Alibaba: The House That Jack Ma Built pdfdrive com

parties by setting up bulletin boards and, beginning in June 2004, launching an
embedded, proprietary chat window with the unfortunately in English named
AliWangwang.
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 Buyers on the site use the service to haggle with sellers, which

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resonates well with the vibrant marketplace culture in China. Communication is
a key underpinning of commerce, but eBay users struggled to communicate with
vendors.
Designed with input from Taobao users, AliWangwang is an early example
of the type of “consumer-driven innovation” that drives successful technology
firms in China today, such as the role that cell phone vendor Xiaomi’s fan club
plays in suggesting new product features.
To this day, AliWangwang remains a popular feature on Taobao, allowing
consumers to maintain their own list of personal purveyors—one, say, for
cosmetics, another for baby formula—who are at their beck and call around the
clock. Customer service on Taobao is so good that it can be overwhelming. A
purchase on Taobao is often accompanied by a flurry of messages on
AliWangwang, a series of virtual bows and scrapes from merchant to customer,
who may have a hard time exiting the conversation.
But whatever the “pull” of Taobao, a decision by eBay in September 2004
would serve to “push” many of EachNet’s customers away. eBay executives in
San Jose decided to “migrate” the China website to the United States. Instead of
hosting the website close to customers in China, it was shifted to the States. In a
borderless Internet, where a website is hosted shouldn’t matter. But China’s is
not a borderless Internet. Today the Chinese government is actively promoting
its vision of “Internet sovereignty” around the world: a rejection of the idea that
a nation-state’s virtual borders should be less meaningful than its actual
frontiers. In China, the effects of the government’s long-standing efforts to build
and extend the “Great Firewall of China” often means websites hosted overseas
are much slower to load than those hosted in China itself. All Web traffic
accessing sites hosted outside the mainland has to go through a series of
chokepoints where the request is screened. This is to ensure that a foreign
website does not display material the Chinese government deems “sensitive,”
including the “three T’s” (Tibet, Taiwan, and Tiananmen Square). These and
other sensitive topics, such as unrest in Xinjiang, are widely thought to have
been the reason that China has blocked some of the world’s leading websites,
from Twitter to YouTube to Facebook and, increasingly, Google.
While e-commerce and online shopping typically don’t touch on these
sensitive areas, the Great Firewall can often ensnare or seemingly block even
anodyne activities or requests. For example, once eBay had moved its servers
outside China, a user who happened to have a “64” or an “89” as part of his or
her username might see their account blocked or be unable to access the Internet
—the reason being that both numbers automatically trigger the censors in China
as part of the effort to block any mentions of the events in Tiananmen Square on

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June 4, 1989 (6/4/89).
eBay had its reasons for the migration. As the business grew in China, the
engineers in San Jose worried whether the platform built by a Shanghai-based
start-up could cope. It turned out that EachNet had built robust technology,
capable of scaling up by even a hundred times. But after a series of site outages
that had damaged its reputation at home, eBay had become obsessed with the
stability of its platform. eBay pushed ahead with the China migration anyway.
The attraction of a unified worldwide site with a consistent set of features was
just too hard to resist.
Some senior executives within eBay already knew that migration would be
a mistake—the company had already seen the damaging impact in Taiwan—but
bizarrely eBay managers in Taipei were blocked by migration-obsessed
managers in San Jose from sharing their experience with the team in Shanghai.
As predicted, as soon as the China site was migrated and integrated into the
global site, the impact on EachNet’s traffic was disastrous: It dropped off
precipitously. Customers in China started to experience long delays and time-
outs on the site. Why would they bother to wait for eBay in China—a site that
charged fees—when Taobao was available instantly and for free?
Migration was also costly for eBay because the company typically carried
out maintenance of its servers every Thursday at midnight on the West Coast,
ahead of the peak traffic of Friday. But this meant the disruption happened at the
peak of China traffic, fifteen hours ahead of San Jose. EachNet tried to adjust the
maintenance schedule but with no success.
Meg Whitman had made China a key priority for eBay. But when migration
caused traffic in China to plummet, no one told her. She found out only a month
later on a visit to Shanghai, and she was furious at not having been kept
informed.
Things quickly spiraled out of control for the company in China. Once the
website had been migrated to the United States, all modification requests from
engineers in China were stacked up in what the company called a “train seat”
system. Departments would submit their requests for changes, and like an
assembly-line process these were then lined up and consolidated into a “train of
needs.” Changing one word on the site would take nine weeks. Changing one
feature would take one year.
How could eBay be so inefficient? There are two explanations. First, eBay
had an effective monopoly in the States, and this bred complacency. Second,
despite its Silicon Valley aura, eBay was never very strong at technology. One
eBay executive famously once said, in public, “Even a monkey could run this
business.” After the embarrassing site outages, stability and process trumped

