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Penelope Chan prepared this case under the supervision of Professor Zhigang Tao for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes.

© 2011 by The 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. 11/503C

ZHIGANG TAO

YAHOO: RELATIONSHIP CRISIS WITH ALIBABA IN CHINA

I have been perplexed by Bartz’s decisions and attitude since she became the CEO of Yahoo in January 2009. They demonstrate a lack of appreciation of the internet, the mainland market and business partners.

- Wang Shuai, chief marketing officer of Alibaba’s subsidiary Taobao1

In October 2005, Yahoo! Inc (“Yahoo”) attempted to accelerate its business expansion in China by forming a partnership with Alibaba Group Holding Limited (“Alibaba”), the country’s biggest e-commerce firm. Yahoo invested US$1 billion in Alibaba for a 40% stake. As part of the deal, Yahoo transferred the ownership of one of its crown jewels, Yahoo! China (“Yahoo China”), to Alibaba. Some media outlets described the two companies’ relationship since 2005 as being “anywhere from rocky to downright ugly”.2 Amid the severe global recession in 2008 and 2009, Microsoft Corp (“Microsoft”) launched a hostile takeover of Yahoo, which was fighting an uphill battle against Google Inc. Eventually Yahoo agreed to adopt Microsoft’s Bing search technology on Yahoo’s websites worldwide. In mid-2010, Alibaba started using the search engine Sogou offered by Yahoo’s local competitor Sohu.com, and collaborated with eBay Inc (“eBay”) instead of Yahoo in entering the US business-to- business market. Meanwhile, Yahoo began to solicit companies in southern China to advertise on its Hong Kong website,3 resulting in direct competition with Yahoo China for advertisers. Alibaba had been making a loss in its operations since 2006 despite being the market leader in many business areas, and the search revenue share of Yahoo China dropped from 27% in 2005 to an insignificant level in 2010. But Yahoo had turned down Alibaba’s offer to buy back its stake because it would like to wait for the initial public offerings (“IPOs”) of Alibaba’s two major subsidiaries before any exit. In early 2011, in light of growing tension with Alibaba, Yahoo’s board was mulling over what went wrong with this partnership and what should be done to make things right.

1 China Daily (20 September 2010) “Alibaba Says No to Yahoo’s CEO”, http://news.xinhuanet.com/english2010/china/2010-

09/20/c_13520578.htm (accessed 16 February 2011). 2 Clendenin, M. (30 June 2010) “China’s Alibaba Wants Yahoo Stake Back”, Information Week. 3 Yahoo had a separate portal in Hong Kong, a city in southern China, while the one on the mainland was managed by Alibaba.

HKU970

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11/503C Yahoo: Relationship Crisis with Alibaba in China

Overview of China’s Internet Market

Whoever wins China, will win the world. - Meg Whitman, chief executive of eBay Inc, 20054

In late 2010, China had around 457 million internet users among its 1.34 billion people. The internet penetration rate was 34.3% [see Exhibit 1].5 This rate was still well below those in other developed markets such as North America (77.4%) and Australia (61.3%) [see Exhibit 2]. One of the reasons was a lack of internet infrastructure in rural areas where over half of the Chinese citizens resided. The Chinese government planned to launch a “triple play” project in 2013, which would deliver TV, telephone and internet services over sophisticated broadband networks nationwide.6 This project was expected to spur significant growth in internet usage, particularly in small cities, inland regions and rural areas. It was likely that the Chinese language, ranked second in 2010, would soon surpass English as the most popular language used on the internet [see Exhibit 3]. In a survey in mid-2010, around 73.6% of Chinese netizens accessed the internet through a desktop computer, and 65.9% did so using a mobile phone [see Exhibit 4].7 With a rapid increase in the popularity of smartphones and tablet computers, strong growth in mobile internet access was expected in the future.

As of February 2011, the top 10 websites with the highest internet traffic in China were all local companies [see Exhibit 5]. The internet portal operated by Tencent Holdings Limited (“Tencent”) was the most popular site. Other high-traffic websites were in the sectors of e- commerce, online games and entertainment, and telecommunication services. A few websites that were very popular in the United States and other Western countries were banned in China. For example, Facebook, Twitter and YouTube had been banned since mid-2009 after someone uploaded a video that featured protests in Tibet onto YouTube.

