised pages at a lower insertion but higher final value fee than regular auction or fixed-price listings, for a minimum 30-day listing period.49 Customer Services and Support Our goal is to create, maintain, and expand the functionality, safety, ease-ofuse and reliability of our online commerce platforms while, at the same time, supporting the growth and success of our community of users.50 eBay was devoted to efficient, effective and personalised customer support through various channels including e-mail, online text chat or, in some cases, telephone, in addition to online self help features. Not only did it provide an online trading platform for its global community, it also allowed for efficient exchange of information among buyers and sellers. In order to enhance user experience, eBay offered announcement and bulletin boards, customer support boards, and personal pages as well as forums that allowed for topical or category-specific information exchanges, among others. Moreover, value-added tools and services were also available, either directly or through contractual arrangements with third parties. These included the following: Personal Shopper provided potential buyers with e-mail alerts once an item in a certain category that might be of interest to them was listed; Turbo Lister, eBay Blackthorne, ProStores, Selling Manager and Selling Manager Pro automated the selling process; Picture Services allowed users to post pictures to the listings; Shipping Calculator calculated shipping costs; Shipping Labels were used to print certain postage and UPS labels; Shipment Tracking tracked shipped packages; and PayPal facilitated the secured exchange of funds online. The company also sought to create a level playing field for all buyers and sellers through the consistent application of policies to ensure fair trading for everyone. Because of the anonymous nature of the internet, eBay users were able to hide or even fake an identity. Trading on eBay also meant that there would inevitably be some delay between payment and reception of the items purchased. The company understood that trust played a significant role and thus introduced the Feedback Forums whereby both parties were encouraged to submit ratings and comments on each other in terms of product quality, order processing, delivery and payment etc at the end of their transaction, which would then be posted to their respective public trading profiles. These would allow other users to assess the trustworthiness of potential trading partners. Other features that enhanced safety on eBay and trust among its users included Verified Rights Owner (“VeRO”) Program and SafeHabor Program. While VeRO51 served to protect buyers from purchasing counterfeit products, SafeHabor52 ensured a harmonious environment for eBay users and provided guidelines for trading.

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Buy-It-Now was available for sellers who had appropriate feedback ratings through which they could set a price at the time of listing an item at which a buyer could just make a purchase on a first-come-first-serve basis. In 2006, fixed priced trading accounted for around 36% of eBay’s gross merchandise volume. Source: eBay (2006) Annual Report. 49 In 2006, the number of eBay stores had reached 600,000 globally. 50 eBay (2006) Annual Report. 51 Nevertheless, VeRO was a reactive system which required intellectual property right owners to make removal requests for listings of items that violated their rights. 52 Guidelines were provided with regards to dispute resolution. eBay’s staff would also investigate complaints of possible abuse of eBay services regarding manipulation of bids, malicious posts on Feedback Forums and listing of illegal items for sale, and take actions accordingly in the form of warnings, removal of the listings in question or suspending users from buying or selling on eBay etc.

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The Chinese Online C2C Market
It is not difficult, at face value, to see what is driving Western interest in China’s internet sector. China’s heady economic growth continues to dazzle investors of all shapes and sizes. Its manufacturing-led boom and gradual integration into the global trading community is creating potentially vast opportunities for foreign companies. The internet is at the forefront of this socalled ‘gold rush’. Growing prosperity, technological advances and a more liberal attitude by the Chinese authorities means the internet is becoming an easier and more popular place to do business. 53 China had also caught on to the popularity of e-commerce. As more and more Chinese consumers had access to the internet and began to buy online, the potential of e-commerce in China became immense. In 2002, the population of Chinese internet users was, although small compared to the US, around 59.1 million, representing a 4.6% penetration rate.54 This was almost a two-fold increase from its 2.6% level in 2001 [see Exhibit 14 and 15]. The internet usage penetration rate continued to double in 2003 to 6.2%, amounting to 80 million users. Among these users, 8% had shopped online during fiscal year 2002 as well as 2003.55 The amount spent on C2C e-commerce was US$106.3 million, US$144.9 million and US$471 million from 2002 to 2004, respectively. 56 , 57 , 58 By 2006, China already had 137 million internet users or had a 10.5% penetration rate59––about 43.1 million (31.5%) of them shopped online.60 By the end of the year, transactions from C2C e-commerce had reached US$2.9 billion [see Exhibit 16].61 iResearch Consulting Group predicted that between 2006 and 2010, there would be a steeper increase in the number of users and transactions made on C2C online marketplaces in China, and competition would also become more fierce. As more and better services became available, fees would inevitably be charged on some––a free lunch would not be possible in the long term. A variety of e-commerce models––business-to-business (“B2B”), business-toconsumer (“B2C”) and C2C––would be integrated in order to offer consumers a seamless and comprehensive online shopping experience. In addition, the emerging internationalisation trend would become more distinct.62

Stamp, G. (11 August 2005) “All roads lead east for web firms”, BBC News, http://news.bbc.co.uk/go/pr/fr//2/hi/business/4141550.stm (accessed 3 May 2007). 54 The International Telecommunication Union estimated that in 2002, internet usage penetration was approximately 58% in the US—up from 50% the year before. 55 eBay’s fiscal year starts on 1 January and ends on 31 December. 56 CIA, The World Factbook: China, 2001–2004. 57 iResearch Consulting Group (2004) “China Online Shopping Research Report 2004”. 58 Xinhua News Agency (1 February 2007) “Internet Use in China Jumps By Almost 25 Pct in 2006”, China Market Information Center, http://chinamarket.ccidnet.com/pub/article/c1834_a140171_p1.html (accessed 3 May 2007). 59 Lee, S. (16 January 2007) “Mainland Net users at 130m as revenue tops 276b yuan”, Hong Kong Standard. 60 Xinhua News Agency (1 February 2007) “Internet Use in China Jumps by Almost 25 Pct in 2006”, China Market Information Center, http://chinamarket.ccidnet.com/pub/article/c1834_a140171_p1.html (accessed 3 May 2007). 61 Analysys International (7 March 2007) “Analysys International Says Taobao, eBay and Paipai Rank Top 3 in China C2C Market in Q4, 2006”, http://english.analysys.com.cn/3class/detail.php?id=267&name=report&FocusAreaTitleGB=&daohang=Internet&title=Analysys %20International%20Says%20Taobao,%20Ebay%20and%20Paipai%20Ranks%20Top%203%20in%20China (accessed 4 June 2007). 62 iResearch Consulting Group (2005) “China C2C ECommerce Research Report 2005”.