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technology.
Once Taobao appeared on the scene, eBay’s “train seat” system quickly
became a train wreck. EachNet executives desperately tried to signal the danger
to senior executives in San Jose, but to no avail.
Although Taobao had its merits, Alibaba could hardly believe its luck as the
ineptness of this supposedly world-renowned company became apparent. Jack
compared eBay’s lumbering approach to a jumbo jet: “A global technology
platform sounds great, like a Boeing 747 flying is great. But if the airport is a
school yard, you cannot land. Even if you want to change a button, you have to
report to, like, fourteen guys.”
Looking back on the fiasco eight years later in her new role as CEO of
Hewlett-Packard, Meg Whitman was contrite about eBay’s missteps in China.
“You’ve got to have a set of products uniquely designed for this market by
Chinese. It is not a market where you can take a product or a system that works
in Europe or the United States and export to China.”
She also concedes that migration was the fatal blow to eBay’s China
ambitions. “We made one big mistake. We should have left EachNet on their
own platform in China. Instead what we did was put EachNet onto the global
eBay platform because it had worked everywhere. It had worked in Western
Europe, it had worked all over. . . . We had bought all these baby eBays and
basically migrated them to one common platform, which had a lot of advantages.
One is cost. Second is speed to market, because when you roll ‘buy it now’ you
could roll it to thirty countries as opposed to do it incrementally. But we made a
mistake in China.”
She gives credit to Alibaba’s achievements in designing Taobao to suit the
local market: “They had a uniquely Chinese platform—and by the way they
didn’t charge anything for years and years and years and years—and they just
outexecuted us.”
After Bo stepped down, eBay struggled to find a replacement, going
through a series of executives, from James Zheng to a Taiwanese-born
American, Martin Wu, newly hired from Microsoft China, who would last only
twelve months.
Whitman today rues the loss of the entrepreneur who had founded EachNet:
“What I would have done is left Bo Shao in charge and owned the thirty percent
of China that we originally owned and let him do his own thing.”
Sensing eBay’s disarray in China, Jack pushed ahead. At a four-hour
session in a stadium in Hangzhou in September 2004 to celebrate Alibaba’s fifth
birthday, Jack rallied all two thousand employees of Alibaba, including the fast-
growing Taobao team, who held aloft flags emblazoned with worker ants, the

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mascot of Taobao. 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.
The elephant in the room was, of course, eBay. From the moment he
conceived of Taobao, Jack maintained a relentless focus on the company. In a
much-quoted analogy, 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.”
The tide was turning against eBay. From a market share of more than 90
percent in 2003, eBay’s market share fell by half the following year—barely
ahead of Taobao.
And there was another problem for eBay: online payment.
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.
Lucy Peng, a cofounder of Alibaba, is today CEO of Ant Financial, the
Alibaba affiliate that controls Alipay. In 2012, at a talk I moderated for her at
Stanford University, she reflected on the launch of the service: “The simple
[escrow] model established a trust system in online shopping during its early
stages. This was a very primitive model. . . . During Alipay’s initial operations
one department had a fax machine, after clients wired monies via banks or post
offices, they had to fax bank slips to Taobao. We would then double-check and
confirm.”
It would be three months before eBay woke up to the threat of Alipay. In
January 2004, PayPal assembled a task force in San Jose to pick up on
EachNet’s earlier unsuccessful efforts to devise an escrow solution.
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. PayPal struggled to come up with workarounds to these challenges,

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including local partnerships.
PayPal had started out in the United States as a huge risk taker, legendary
for its swashbuckling founders and early executives, today often referred to as
the “PayPal mafia”: Peter Thiel, Reid Hoffman (cofounder of LinkedIn), and,
after they bought his payments company, Elon Musk (Tesla Motors, SpaceX,
SolarCity). But within eBay, and far from home, PayPal would struggle in China
from the outset.
Attempts to figure out a way forward for the company in China were
complicated when PayPal was sued for alleged patent infringement in the United
States by AT&T, causing new work on escrow solutions to grind to a halt. To
keep momentum on solving the China problem, eBay’s newly established China
Development Center initiated its own proposed escrow product, called An Fu
Tong (AFT). The idea was that while PayPal was tied up with the lawsuit in the
States, AFT could be deployed as a stopgap solution. Finally, in December 2004,
eBay could provide an answer to Alipay and deployed AFT in China. But by
then PayPal had resolved the AT&T lawsuit and wanted to deploy its own
solution, not AFT. Meanwhile, Alibaba hadn’t been standing still, rolling out a
steady stream of improvements to Alipay including popular text message
notifications to inform customers of successful payments and, working with
domestic logistics companies, shipments as well. Alibaba’s “iron triangle” was
beginning to take shape.
For Alan Tien, a Stanford-educated engineer working on PayPal’s China
efforts since 2004, the AFT/PayPal infighting and the disastrous migration of
servers to the United States were the beginning of the end for eBay in China. In
a series of internal memos to the head office, he tried to raise attention to the
seriousness of the threat from Alibaba and Alipay. In January 2005 he wrote,
“Current situation isn’t good. Momentum has shifted away from us. Must
execute on get well plan to stay in the fight,” adding, “We cannot afford to
deceive ourselves anymore.”
eBay just wouldn’t take Alibaba seriously, questioning the reliability of
mounting data that showed Taobao was selling more goods than eBay in China.
Taobao now had more listings, but eBay convinced itself that because those
listings were free they must be inferior. 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.”
Sensing it was game over, Alan Tien concluded, “Taobao’s product
development cycle is much faster. Jack Ma’s right. We cannot fight on his

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terms.”
Whitman had reached the same conclusion and secretly began to look for a
way out of the China morass. The most obvious route was to make an offer to
buy Alibaba, and so she sent three senior executives
28
from San Jose to
Hangzhou, where they met Jack and Joe. The meeting got off to a bad start when
eBay senior vice president Bill Cobb talked down Taobao’s achievements and
CFO Rajiv Dutta offered a lowball number of $150 million to buy the company.
After Jack told the eBay delegation that he was just getting started with Taobao,
Joe countered with a sales price of $900 million, at which point the two sides