The internet economy had three major segments in terms of revenue generation: advertising, e-commerce services and video games. Most internet portals obtained income from all three sources, while other internet companies might focus primarily on one or two segments. In China, Baidu Inc (“Baidu”) had a 30% share of the internet advertising market in the first three quarters of 2010, leading other players by a wide margin [see Exhibit 6]. Google was the only foreign company among the top eight, with a 10.7% market share.

Internet Search Market Internet search companies obtained their revenues mainly from display advertisements, sponsored search results and conducting customised search and marketing services for businesses. The internet search market size in China was US$1.75 billion in 2010,8 and was projected to grow to US$4.72 billion in 2013 [see Exhibit 7A].9 Richard Ji, an analyst at Morgan Stanley, said: “Sixty percent of the internet users here are under the age of 30. In the 4 Steiner, I. (25 August 2010) “Alibaba.com’s David Wei Calls Auctiva a Merchant Enabler”, AuctionBytes,

http://www.auctionbytes.com/cab/abn/y10/m08/i25/s01 (accessed 18 February 2011). 5 Fu, R. (9 February 2011) “China Internet Users by Numbers: Feb 2011”, China Internet Watch,

http://www.chinainternetwatch.com/926/china-internet-users-2011 (accessed 20 February 2011). 6 Lee, M. (15 November 2010) “Analysis: Rural Youth Offer Next Frontier for China Web Darlings”, Reuters. 7 , “ ” [Analysys International, “Hit Rate Ranking of Vendors”],

http://www.enfodesk.com/SMinisite/index/vendors-menuid-1-submenuid-3.html (accessed 24 February 2011). 8 (2011 1 21 ) “2010 4 38.5 ” [Enfodesk (21 January 2011) “China’s

Search Engine Market Reached Rmb 3.85 Billion in Q4 of 2010”], http://www.enfodesk.com/SMinisite/index/articledetail- type_id-1-info_id-5721.html (accessed 20 February 2011).

9 (2011 1 4 ) “ 2013 314.33 ” [Enfodesk (4 January 2011) “China’s Search Engine Market Estimated to Reach Rmb 31.433 Billion in 2013”], http://www.enfodesk.com/SMinisite/index/articledetail-type_id-1-info_id-5640.html (accessed 20 February 2011).

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11/503C Yahoo: Relationship Crisis with Alibaba in China

US, it’s the other way around. And in the US, it’s about information. But in China, the number one priority is entertainment.”10 From 2006 to 2009, China’s internet search market had been highly concentrated in the hands of the top three players: Baidu, Google and Yahoo [see Exhibit 7B]. Google’s success was partly attributed to its two strategic moves in 2006: offering a new version of a localised search engine and setting up a local office with China- based computer servers that had significantly improved the search speed. Baidu, on the other hand, had capitalised on the passions of young Chinese to download music, play online games and engage in social networking. Moreover, Baidu’s search results used deep links that directly took users to a specific point within a website without first going through its home page. Hence, Baidu’s search engine became a popular tool used by netizens to hunt for cheap counterfeits and pirated goods online.11 In Q4 of 2010, the competition became a two-horse race. Baidu’s market share grew to 75.5%, followed by Google with 19.6%. Yahoo recorded less than a 0.3% market share.12

E-commerce Market: B2B, B2C and C2C Marketplaces There were three segments in China’s e-commerce market: business-to-business (“B2B”), business-to-consumer (“B2C”) and consumer-to-consumer (“C2C”). The B2B segment represented online wholesale. Its size grew from US$45 million in 2003 to around US$1.1 billion in 2010 [see Exhibit 8A]. The major players were Alibaba (69.7%), Global Sources (4.9%) and Focus Technology Company Limited (2.7%) [see Exhibit 8B]. The B2C and C2C segments together made up online retailing. The C2C segment included not only goods and services sold by consumers to consumers, but also those sold by small businesses to consumers. These small businesses were often low-tier distributors in the supply chain or local retail shops. Businesses that opened an online store on B2C marketplaces were usually product manufacturers or upper-tier distributors. Goods available on B2C storefronts were in general more expensive than those on C2C storefronts. 13 The growth in China’s online retailing had been exponential in the past decade, booming from merely US$256 million in 2003 to around US$80 billion in 2010 [see Exhibit 9A]. According to China Internet Network Information, China had 142 million online retail shoppers in 2010.14 The penetration rate was 31% among its 457 million netizens.