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eBay’s Development in China
International expansion has become an important driver of our growth. We are confident that the international business can deliver even greater profitability as our newer operations in Europe begin to show accelerating growth and opportunities for generating revenues. Following our proven strategy in Germany, we plan to expand categories, trading formats and services in each market to help local trade flourish. And our recent acquisition in Taiwan and investment in China will allow us to extend our marketplace into thriving new e-commerce markets in Asia.63 eBay adopted a gradual and cautious expansion strategy for China. While confident of the potential of the Chinese market with its 250-million-strong emerging middle class,64 eBay was also aware of the risks and constraints posed by slow internet speeds, high internet access costs, imbalanced economic and technological development in different regions of China, the absence of a reliable credit system for online payment, government regulations65 and other factors like corruption, currency problems as well as lack of transparency and an adequate legal system to protect the interests of both the company and its customers.66 The company first tested the water by investing a minority stake in domestic online auction company EachNet in 2002 before its full entry in 2003. This was unlike its usual full-forced, head-on, “be-first-or-nothing” strategy in other markets. EachNet Founded in 1999 by Tan Haiyin and Shao Yibo, Meg Whitman’s alumnus at Harvard Business School, EachNet was China’s first online auction website. 67 The Shanghai-based company originally set out to imitate what would eventually become its acquirer four years later, US giant eBay, and provided a Chinese-language trading platform. It mainly catered to the 1.23 billion people68 in mainland China and to the Greater Chinese community around the world. Equipped with rich business knowledge, strong domestic and international experience, and well-thought business strategies, EachNet was able to win financial backing from several large venture capital companies in the US––Vantone International, International Data Group, Amazon and Microsoft.69 Other early investors included Whitney & Co., AsiaTech Ventures Limited and Orchid Asia Holdings.70 While the company was still in its infancy, internet penetration was low in China (0.07% or 8.9 million users in 1999, later increased to 0.2% or 22.5 million in 2000).71 Therefore, the majority of EachNet’s users––the early adopters––were hard-core computer fanatics who followed technology trends closely, and items listed on EachNet were mostly computers, peripherals or computer-related accessories. The limited range of auction items could also be
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eBay (2001) Annual Report. Rein, S. (14 February 2007) “eBay’s Online Deal: Timely Lessons for Global Online Company Managers”, SeekingAlpha, http://china.seekingalpha.com/article/27041 (accessed 3 May 2007). 65 Zhao, H.X. (2002) “Rapid Internet Development in China: A Discussion of Opportunities and Constraints on Future Growth”, Thunderbird International Business Review, 44 (1), pp. 119–138. 66 Rein, S. (14 February 2007) op. cit. 67 Mulligan, W. (24 July 2006) “Online Auction Market in China: eBay/EachNet vs. Yahoo!/TaoBao”, SeekingAlpha, http://china.seekingalpha.com/article/14162/ (accessed 4 June 2007). 68 This figure pertained to the year 1999. The population in China had since grown to 1.3 billion. 69 Zhao, H.X. (2002) op. cit. 70 Denlinger, P. (13 June 2003) “eBay Buys out EachNet”, China Business Strategy, http://www.chinaready.com/news/eBayBuysOutEachNet061303.htm (accessed 6 June 2007). 71 China Securities Bulletin (20 January 2000) “China Internet users said up 14-fold in two years”.

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attributed to the fact that in China, retailing was more like a combat between retailers and customers who would haggle over almost anything in order to get the best deal, and the best usually meant the lowest price they could have. Thus, an auction-selling format where prices only went up might have seemed bizarre to most Chinese consumers. EachNet managed to overcome the initial hurdles and expanded dramatically. Sound business and operational strategies as well as sufficient start-up capital made it successful. Even though the auction-selling format might have discouraged some consumers from shopping on EachNet, it enabled others to shop in the comfort of their own home––a convenient option seldom offered by other Chinese retailers at that time. Shopping in China is done mostly at the thousands of mom-and-pop stores that line dusty rural streets and Shanghai alleyways rather than in vast shopping malls common to the US. While Shanghai does have fashionable malls with clothing and cosmetics boutiques, these tend to be in trendy, touristy areas. There are few general merchandise stores like Wal-Mart.72 Despite EachNet’s attempt to become the Chinese equivalent of eBay, it was not a copycat of the latter. The company was sensitive to the differences between Chinese and US markets. It modified the eBay model to accommodate certain aspects that were unique to the Chinese market, such as payment systems, demographics and consumer behaviour, while retaining those that might work in China. For example, EachNet users could meet face-to-face for payment and exchange of goods since the majority of the population did not have a credit card. There was also a lack of other means of e-payment and thus cash became the only option for most users. Other features of the eBay model that EachNet adopted were the fixedprice trading option as well as feedback forums.73 By February 2000, just six months after its start, EachNet had over 220,000 registered users simultaneously holding more than 20,000 auctions each day on a wide range of items, from clothing to musical instruments. Its gross transaction value exceeded US$12 million, claiming more than 50% market share.74 By 2002, EachNet had become the only significant player in the online auction market in China. eBay’s Acquisition of EachNet EachNet soon attracted eBay’s attention and it invested US$30 million in March 2002 for a 33% interest, as part of its pilot expansion strategy in the Chinese online auction market––its second Asian destination after Japan. 75 The acquisition proved to be a success. By 2003, EachNet had already commanded 85% market share. Its value76 had grown almost two and a half times, from US$90 million in 200277 to US$225 million in 2003, and its revenues were recorded at US$1.8 million––equivalent to a ten-fold annual growth rate. In June 2003, eBay acquired the remaining 67% stake for US$150 million78 and the company was re-branded as eBay EachNet.79

72 73

Fannin, R. (September 2003) “The eBay of China: Eachnet: a Shanghai online auction firm set out to imitate eBay. In June, eBay bought it", The Chief Executive, http://findarticles.com/p/articles/mi_m4070/is_191/ai_109669776 (accessed 6 June 2007). Fannin, R. (September 2003) op. cit. 74 Zhao, H.X. (2002) op. cit. 75 eBay (2002) Annual Report. 76 The figures were calculated based on transaction value and total company valuation. 77 Denlinger, P. (13 June 2003) op. cit. 78 eBay Annual Report (2003). 79 Fannin, R. (September 2003) op. cit.

