Inside Yahoo's China Gambit


In a bold move to better tap the promising Internet market in China, Yahoo! (YHOO) announced on Aug. 11 that it's investing $1 billion in Chinese Internet firm Alibaba. Under the deal, Yahoo will cede control of its properties there to Alibaba.

The combined outfit, of which Yahoo will own a 40% stake, will be an Internet powerhouse in China, boasting popular online auction and search properties. Yahoo co-founder Jerry Yang, who will sit on the board of Alibaba, spoke with BusinessWeek Correspondent Ben Elgin to explain the strategy. Here are the edited excerpts:

Q: Why did you choose to partner with Alibaba rather than build up the business in China on your own?

A: We've been doing a lot of everything in China. We've been building, partnering, and buying. We purchased a company a year and a half ago called 3721 that is the basis for our search business in China.

But this Alibaba arrangement is a unique model of partnership for us. We believe that to be successful in China, we absolutely have to have strong local management, and [Alibaba CEO] Jack Ma and his team are the best-of-breed Internet management team inside China.

[Alibaba and Yahoo China are] probably the most unique basket of assets assembled together. We are combining our strong No. 2 search and mail businesses with Alibaba's first-place consumer auction platform, their leading business-to-business franchise, and their AliPay, which is their payment platform.

It's the only company in China that has commerce, search, communications, and a very, very strong local management team. This is going to be a very valuable franchise going forward.

Q: What issues are there for other Internet firms looking to control their own businesses in China?

A: We've had experience. We were one of the first foreign Internet companies to go into China in 1999. We've gone through several stages of learning and understanding how to do business there.

To be successful as a foreign company in China there has to be a tremendous amount of local knowledge and local relationships. One of the similarities between Alibaba and our current search-keyword operations at 3721 is that hundreds of thousands of small and midsize businesses are buying keywords or listings on Alibaba.

Channel relationships, whether they are direct or reseller relationships, are extremely local. This isn't a heavily self-service model yet like the U.S. Over time it might be, but to get it off the ground and going, you need a lot of local knowledge and local relationships.

Q: Does partnering with a local outfit partially shield Yahoo when decisions have to be made in China about, say, censoring content?

A: The businesses that we're in today, which are search, communications, and commerce, have less to do with more sensitive media areas like news and potentially other kinds of media and content.

But I think you're right. There is a lot of regulation. Not just around censorship, but a lot of regulation about a foreign company's role in media in general. It's fair to say our focus around commerce, search, and communications, which have both a technology and commerce aspect, are a lot more open to foreign involvement. I think the government has been very supportive of e-commerce companies in China.

Q: But as the company grows, it will likely be involved in more media-related businesses. MSN's (MSFT) efforts, for instance, to get into the blog space in China kicked up quite a firestorm with their censorship efforts. This would almost seem to exempt you from those types of decisions.

A: If Alibaba and the management team chooses to become more of a media company, they certainly have the backing of Yahoo's technology and experience. But one of the things we love about this management team is their relentless focus around things they know how to do well.

Commerce is a root of what they do. They have developed a strong passion around search ... Look at the importance of integrating search and commerce together, which is already happening in parts of the world.

Everything else that revolves around that -- communicating through e-mail and IM [instant messaging], as well as payments through AliPay -- those are the core things they're going to focus on. The growth is also in those areas. If you look at e-commerce as a category, that's where the action is in China. There isn't a very huge amount of media business in China.

Q: With Alibaba taking control of your China operations, what are long-term plans for Yahoo's brand in China?

A: We think this is a marriage of very strong brands across the board. Alibaba will continue to be the B2B [business-to-business] brand in a product sense.

They have built a strong domestic and international trading brand around Alibaba. Taobao, a unit of Alibaba, is the leading consumer brand around auctions, and that will continue to be the case.

And all of the consumer Internet products will be branded Yahoo -- search, mail, and anything new they decide to come up with. They definitely feel that the Yahoo brand in China has not only global implications but a lot of resonance.


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