A deeper look into the breakdown of the online retail market revealed a changing trend of consumer behaviour. In 2010, the revenue of China’s B2C segment was US$15.6 million. The size of the C2C segment was US$62.3 million, which accounted for 80% of the online retail market [see Exhibit 9A]. In contrast, the B2C segment in developed countries, such as the United States, Europe and Japan, often occupied the lion’s share of online retailing. Such a difference reflected the high emphasis on low price by Chinese online shoppers. However, the B2C segment was expected to grow faster than the C2C segment and make up close to 47% of online retail shopping in 2013. This was because, as China’s e-commerce sector matured, shoppers had higher awareness of potential cheating in online trading and they gradually put more emphasis on the trustworthiness of online merchants, product quality and after-sales services. More people would opt for B2C marketplaces, which often had a trusted supplier network, rather than C2C ones.15

10 Barboza, D. (23 March 2010) “China’s Internet Giants May Be Stuck There”, New York Times. 11 Palmer, D. (28 February 2011) “US Calls China’s Baidu ‘Notorious Market’”, Reuters. 12 The market share of Yahoo in this quarter was not listed in the ranking chart of the source. The lowest-ranked player NetEase

had a 0.3% market share. This implied that Yahoo’s market share was less than 0.3%. See: (2011 1 26 ) “2010 4 , 75.5%” [Enfodesk (26 January 2011) “Baidu Continued to Lead China’s Search Engine Market with 75.5% Market Share in Q4 of 2010”], http://www.enfodesk.com/SMinisite/index/articledetail-type_id-1-info_id-5738.html (accessed 20 February 2011).

13 (2011 1 6 ) “ ” [Beijing Business Today (6 January 2011) “Emerging Turning Point for the Mode of E-commerce Battle”], http://www.analysys.com.cn/cache/1247/95995.html (accessed 1 March 2011).

14 Ibid. 15 Ibid.

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11/503C Yahoo: Relationship Crisis with Alibaba in China

Another point to note was that the top four players of the C2C segment had a combined market share close to 100% in the first half of 2010. These players were Taobao (83.5%) under Alibaba, Paipai (11.5%) under Tencent, Eachnet under eBay (4.4%) and Youa under Baidu (0.6%) [see Exhibit 9B]. Alibaba and Tencent also dominated the online payment market, with 51.2% and 23.3% market shares in 2010, respectively [see Exhibit 10]. In the more fragmented B2C market, the top three players were 360buy (34.5%), Dangdang (9.0%) and Amazon Inc (“Amazon”) (8.8%) [see Exhibit 9C].

Yahoo’s Company Background

Yahoo, headquartered in California, was one of the major global internet companies that provided online digital media, content and communication services to users through internet portals. The company was started in 1994 by Jerry Yang and David Filo when they were taking postgraduate studies at Stanford University. At the beginning, they created a website that offered directory services to help users find information on other websites. This website was later expanded into an internet portal with a wide range of services, including online news, internet search, digital content, e-mail and collaboration services [see Exhibit 12]. The company enjoyed rapid growth amid a booming internet economy. In 2000, Yahoo started using the search technologies of Google for search results. Then, in 2004, it switched back to its own search technologies developed over the previous four years. As of 2010, Yahoo operated portals in more than 25 languages and in more than 50 countries. It directly owned most of its international operations, except in China, Japan, Australia and New Zealand, where Yahoo had joint ventures and/or non-controlling interests. Many services were offered to users free of charge. The major revenue sources were display advertising, search advertising, and subscription fees and charges for certain premium services or content. Yahoo’s revenue in 2010 was US$6.3 billion, generating a net income of US$1.2 billion [see Exhibit 11A].

Development in China Yahoo was the first major American internet company to enter China. It set up a local office in Beijing in 1999 [see Exhibit 13]. At the beginning, the company faced the challenge of bridging the cultural gap, and its China portal provided a foreign look and feel to the local people. In December 2003, Yahoo acquired a Hong-Kong based software company, “3721”, that allowed users to conduct searches in Chinese characters on its website. Yahoo also formed a partnership with SINA Corp to launch an auction site in early 2004. The goal was to compete with EachNet, which was a local C2C company acquired by eBay in 2003.