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eBay EachNet’s performance was remarkable in the next few years. In order to capture users, the company formed alliances with the top three Chinese internet portals––Sina, Sohu and NetEase––as well as other leading vertical websites, such as Shanda––the biggest online game operator in China. By the end of 2003, the number of registered users on EachNet had reached 4.3 million, amounting to nearly a 95% increase from its 2000 level.80 eBay EachNet was also the largest online advertiser in China.81 In 2005, much of the US$100 million investment injected into its Chinese operations went towards promoting the company in the form of online advertisements, television commercials and other promotional campaigns. For instance, registered users in Shanghai received a free hour at many popular karaoke pubs in Shanghai. According to JP Morgan, the company single-handedly snapped up 4% of the total spending on online advertising in 2006—an equivalent of US$25 million.82 Competition in the Chinese Online Auction Market eBay EachNet soon faced the obstacle of increasing competition from local market rivals. Just like its search-engine counterpart, Google, lost out to domestic competitor, Baidu, eBay EachNet did not escape the fate of seeing its market position encroached by domestic competitors, the most significant of which was TaoBao—a subsidiary of Alibaba. By the end of 2006, eBay EachNet had seen its market share declining each year, until it had only a staggering 29%, compared to TaoBao’s 60%.83 By then, eBay EachNet had already invested a total of US$300 million into the Chinese market. 84

Alibaba
Alibaba was originally founded in 1999 by an English teacher, Jack Ma, as an online B2B marketplace to help companies world-wide to find suppliers in China. Within the next few years it grew rapidly to become the leading player in the Chinese market and claimed to own the largest B2B e-commerce site—Alibaba.com. 85 Its appeal could be attributed to the efficiency and trustworthiness of its platform, facilitating e-commerce between buyers and sellers around the world, and was evidenced by its ability to seek financial backing from companies like Goldman Sachs, Fidelity and Softbank. 86 In August 2005, Alibaba successfully formed a strategic partnership with Yahoo!, giving the latter 40% interest in Alibaba with 35% voting rights, thereby making it the largest strategic investor in Alibaba.87 This partnership also resulted in TaoBao becoming a wholly owned subsidiary of Alibaba.88 By 2006, Alibaba had approximately 20 million registered users, spanning more than 200 countries and regions globally. In terms of small- and medium-sized business users, over 10 million were using Alibaba for B2B marketing or sales.89
80

China Daily (9 May 2005) “Keeping challengers at bay”, http://www.chinadaily.com.cn/english/doc/200505/09/content_440384.htm (accessed 5 June 2007). 81 So, S. (23 April 2007) “EBay to cut advertising after Tom Online link”, South China Morning Post. 82 Powell, B. and Ressner, J. (22 August 2005) “Why eBay Must Win in China”, Time, http://www.time.com/time/magazine/article/0,9171,501050829-1096554,00.html (accessed 15 August 2007). 83 Analysys International (30 March 2007) “eBay's Market Share of Chinese C2C Transactions Reaches 29% in Q4 2006”, International Marketing NewsWatch, http://www.imnewswatch.com/archives/2007/03/ebays_market_sh.html?visitFrom=1 (accessed 5 June 2007). 84 Rein, S. (14 February 2007) op. cit. 85 While its main site—Alibaba.com—catered to overseas buyers, its domestic site—Alibaba.com.cn—was devoted to in-China trade. 86 See Alibaba Group’s website: http://www.alibaba.com. 87 ChinaTechNews.com (24 October 2005) “Yahoo! Completes Strategic Partnership with Alibaba.com”, http://www.chinatechnews.com/2005/10/24/2900-yahoo-completes-strategic-partnership-with-alibabacom/ (accessed 15 August 2007). 88 On 11 August 2005, Yahoo! announced that it would acquire 40% interest in Alibaba with US$640 million in cash, Yahoo! China’s as well as TaoBao’s shares which it purchased from Softbank. The deal thus gave Alibaba exclusive ownership of TaoBao. Source: Song, B.Q. and Sun, L.B (25 September 2006) “Yahoo! Defeats China”, IT Time Weekly, http://tech.sina.com.cn/i/2006-09-25/19001158444.shtml (accessed 15 August 2007). (Note: Original article in Chinese.) 89 See Alibaba group’s website: http://www.alibaba.com.

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TaoBao
Established in May 2003, TaoBao soon gained the hearts of Chinese consumers and beat eBay EachNet in China’s C2C online auction market. Its service offerings were later extended to include B2C e-commerce. By 2006, the company had become the leading C2C and B2C marketplace in China with a gross merchandise volume90 of US$2.1 billion, amounting to a 110% increase from 2005.91

