Tom Online: eBay's Last China Card

The auction giant's hookup with the well-connected, Hong Kong-based, Internet outfit signals a retreat on the mainland from eBay's core biz

by Frederik Balfour

Ebay's (EBAY) long-expected retreat from the online auction business in China is now a reality. On Dec. 20, the U.S.company released the details. It will shut down its existing site in China, then buy 49% of a joint venture with a local partner, which will run the renovated auction business with eBay's help. The local partner is Tom Online (TOMO).

Tom who? That's probably the reaction of U.S. investors who know plenty about eBay, but little about the ins and outs of China dot-coms. So here's the skinny on Whitman's new partner. Tom Online and its parent Tom.com are controlled by Hong Kong billionaire Li Ka-shing, who has superb guanxi (connections) on the mainland and an uncanny sense of timing for deals. For its part, Tom Online is keen to diversify away from wireless value-added services, which currently account for about 90% of its earnings.

Tom Online was originally founded in 2000 as an Internet portal by its parent Tom.com during the height of the Internet boom. When advertising revenues failed to deliver on their original promise, as they did for other portals such as Sina.com (SINA) and Sohu.com (SOHU), Tom Online moved into providing services to mobile-phone users in the fast growing fields of instant messaging and music downloads. It was spun off in the first quarter of 2004 with dual listings in Hong Kong and Nasdaq.

A Host of Alliances

Tom Online has been able to leverage the connections of its media parent (now renamed Tom Group) and has proved nimble in striking several strong alliances with content providers including Sony (SNE), EMI, Warner Chappell, Universal, and BMG to offer wireless Internet content. "Its key strength is in wireless valued-added services and online portal-entertainment," says Liu Bin, principal Internet analyst at Beijing-based consulting firm BDA China.

In the second quarter it formed a joint venture with Skype which now has close to 25 million users. Although Skype China has not been licensed to charge users for connection to fixed lines, Tom Online has said it plans to run ads on the Skype pages.

Through its parent Tom Group, Tom Online also has an agreement with UMPay, an online payment service similar to eBay's Paypal, in which Tom Online will help promote a system called "mini wallets" which enables users to top-up prepaid cards for amounts under $5.

The tie-up with Tom Online will give eBay some of the on-the-ground expertise it needs to compete with the likes of Jack Ma, the mainland entrepreneur whose Taobao auction site has given eBay fits. Tom Online's CEO Wang Lei Lei has shown considerable skill in negotiating the regulatory shoals thrown in his way. Though a clampdown on how service providers bill users for services such as ringtone downloads and short message services caused revenues to fall 22% to $39 million in the third quarter, Tom Online's wireless services were 60% greater than its nearest competitor, Sina.com (SINA).

eBay Takes a Back Seat

Tom Online is a bona fide player. Yet the fact remains that the world's largest online auctioneer will be taking the back seat to a tiny company with no experience in online auction sites and which had revenues of just $173 million last year. The move speaks volumes for just how far the mighty have fallen. "It's an attempt at a graceful exit," says Duncan Clark, managing director of Beijing consulting firm BDA China.