In April 2004, the Chinese government asked Yahoo to submit the e-mail content of a local journalist and human rights activist, Shi Tao, and Yahoo’s local staff in Beijing did so accordingly. Shi was arrested the following month and was sentenced to a 10-year imprisonment in April 2005. This incident triggered a backlash by some netizens who shunned the Yahoo China portal, which led to a decline in traffic. Zhao Jing, a famous political blogger in China, said that Yahoo had put individual dissidents in serious danger and had done so apparently without thinking much about the human damage. “Chinese people hated Yahoo,” noted Zhao. 16 Therefore, Yahoo had an imminent task of rebuilding the company’s rapport with local citizens, while having to maintain good government relations at the same time. In addition, Yahoo was not as adept as other competitors in capitalising on the netizens’ craze for online entertainment and social networking. The company also did not support illegal downloads of copyrighted music or software. In comparison, Baidu, whose market share enjoyed rapid growth, had around one-fifth of its traffic coming from searches

16 Thompson, C. (23 April 2006) “Google’s China Problem”, New York Times.

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11/503C Yahoo: Relationship Crisis with Alibaba in China

for unlicensed MP3 music.17 In order to further its business expansion in the country, Yahoo was looking for opportunities of partnering with a local company.

Alibaba’s Company Background

Alibaba ( ), based in Hangzhou, was China’s biggest e-commerce company. Its founder, Jack Ma ( ), was formerly an English teacher. He set up his first internet business, China Yellow Pages, in 1995. This company was an online directory for Chinese businesses. It was later acquired by the state-owned telecom company China Telecom. Then, in September 1999, Ma pooled together US$60,000 from himself and 17 friends as start-up capital to launch an e-commerce venture, Alibaba (China) Technology Company Limited [see Exhibit 14]. At that time, the internet was still at its nascent stage in China and few people had access to the internet. People relied mostly on personal relationships in sourcing suppliers, and business deals were closed primarily in face-to-face meetings. Ma’s bold move earned him the title of China’s internet godfather. At first, the company operated a B2B marketplace, Alibaba.com, that allowed Chinese manufacturers to post their information for easy searches by buyers locally and overseas. In May 2003, Alibaba set up Taobao, a C2C marketplace that offered free listings for sellers. Ma noted: “When we started Taobao, even our own chief technology officer said: ‘Jack, you are crazy. Don’t forget eBay.’”18

Over the years, Alibaba expanded into other online businesses, including B2C e-marketplaces, online payment, enterprise management software and an advertising exchange that connected advertisers and website owners [see Exhibit 15]. The company was later renamed as Alibaba Group Holding Limited. Some of Alibaba’s product offerings were available to users free of charge, but fees were collected from some merchants and for premium services. Online advertising was another major income source. In the first three quarters of 2010, Alibaba ranked fourth in China’s internet advertising market, enjoying an 8.2% market share [see Exhibit 6]. It was also the market leader in B2B e-commerce (69.7%), C2C e-commerce (83.5%) and online payment (51.2%) [see Exhibits 8B, 9B and 10]. As of the end of 2010, Alibaba had around 21,000 employees and had offices in over 60 cities across China, the United States, Europe, Japan and Korea. The group’s total revenue amounted close to US$1.3 billion that year [see Exhibit 16]. The biggest portion came from its B2B subsidiary, Alibaba.com, which recorded US$816 million in revenue and US$216 million in net profit [see Exhibit 17A]. Alibaba.com had 61.8 million registered users, 8.5 million storefronts and 0.8 million paying merchant members [see Exhibit 18]. Most of its business came from the Chinese market. Taobao was Alibaba’s second biggest subsidiary. Its volume of e-commerce transactions amounted to US$30.3 billion in 2009 [see Exhibit 19].