eBay EachNet eBay EachNet began charging listing and final selling fees after eBay’s full acquisition of EachNet in 2003.92 TaoBao, on the other hand, offered free services. Although this seemed to be the reason for consumers’ preference for TaoBao, China Market Research Group found that fees were not the main reason for their switch since they were willing to purchase from retailers that they found worthwhile to do so from.93 Chinese consumers preferred to buy from big-named, foreign companies which had a longestablished presence in China and tended to hold those that were new in distrust. However, given a choice between a new foreign company and a domestic one, they would opt for the latter.94 Trust was particularly important in China, due to the lack of an adequate legal system or other formal means of dispute resolution. Since trust was normally nurtured over time, eBay fared worse than its rival TaoBao despite an earlier start (first as EachNet in 1999, followed by its acquisition by eBay in 2002 and 2003, and then re-branded as eBay EachNet in 2003), a Chinese origin and its popularity (gained earlier as EachNet). The problem was that eBay, as a foreign company founded in 1995 with less than ten years of history when it first set foot in the Chinese market in 2002, was fairly new to Chinese consumers. On the other hand, TaoBao, albeit founded much later than eBay, was a subsidiary of Alibaba which had a more established presence in China.95 The fact that Chinese consumers felt that eBay EachNet had not made much effort in building trust both towards the company itself and between buyers and sellers further exacerbated the problem. Dwight Perkins, professor of economics at Harvard University and former director of Harvard’s Asia Center, commented that “Companies need to provide security every step of the way during a sales transaction to ensure that consumers feel comfortable making their purchases. eBay failed to do this when [it] first entered China.”96 When eBay entered China, it did not incorporate an escrow into its online payment system––PayPal. TaoBao, on the other hand, made it an important component of its AliPay system. An escrow helped ease consumers’ concern by introducing third-party monitoring throughout the transaction process. In this way buyers felt confident about paying and only released the funds after they received their purchase in good order while sellers were assured that they would be paid as long as they fulfilled their obligations. Although eBay EachNet introduced an escrow later, it was not able to regain its lost market share. Paypal made the whole process nerve-wracking!97
- TaoBao customer (Female, 22)

90 91

Gross merchandise value refers to transaction volume. See Alibaba Group’s website: http://www.alibaba.com. 92 eBay EachNet removed its listing fee in early 2006 in order to stay competitive. 93 Rein, S. (14 February 2007) op. cit. 94 Ibid. 95 Later in 2005, Alibaba formed an alliance with Yahoo! China. 96 Rein, S. (14 February 2007) op. cit. 97 Ibid.

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While eBay EachNet did not initially allow direct interaction between buyers and sellers until a sale had been confirmed, TaoBao enabled them to communicate directly and haggle over prices in real time, which helped in building trust between both parties. I like to be able to haggle directly with the seller when I buy DVDs. It makes the process go more smoothly as I build up relationships with the sellers. So I have switched from eBay to TaoBao now. 98
- TaoBao customer (Male, 18)

Poor customer service also contributed to eBay EachNet’s flagging business in China. In a survey on young Chinese consumers conducted by the Chinese Market Research Group, respondents cited the lack of a customer service hotline on eBay EachNet as one of the reasons why they had switched to TaoBao. Other TaoBao features that had appealed to them were its AliPay and instant messaging systems. Nevertheless, respondents overwhelmingly agreed that eBay EachNet did a better job than TaoBao in monitoring and protecting its users from purchasing counterfeit items from its site.99 Furthermore, decision-making at eBay EachNet became centralised, even for matters such as office expansion, leading to inflexibility and a lag in response to the ever-changing Chinese market.100 In a study conducted by the China Market Research Group, interviews with former EachNet and eBay EachNet executives revealed that senior management had not felt respected by their US headquarters, which had not given them enough autonomy and had directed them from afar instead. This sentiment had been particularly acute among the original EachNet management team who had felt that their American colleagues were looking down on them such that former EachNet executives, including CEO Shao Yibo, had left in droves after the acquisition in 2003.101 Arrogance eventually contributed to eBay’s failure in its China efforts. One problem is that some executives at headquarters do not know [much about] what is going on in China They only have experience in mature markets where a rule of law exists, so when they see management in China localizing and modifying corporate practices, they get upset. 102
- Professor Juan Fernande, China-Europe International Business School

Like many of its predecessors, eBay entered China with the assumption that its brand image in the US as an industry leader would transfer to the Chinese market without any modification. eBay had done a good job in localising its websites—creating market-specific websites in local languages and currencies and providing location-specific information, among other things—and it attempted to protect its brand image worldwide. Although this strategy might have worked in some markets, the company’s loss of market share to TaoBao proved its inapplicability in China.103 It was possible to attribute online traffic to a brand’s goodwill––a hard-won value based on trust among customers and business partners that a company nurtured over time. A company
98 99

Ibid. Rein, S. (26 October 2006) “EBay Faces a Tough Road in China”, SeekingAlpha, http://china.seekingalpha.com/article/19322 (accessed 5 June 2007). 100 The fact that eBay EachNet had moved its server to its US headquarters exacerbated the problem. 101 Rein, S. (14 February 2007) op. cit. 102 Fernandez, J.A. and Underwood, Laurie (2006) China CEO: Voices of Experience from 20 International Business Leaders, Wiley: USA. 103 Rosenlund, D. (4 November 2005) “E-Commerce Companies Must Globalize to Thrive”, E-Commerce Times, http://www.ecommercetimes.com/story/46841.html (accessed 7 June 2007).

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had to ensure correct and consistent representation of its brand attributes across its target markets. But at the same time, it also had to adapt the brand to each market if necessary while taking care to avoid inconsistencies in the underlying brand message. 104 eBay applied its American model to China and used a similarly simple interface, which was different to other local websites that were loaded with information, links, graphics, banners and multimedia. eBay EachNet’s website was therefore considered “too empty” by Chinese consumers. In applying a consistent brand image to its Chinese market, eBay EachNet emphasised automation throughout the auction and transaction processes. Thus, instead of a customer service or technical support hotline, eBay EachNet provided topic-specific guidelines and links to Frequently Answered Questions, both of which were meant for self help. It also provided users’ community bulletins/forums to enable users to help each other if they could not resolve their problems by themselves. This was considered bad service by consumers in China where do-it-yourself was not as popular as in Western countries. TOM Online Founded in 2000 as an internet portal, TOM Online became one of the largest wireless service providers and the fifth-largest internet portal in China. The Beijing-based company was listed in March 2004 in the US (NASDAQ:TOMO) and in Hong Kong (HKGEM:8282). Its shareholders included Tom Group and Hutchison, both led by Hong Kong tycoon Li KaShing who was ranked as one of the top-ten richest men in the world by Forbes magazine.105 Tom Online provided value-added multimedia products and services primarily to young and trendy consumers in mainland China. These included: Wireless services: • Short Messaging Service (SMS) • Multimedia Messaging Service (MMS) • Wireless Application Protocol (WAP) • Wireless Interactive Voice Response • Colour Ring-Back Tones • Other value-added services (eg, news subscription, mobile e-mail/games, ring tones etc). Internet services: • Content channels (eg, entertainment, music and sports) • Search and classified information • Free/fee-based advanced e-mails • Free/fee-based online games • Online advertising • E-commerce. While its wireless services were provided through mobile telecommunication operators; alliances with mobile handset manufacturers like Motorola, Nokia etc; and through traditional media (eg, television, radio and print media), its internet services were offered through its own online portal––tom.com––and alliances with other internet portals. In November 2004, TOM Online entered into an alliance with Skype to co-develop a customised, simplified Chinese version of Skype. The co-branded software had attracted more than 3.1 million registered users, making China one of Skype’s top three markets. In
104 105

