A Break in Yahoo's China Clouds?

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Unfortunately for Alibaba chairman and founder Jack Ma, though, Alibaba has yet to figure out a way to translate Taobao's popularity into revenues: The site is free and Ma, after an unsuccessful attempt to launch some paid services last year, has pledged to avoid any charges until next year at the earliest.

Liu of BDA is hopeful that Ma will figure out a way to start generating some revenue from Taobao. "One problem has been that this generation of Chinese Internet users is not used to paying," he says. However, adds Liu, "They will change. They will form habits to pay for services."

Censorship Issues Remain

The remaining question mark is Yahoo China. Although Ma has said that he intends to become more competitive against Baidu and Google's Chinese service, the company remains a distant third in the search market, with about 5% of the market compared to about 60% for Baidu and 20% for Google. Yahoo China's brand-name recognition "is much lower than its two major rivals," says Liu. "The company has spent a lot promoting its search business but it only has had limited improvement."

In the meantime the headaches continue to mount. Yahoo's willingness to follow Beijing's policies regarding Internet censorship have led to a lawsuit filed in April by a human rights group, World Organization for Human Rights USA. A month later, Shi Tao, the Chinese reporter jailed for 10 years after Yahoo provided the Chinese government with information about his Yahoo! e-mail account, sued Yahoo, and Alibaba as well.

In other legal battles there have been mixed results. In December, Yahoo China won the unfair competition lawsuit it brought against Qihoo.com, operated by former Yahoo China general manager Zhou Hongyi, which had been targeting Yahoo's toolbar as malware—short for malignant software, which is similar to spyware.

But in April the company lost a suit in Chinese court brought by international recording companies such as EMI (EMI) that alleged Yahoo China helped facilitate copyright infringement by providing the links to Web sites carrying unauthorized songs. Rival Baidu had successfully defended itself against a similar lawsuit. Yahoo is appealing the ruling. A successful IPO of Alibaba.com would give Yahoo and Yang a welcome boost.

Einhorn is a correspondent in BusinessWeek's Hong Kong bureau .