Alibaba’s Founder Jack Ma Ma was a charismatic entrepreneur with fervent enthusiasm in driving China’s e-commerce business. “Companies like Wal-Mart, these big-size buyers, killed a lot of SME buyers. But now most of the SME buyers and sellers start to do business throughout the world because of the internet. So I think the world has moved. I strongly believe small is beautiful,” he said.19

Regarding wealth creation, Ma had his own philosophy: “You have a couple of million, you’re a rich guy. You have $20 to 30 million, it’s capital [for running a business]. You have $100 million, it’s a social responsibility. . . . I’ve never thought the money I have belongs to me . . . it belongs to the society.”20 Ma strongly supported the notion that companies operating 17 Ibid. 18 Powell, B. and Ressner, J. (22 August 2005) “Why EBay Must Win in China”, Time Magazine. 19 Hille, K. (19 January 2009) “The Monday Interview: Jack Ma”, Financial Times. 20 Purchase.com (26 September 2010) “Jack Ma: Alibaba Will Be Bigger than Microsoft and Walmart”,

http://www.purchase.com/blog/leadership/jack-ma-of-alibaba-interview-on-charlie-rose (accessed 16 February 2011).

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11/503C Yahoo: Relationship Crisis with Alibaba in China

in China should obey all local laws, saying: “I’m doing business everywhere in the world following the laws. . . . The Chinese government is smart. The Chinese government still knows what it is doing, and it’s still popular and powerful. So, if you want to forget about doing your own things, and make it unhappy, you can do nothing. So, if you go slowly, you can improve the world.”21

Business Partnership between Yahoo and Alibaba

Challenges Faced by Alibaba in 2005 In 2005, Alibaba was competing neck-and-neck with eBay, which invested US$100 million in China that year. eBay’s chief executive Meg Whitman often made business trips to the country to understand its market dynamics. She said: “If we are good and we execute, ultimately China could be eBay’s largest local market in a five to 10 year period.”22 Some people likened the battle between Alibaba and eBay to David versus Goliath. One of the competitive advantages of Alibaba was that its C2C website Taobao.com provided listing and transaction services to sellers free of charge, while eBay charged a fee. In the third quarter of 2005, Alibaba managed to surpass eBay in securing over 60% of the C2C market share.23

Then the company announced in October that it would extend Taobao’s free e-commerce services for three more years. Ma also posed a challenge to eBay: “We call on eBay to do what is right for this phase of China’s e-commerce development and make your services free for buyers and sellers in China.” eBay responded with a statement saying: “Free is not a business model. It speaks volumes about the strength of eBay’s business in China that Taobao today announced that it is unable to charge for its products for the next three years. Some amount of pricing ensures a higher quality supply.”24 As a consequence of this price war, Taobao did not contribute significantly to Alibaba’s revenue. In order to win over eBay in the long run, Alibaba was in need of a capital injection to streamline its operation and improve its technology infrastructure for better economy of scale.

Striking a Deal Together, Yahoo! and Alibaba have created one of the largest internet companies in the fastest-growing internet market. Through this strategic partnership, we will combine the best of e-commerce, search, communications and online advertising capabilities in new ways for Chinese consumers and businesses, under the management of a strong local team.

- Terry Semel, chief executive of Yahoo Inc, October 200525

On 24 October 2005, Yahoo and Alibaba announced an agreement under which Yahoo invested approximately US$1 billion in cash in Alibaba for a 40% stake and 35% voting rights. In return, Yahoo transferred the ownership of Yahoo China to Alibaba. But this deal did not include Yahoo’s popular portal in Hong Kong, a city in southern China where people used traditional Chinese in writing, in contrast to simplified Chinese on the mainland. Jerry Yang, Yahoo’s co-founder, became one of four directors on Alibaba’s board. His ability to speak fluent Chinese made him an ideal candidate for this position. Two other directors came

21 Steinberg, D. (12 June 2006) “Web 2.0 Podcast: Jack Ma”, O’Reilly Media,

http://www.oreillynet.com/pub/a/network/2006/12/06/web-20-ma.html (accessed 18 February 2011). 22 Steiner, I. (30 October 2006) “Alibaba to Compete with EBay in Classifieds Market”, AuctionBytes.com,

http://www.auctionbytes.com/cab/abn/y06/m10/i30/s00 (accessed 25 February 2011). 23 Yeung, F. (21 October 2005) “EBay Lectures Taobao That Free Is Not a Business Model”, South China Morning Post. 24 Ibid. 25 Yahoo Inc (24 October 2005) “Yahoo! and Alibaba.com Announce Completion of Strategic Partnership in China”,

http://yhoo.client.shareholder.com/releasedetail.cfm?ReleaseID=177267 (accessed 18 March 2011).