Ibid. Forbes (2006) “The World’s Richest People”, http://www.forbes.com/lists/2006/10/Worth_1.html (accessed 11 June 2007); Lau, D. (22 January 2001) “Forbes Faces: Li Ka-shing”, Forbes, http://www.forbes.com/2001/01/22//0122faces.html (accessed 12 June 2007).

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September 2005, TOM Online enhanced its partnership with Skype with a joint venture, enabling it to expand into the internet communication sector.106 The company hoped that the joint venture would allow it to develop its mobile internet platforms further by leveraging its expertise in mobile technology and Skype’s expertise in internet communication.107 Nevertheless, despite its strategic partnership with Skype, almost 89% of its revenues came from value-added mobile phone services.108 Such a heavy dependence without being a mobile telecommunication provider posed immense risks for the company. For example, in July 2006, China Mobile and China Unicom, through which TOM Online provided its mobile services, were ordered by the Chinese government to contact all their customers to ascertain they wished to have such services. The company’s profits in the third quarter plunged 59% to US$5.28 million compared to a year earlier, while its revenues fell by 15.2% to US$38.95 million.109 The Joint Venture: TOM EachNet The joint venture will provide an enhanced user experience, tailored for the China market, and will capitalize on our companies’ strengths in the emerging e-commerce sector. 110
- Wang Leilei, CEO of TOM Online

In December 2006, eBay and TOM Online announced a joint venture of which eBay would have 49% ownership while TOM Online would have 51%. In addition to eBay EachNet being transferred to a new platform launched in 2007,111 eBay would inject another US$40 million cash into the joint venture which would be renamed TOM EachNet112––a clear indication of eBay’s decision to step down from the forefront of the online auction battle, although a less drastic move compared to its complete retreat from Japan in 2002. TOM Online, on the other hand, would invest US$20 million and contribute its local knowledge, technology and brand value to the joint venture.113 Besides pooling resources and expertise, both parties could also benefit through diversifications. On the one hand, eBay would be able to venture into the mcommerce—mobile commerce or the ability to conduct commerce with a mobile device such as mobile phones or PDA etc—sector in China where TOM Online had been a market leader; on the other, TOM Online could expand into online auction and divert itself from its reliance on mobile value-added services for revenues. eBay intended to save its flagging business in China through the joint venture and to regain its lost market share from local rivals because the partnership would allow the company to take advantage of TOM Online’s political networks in China. For example, TOM Online had the
106

Skype (12 September 2005) “eBay to Acquire Skype”, Press Release, http://www.skype.com/company/news/2005/skype_ebay.html (accessed 20 June 2007). 107 Skype (5 September 2005) “Tom Online, Skype Announce Joint Venture in China”, Press Release, http://about.skype.com/2005/09/tom_online_skype_announce_join.html (accessed 20 June 2007). 108 Total revenues for 2006 were US$168.37 million. Source: TOM Online Press Release. 109 Bradsher, K. (22 December 2006) “With TOM Online, eBay gains Chinese clout”, International Herald Tribune, http://www.iht.com/articles/2006/12/21/business/ebay.php (accessed 7 June 2007). 110 Rein, S. (14 February 2007) op. cit. 111 ebay.com.cn would be retained for international transactions only. 112 According to TOM Online’s CEO, Wang Leilei, TOM EachNet would seek a new online auction model from eBay EachNet. Rather than focusing on gaining market share, the joint venture would aim to make profits. According to Wang, a profit-oriented strategy would help TOM EachNet move beyond competitions and help co-operate with domestic market rivals (in China) in foreign markets where the latter clearly had a competitive advantage. In other words, this would open up opportunities for TOM EachNet to form profitable strategic partnerships with what would otherwise be their competitors. Wang expected TOM Eachnet to become profitable by 2009 or 2010. Source: Xinhua News Agency (25 December 2006) “TOM Online CEO: urrent arket hare of nline uction eans ittle”, Xinhua Electronic News, http://global.factiva.com/ (accessed 1 June 2007). 113 Rein, S. (14 February 2007) op. cit.

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backing of pro-China Li Ka-shing––the biggest shareholder of the company––who was known for his connections with high-ranking officials both in China and in Hong Kong. For example, there were rumours that the late Deng Xiaoping once sought advice from Li regarding Hong Kong’s future. Li was also known to be on friendly terms with Jiang Zemin (former president of China), Li Peng (former premier of China) and Tung Chee-hwa (former chief executive of Hong Kong). Another significant player in TOM Online, Wang Leilei (CEO), was the grandson of a Chinese general. Such connections would be useful especially in China where guanxi114 was considered by some to be tantamount to doing business.115

eBay’s Future in China eBay’s decision to form a joint venture with TOM Online indicated a clear change in strategy for its Chinese market. In particular, the abandoning of the eBay brand suggested a partial retreat from China. However, Whitman disagreed. Re-branding the auction site as TOM EachNet was based on market research which found a stronger recognition of domestic Chinese brands, such as TOM and EachNet, than of foreign brands like eBay, especially while the latter was still fairly new, even in the US, and had not established a strong presence in China. Whitman expected the Chinese market to become a very significant part of eBay’s business by 2010–2015.116 On the other hand, competitors would not slow down. According to press reports, TaoBao, eBay’s major market rival to which it had lost much of its market share in China, would continue to invest capital and manpower to boost its business. TaoBao sought to acquire even more customers, and thereby market share, by connecting with consumers more closely and addressing their needs.117 Moreover, its parent company, Alibaba, also announced in October 2007 that it would spend much of the proceeds from its IPO in Hong Kong, which could help raise up to US$1.5 billion,118 on its affiliates—including TaoBao.119 It remained to be seen whether the joint venture with Tom Online would help eBay regain its lost market leader status.