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11/503C Yahoo: Relationship Crisis with Alibaba in China

from Alibaba’s management, and one from Softbank Corp (“Softbank”), which owned a 29% stake in Alibaba. On the fifth anniversary of the deal, Yahoo would be entitled to an additional seat on Alibaba’s board.

In e-commerce, one [key element] is e-marketplace, the other is search engine. So we thought, “Well we got to have a search engine.” . . . because if we don’t have it, we’d be in trouble. So we got Yahoo, the purpose is not that we want to use search engine to defeat Google, to defeat Baidu, we think a search engine is a very, very important engine and tool for Alibaba’s e- commerce work.

- Jack Ma, founder and chairman, Alibaba Group Holding Limited26

Search Market Share of Yahoo China Going Downhill The partnership with Alibaba did not bring about a quick revival of the web traffic of Yahoo China as originally hoped. The subsidiary’s market share in search revenue shrank from 27% in 2005 to 15% in 2006 [see Exhibit 7B].27 In January 2007, Ma acknowledged that Yahoo China was lagging behind its competitors and was losing money. He said: “If Yahoo is going to win, it has to do so in a new way.”28 At that time, the search engine of Yahoo China attracted more affluent, business-oriented customers in China, while the market leader Baidu had a high percentage of student users. Alibaba decided to re-orientate the search engine as more business-focused, hoping that this would differentiate itself from other competitors and enable it to win in a niche market. However, this strategy also did not work. The search engine of Yahoo China secured only an 11% market share in 2007.29 Meanwhile, Alibaba listed around 27% of its B2B division, Alibaba.com, on the Hong Kong Stock Exchange in November 2007, raising US$1.7 billion. Including the purchase of some of its listed shares, Alibaba still owned about 80% of Alibaba.com.

Yahoo Contemplating Selling Its Asian Assets amid Investor Pressure In the United States, Yahoo had been fighting an uphill battle against Google, which dominated the internet search market with 65.98% of search traffic in December 2007. Yahoo came in second with 20.88% [see Exhibit 20]. Another threat to Yahoo’s online advertising business came from the increasingly popular social networking site Facebook. On 31 January 2008, Microsoft announced an offer to acquire Yahoo for US$44.6 billion, equivalent to US$31 per share. Although this offer carried a high premium of 62% over Yahoo’s closing share price of US$19.18 on that day, it was turned down by Yahoo’s board a few days later. Then Microsoft hinted at a hostile takeover. Alibaba was worried about Microsoft’s hands-on approach, so it promptly hired advisers in early February to help it negotiate for management independence in case the deal went through. In mid-February, Ma said in a speech to 8,000 employees that Alibaba’s management “would always maintain its independence and management control” regardless of who its shareholders were.30

In April 2008, Microsoft raised its bid to US$47.5 billion, equivalent to US$33 per share. This was again rejected by Yahoo. Then, Microsoft aborted its takeover attempt in May. A

26 Steinberg, D. (12 June 2006) “Web 2.0 Podcast: Jack Ma”, O’Reilly Media,

http://www.oreillynet.com/pub/a/network/2006/12/06/web-20-ma.html (accessed 18 February 2011). 27 (2008 4 12 ) “ ” [NetEase (12 April 2008) “Analysys International: Market

Concentration of Internet Search Increases”], http://eyey1441.blog.163.com/blog/static/22302466200831294654263 (accessed 20 February 2011).

28 Los Angeles Times (9 January 2007) “Yahoo China to Be Geared to Business”. 29 (2009 1 7 ) “08 ” [Tencent Technology (7 January 2009) “Analysis of

China’s Search Engine Market in 2008”], http://www.crossn.com/zmcms/html/hangyeguancha/dongtai/200901/07-90.html (accessed 20 February 2011).