114

Guanxi is a cultural phenomenon in China. It mainly involves relationships between individuals that create obligations for the continued exchange of favours. Similar relationships may also been found in other cultures. Source: Dunfee, T.W. and D.E. Warren (2001) “Is Guanxi Ethical? A Normative Analysis of Doing Business in China”, Journal of Business Ethics, 32 (3), pp. 191–204. 115 For example, guanxi could help cut through red tape and make it more “efficient” to do business in China. 116 AFX News (Date Unknown) “eBay CEO Whitman says company ‘not fading’ from China”, Forbes, http://www.forbes.com/technology/feeds/afx/2006/12/20/afx3270790.html (accessed 25 May 2007). 117 Rein, S. (14 February 2007) op. cit. 118 Associated Press (22 October 2007) “Chinese IPO could raise $1.5B: Alibaba.com, China's business-to-business e-commerce portal sees membership soar; largest IPO since Google”, CNNMoney.com, http://money.cnn.com/2007/10/22/news/international/bc.apfn.as.fin.china.alibaba.ap/index.htm (accessed 26 October 2007). 119 Or, A. (October 2007) “Alibaba.com IPO to Benefit Other Co.s in Alibaba Group-Analysts”, Dow Jones International News.

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EXHIBIT 1: CAUSES FOR DOTCOM FAILURES

Causes for DotCom failures

Controllable

Uncontrollable
Behavioral Technical Technical

Strategic

Operational

Coders as Planners
Inadequate business experience Lack of product differentiation strategy Lack of appropriate promotional strategy Lack of vision Free spending to accommodate high growth

Website Design
− Too much graphics − Complex navigation − Time consuming Internet security concerns Hacking of Websites Problems with Internet Service Providers (ISPs) Dial-up connections

Server downtime
− Maintenance − Upgrade − Traffic

Vulnerable financial structure Mgmt. incompetence and misuse of funds Inadequate customer service Slow delivery Inadequate infrastructure to support business process − − Front End Back End

Over expectation Lower customer confidence
− − − Unproven product/service quality Uncertain delivery time Lack of secure transaction environment

Lack of customer loyalty
− − − Cost Alternative products/services Lack of quality customer service

Intense competition
− Mushroom growth of companies offering similar products/services

Source: Razi, M.A., Tarn, J.M. and Siddiqui, F.A. (2004) “Exploring the Failure and Success of DotComs”, Information Management and Computer Security, 12 (3), pp. 228–243.

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EXHIBIT 2: SEVERE MONEY-LOSING NET BUSINESSES

Source: Razi, M.A., Tarn, J.M. and Siddiqui, F.A. (2004) “Exploring the Failure and Success of DotComs”, Information Management and Computer Security, 12 (3), pp. 228–243.

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EXHIBIT 3: NET COMPANIES FAR FROM BREAK-EVEN POINT

Source: Razi, M.A., Tarn, J.M. and Siddiqui, F.A. (2004) “Exploring the Failure and Success of DotComs”, Information Management and Computer Security, 12 (3), pp. 228–243.

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EXHIBIT 4: EBAY MARKETPLACE’S GLOBAL NET REVENUES

Year 1995* 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Net Revenues –– 32.1 million 41.4 million 86.1 million 224.7 million 431.4 million 731.1 million 1.1 billion 1.7 billion 2.6 billion 3.5 billion 4.3 billion

(US Dollars) Year-on-Year Growth Rates (%) N/A –– 29 108 161 92 69.5 50.5 54.5 52.9 34.6 22.9

* Figures not available. Note: Includes both major categories and sub-categories.

Source: eBay (1998–2006) Annual Report.

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EXHIBIT 5: ITEMS LISTED ON EBAY

Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Items 18 289,000 4.4 million 33.7 million 129.6 million 264.7 million 423.1 million 638.3 million 971 million 1.4 billion 1.9 billion 2.4 billion

Categories* 10 –– –– 1,500 3,000 8,000 18,000 22,000 45,000 –– –– ––

* Includes both major categories and sub-categories. Note: Some of the figures are not available.

Source: eBay (1998–2006) Annual Report; Innovate (April 2006) “eBay: The Global Electronic Souk”, http://www.korekalibre.com/index.php?option=com_magazine&task=show_magazi ne_article&magazine_id=11 (accessed 28 May 2007).

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EXHIBIT 6: MAJOR ITEM CATEGORIES ON EBAY (AS OF AUGUST 2007)

Source: eBay main website: http://www.ebay.com/.

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EXHIBIT 7: EBAY’S CORPORATE STRATEGIES120
Country US US US US US Germany Australia & New Zealand Australia & New Zealand US & Global US

Year 1998

1999

Company America Online121 Jump Incorporated Butterfield & Butterfield Kruse International Billpoint alando.de AG PBL Online ecorp i-Escrow

Go.com

2000

2001

AutoTrader.com Blackthorne NEC Wells Fargo Bank Warner Brothers Juno Online Services Oracle Mobile Sprint PCS Half.com Microsoft Artnet.com Eppraisals.com iBazar HomesDirect MercadoLibre124

US US Japan US US US US Canada US US & Global US & Global US & Global Europe US Latin America

Strategy Partnership to become the exclusive online trading community for AOL. Acquisition of outstanding shares in Up4Sale—online auction services supported by advertising. Acquisition (US$260 million) to allow eBay to enter into higher priced items and enhance its position in middle-tier items (priced US$500–5,000).122 Acquisition to expand into the collectible car market.123 Acquisition to facilitate C2C credit card payment on eBay. Acquisition to form eBay Germany (localised site). Joint venture to introduce eBay to people in the two countries. Joint venture (50% stake) to form eBay Australia and eBay New Zealand. Alliance to provide co-branded third party escrow services to eBay users. Alliance to provide Disney’s Go.com users with online C2C services and introduce co-branded, B2C sites for Disney.com, ESPN.com and ABC.com. Alliance to form co-branded automotive site—AutoTrader.com. Acquisition to provide back-office automation for eBay’s sellers. Joint venture to form eBay Japan (70% stake). Alliance to launch Electronic Check—a C2C online payment system. Partnership –– eBay users could bid on entertainment merchandise. Partnership to become exclusive provider of online trading services on Junoland and Shop@Juno. Alliance to make eBay accessible from any internet-enabled mobile device. Alliance to make eBay accessible from any internet-enabled mobile device. Acquisition to expand services into the fixed priced model, under the brand name half.com by eBay. Alliance to integrate eBay’s auction marketplace into select Microsoft websites. Alliance to make Artnet’s fine art pricing database available to eBay Premier customers. Alliance to give eBay users access to professional art and antiques appraisers. Acquisition to enter into five European markets—France, Italy, Spain, Sweden and Belgium. Acquisition to expand eBay’s real estate category and offer users more real estate options. Market entry into Latin American markets125 [see Exhibit 11].

120

121

122

All entries were based on their completion dates. The partnership with American Online was expanded in 1999 to make eBay the preferred provider of C2C services on AOL.com, Digital Cities, ICQ, CompuServe (both domestic and international) and Netscape. Butterfield & Butterfield was sold in 2002 due to poor results. 123 Kruse was sold in 2002. 124 Founded in Argentina in 1999, MercadoLibre was considered to be the Latin American equivalent of eBay, with operations across Latin America. After the acquisition, eBay had 19.5% ownership in the company.

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2002

2003

2004

EachNet NeoCom Technology ecorp PayPal Wells Fargo Bank EachNet CARad Fairmarket Internet Auction Craigslist Marketplaats mobile.de Internet Auction Baazee Acquisition of classified ad website.

Acquisition of 33% stake. Acquisition to form eBay Taiwan. Acquisition of remaining 50% stake in eBay Australia and eBay New Zealand. Acquisition (100%) to introduce online payment system. Acquisition of remaining 35% minority interest in Billpoint. Acquisition of remaining 67% stake and renamed as eBay EachNet. Acquisition to improve services on eBay Motors. Acquisition to expand eBay’s online reward and promotion programs. Acquisition of a majority interest (62% stake) to form eBay Korea for US$120 million. Acquisition (25% stake) of classified ad website. Acquisition to expand into the Netherlands. Acquisition (100% stake) of a leading online classified website for vehicles in Germany. Acquisition of a further 37.9% stake (99.9% in total). Acquisition to form eBay India (100% stake).

2005

Gumtree

Loquo Rent.com Skype Shopping.com US & Global China Latin America China Singapore

China Taiwan Australia & New Zealand Global US & Global China US US South Korea US Netherlands Germany South Korea India Spain, UK, Australia, New Zealand, South Africa Europe US US & Global US & Global

VeriSign

2006

Baidu MercadoLibre TOM Online Zuji

Acquisition of classified ad website. Acquisition to expand into new online property market segment. Acquisition to expand into the internet communication segment. Acquisition to offer online comparison shopping resources for eBay users. Acquisition to provide more services to merchants on eBay, including checkout control on merchant websites, automated order acceptance and separating authorisation from settlement etc. Alliance to co-operate in advertising, online payment and co-branded toolbar. Further expanded into new Latin American markets. Joint venture to form Tom EachNet. Alliance to provide eBay members with travel services online.

Note: The above list may not be exhaustive.

Source: eBay (1998–2006) Annual Report; eBay’s Investor News at http://investor.ebay.com/.

125

eBay first acquired the Brazilian subsidiary of iBazar, but was later acquired by MercadoLibre, after which eBay operated in Latin America under the brand name, MercadoLibre. 24

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EXHIBIT 8: EBAY’S GLOBAL PRESENCE (AS OF 31 DECEMBER 2006)

Source: eBay main website: http://www.ebay.com.

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EXHIBIT 9: OVERVIEW OF EBAY’S GLOBAL EXPANSION STRATEGIES
Global Presence (including US) 5 markets

Year

Country Added Germany126 UK Australia, New Zealand Japan129 Austria Canada South Korea Singapore Ireland Switzerland France, Italy, Spain, Sweden, Belgium Brazil, Argentina, Columbia, Chile, Ecuador, Mexico, Peru, Uruguay, Venezuela

Expansion Strategy (Market Entry) Acquired alando.de to form eBay Germany Launched eBay UK Joint venture127 with ecorp to form eBay Australia and eBay New Zealand128 Joint venture with NEC to form eBay Japan Launched eBay Austria (part of eBay Germany) Launched eBay Canada Acquired majority stake in Internet Auction; operated under Auction.co.kr Launched eBay Singapore Launched eBay Ireland130 Launched eBay Switzerland Acquired iBazar131 to form: eBay France, eBay Spain, eBay Sweden, eBay Belgium First acquired Brazilian subsidiary of iBazar; later acquired by MercadoLibre132 and operated under the brand MercadoLibre in these countries Acquired EachNet to enter China under the brand name EachNet133 Acquired NeoCom Technology to form eBay Taiwan Launched eBay Hong Kong Launched eBay Malaysia Launched eBay Philippines Acquired Baazee to form eBay India Acquired Marketplaats to form eBay Netherlands Launched eBay Poland First acquired iBazar; later acquired by MercadoLibre and operated under the brand MercadoLibre in these countries

1999

2000

8 markets

2001

26 markets

2002 2003 2004

China Taiwan Hong Kong Malaysia Philippines India The Netherlands Poland Dominican Republic, Costa Rica, Panama

27 markets 28 markets 32 markets 33 markets 36 markets

2005 2006

Source: eBay Worldwide website (ebay.com) and country/regional websites; eBay’s Investor News at http://investor.ebay.com; DSN Retailing Today (9 September 2002) “eBay to buy ecorp stake in eBay Australia”, http://findarticles.com/p/articles/mi_m0FNP/is_17_41/ai_91486234 (accessed 28 May 2007); Regan, K. (25 October 2001) “eBay Singapore Joins Web Auctioneer's Empire”, E-Commerce Times, http://www.ecommercetimes.com/story/14395.html (accessed 28 May 2007); Associated Press (24 May 2007) “EBay Partner MercadoLibre Could Be Rival”, Yahoo! Finance, http://biz.yahoo.com/ap/070524/mercadolibre_ipo.html?.v=1 (accessed 28 May 2007).

126 127

Germany was eBay’s first international market. eBay had 50% ownership in each of the newly formed joint ventures. 128 In 2002, eBay acquired the remaining 50% stake in eBay Australia and in eBay New Zealand from Ecorp for US$65 million. 129 eBay Japan ceased operations in 2002. 130 eBay Ireland was first launched as ebayireland.com in 2001 and then as eBay.ie in 2005. 131 iBazar was based in Paris, France. 132 Founded in Argentina in 1999, MercadoLibre was considered to be the Latin American equivalent of eBay, with operations across Latin America in Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, Venezuela, Costa Rica, the Dominican Republic and Panama. After the acquisition, eBay had 19.5% ownership in the company. 133 eBay first acquired a 30% stake in EachNet in 2002, followed by a full acquisition in 2003. The latest expansion strategy announced (in December 2006) by eBay was to form a joint venture with TOM Online. 26

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EXHIBIT 10: NUMBER OF EBAY USERS

Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Confirmed Registered Users (+/-) –– 41,000 341,000 2.2 million 10 million 22.5 million 42.4 million 61.7 million 94.9 million 135.5 million 180.6 million 221.6 million

Active Users* (+/-) –– –– –– –– –– –– 17.8 million 27.7 million 41.2 million 56.1 million 71.8 million 81.8 million

* According to eBay, active users bid, bought or listed an item during the most recent 12 months.

Source: eBay (1998–2006) Annual Report; Sinclair, J.T. (1999) eBay the Smart Way: Selling, Buying, and Profiting on the Web’s #1 Auction Site, AMACOM/American Management Association: USA.

EXHIBIT 11: EBAY’S NET REVENUES IN US AND GLOBAL MARKETS

Year 1999134 2000 2001 2002 2003 2004 2005 2006135

US Marketplace –– –– 617 million 816.6 million 1.1 billion 1.4 billion 1.8 billion 2.2 billion

(US Dollars) International Marketplace –– –– 114.2 million 302.1 million 664.6 million 1.2 billion 1.7 billion 2.1 billion

Source: eBay (2001–2006) Annual Report; eBay’s Quarterly Results (Fourth Quarter 2006).

134 135

eBay began global expansion in 1999. Starting in 2006, eBay changed its reporting format for its net revenues by segments to combine the US and International Marketplaces segments. Therefore, figures for 2006 were estimates from financial data published in eBay’s quarterly report.

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EXHIBIT 12: EBAY MARKETPLACES’ VALUE PROPOSITION

Marketplaces Value Proposition We seek to attract buyers and sellers to our community by offering: Buyers • Selection • Value • Convenience • Entertainment
Source: eBay (2006) Annual Report.

Sellers • Access to broad markets • Cost effective marketing and distribution • Ability to maximize selling prices • Opportunity to increase sales

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EXHIBIT 13: EBAY SERVICE

Source: eBay (1998) Annual Report.

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EXHIBIT 14: PREVALENCE OF INTERNET USAGE IN CHINA
Number of China Internet Users

Million

250 152.80% 205

200

150 137 75.40% 104 80 49.80% 59.1 30.00% 33.70 22.5 8.9 1999 2000 2001 2002 2003 2004 6.70% 23.40% 30.00% 111

100 49.60%

50

0 2005 2006

* 2007
8% 8.50% 10.50% 15.80%

Internet Usage Penetration 0.70% 1.80% 2.70% 4.60% 6.20%

* Denote estimates.

Source: CIA, The World Factbook: China, 2001-2007; China Internet Network Center (CNNIC); iResearch Inc.; Xinhua News Agency (1 February 2007) “Internet Use in China Jumps By Almost 25 Pct in 2006”, China Market Information Center, http://chinamarket.ccidnet.com/pub/article/c1834_a140171_p1.html (accessed 3 May 2007).

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EXHIBIT 15: E-COMMERCE GROWTH IN CHINA

Millions 300

Penetration of online shoppers is low but growing

250

200

150

205

100

137 111 104

50

59 34
0 2001 2002 2003 2004

80 5 12 6 30.8
2005

3

43.1
2006

55
2007 *

Penetration

9%

8%

8%

12%

28%

31%

27%

Online shoppers (Million)

Total Internet users (Million)

* Denote estimates.

Source: Lin, Z. and Li, J. (2005) “The online auction market in China: a comparative study between Taobao and eBay”, ACM International Conference Proceeding Series: Proceedings of the 7th International Conference on Electronic Commerce, 113, pp. 123–129; Chen, F. (n.d.) “China’s online sales to top 51 bln yuan in 2007”, China View, http://news.xinhuanet.com/english/2007-03/21/content_5877928.htm (accessed 4 June 2007); iResearch Inc.

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EXHIBIT 16: E-COMMERCE GROWTH IN CHINA

Transsaction Value of C2C Ecommerce Market in China 2001-2006

25 253.3% 252.4% 120% 68.6% 31.8%

20

15

23.1

10 13.7

5 3.9 0.9 2002 2003 1.2 2004 2005 Growth rate 2006

0 2001

0.4

Transaction value (Billion RMB)

Source: Analysys International; iResearch Inc.

32