30 Dean, J. (16 February 2008) “Microsoft’s Yahoo Bid Ruffles China’s Alibaba”, Wall Street Journal.

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11/503C Yahoo: Relationship Crisis with Alibaba in China

billionaire investor in Yahoo, Carl Icahn, criticised Yahoo’s chief executive Yang for turning down Microsoft’s attractive offer. He launched a campaign to oust Yang and the entire board. In July, Yahoo reached an agreement with Icahn on stopping this campaign, under the condition that Icahn was allowed to join the board. However, facing enormous pressure by shareholders on financial performance, Yahoo said that it might consider selling its Asian assets to boost investor value.31 Besides the stake in Alibaba, Yahoo owned 33.4% of Yahoo! Japan Inc (“Yahoo Japan”).

A New Chief Executive for Yahoo In the second half of 2008, Yahoo’s share price experienced a continuous decline due to its lacklustre financial results [see Exhibits 11B and 11C]. It was exacerbated by a severe global recession that started in September that year. On 18 November 2008, Yang announced that he would step down as chief executive but would remain in the position until a new candidate was found. The next day, Yahoo’s share price closed at US$9.14, less than one-third of Microsoft’s highest offer price of US$33. The net loss of Yahoo in that quarter amounted to US$303.4 million.

In January 2009, Carol Bartz was headhunted from the software company Autodesk Inc to become Yahoo’s chief executive [see Exhibit 21]. Some Yahoo executives said that when Bartz first came on board, she was “very unhappy” about Alibaba’s failure to run Yahoo China more successfully than Yahoo had.32 The search market share of Yahoo China dropped to 5.8% in 2008.33 Some media reported that Bartz did not reach out to Ma or Alibaba.com’s chief executive David Wei, and that when Ma made a trip to the United States to meet with her, she dressed him down in front of his management team by criticising Alibaba’s way of managing the Yahoo China portal.34 A person close to Alibaba said: “She displayed the diplomatic skills of a donkey.” 35

Relationship Going from Rocky to Ugly

In the first quarter of 2009, Yahoo’s net income dropped 78% year-on-year [see Exhibit 11B]. This prompted the company to announce a massive layoff of 5% of its workforce in April and implement other stringent measures to cut costs. Bartz also rekindled talks with Microsoft over co-operation on internet search. The next month, Microsoft launched a new search engine, Bing, which was positioned as a credible alternative to Google Search. Then in June, Yahoo announced it was setting up a new Research Centre in Beijing, the same city where Yahoo China was based. This centre would develop products for Yahoo globally and was independent from Alibaba. Alibaba said the company had agreed with Yahoo that the new research centre would not do things in conflict with the web business of Yahoo China.36

31 Liu, J. (2 August 2008) “Alibaba Is Ready to Acquire Yahoo’s Stake if Offered”, Bloomberg. 32 Hille, K. and Menn, J. (18 September 2009) “Yahoo Rules out Going Solo in Chinese Market”, Financial Times. 33 (2009 1 21 ) “08 Q4 15.3 ” [Analysys International (21 January 2009)

“China’s Search Engine Market Reached Rmb 1.53 Billion in Q4 of 2008”], http://it.sohu.com/20090121/n261878552.shtml (accessed 20 February 2011).

34 Lacy, S. (12 September 2010) “Bartz in a China Shop”, TechCrunch, http://techcrunch.com/2010/09/12/bartz-in-a-china-shop- has-yahoos-ceo-wrecked-the-valley%E2%80%99s-most-valuable-chinese-relationship (accessed 15 February 2011).

35 Ibid. 36 Lu, G. (18 January 2010) “Yahoo China Might Be the Next to Say Goodbye”, Mobinode,

http://www.mobinode.com/2010/01/18/say-goodbye-to-yahoo-china/ (accessed 15 February 2011).

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11/503C Yahoo: Relationship Crisis with Alibaba in China

Yahoo-Microsoft Deal on Search Engine Yahoo is bowing to the inevitable. It simply had neither the resources nor the focus to win the technological arms race for search supremacy. . . . Only a Yahoo outsider like Ms Bartz could do such a deal. She has no sentimental attachment to what was once the core of Yahoo, its search business.

- Tim Weber, business editor of BBC37

On 29 July 2009, Yahoo and Microsoft announced a 10-year agreement on search and advertising services, under which Microsoft would be Yahoo’s exclusive platform technology provider for search services and Yahoo would become the exclusive worldwide relationship sales force for both companies’ search advertisers.38 Yahoo would receive 88% of the revenue from all search advertising sales on its site for the first five years and have the right to sell advertisements on some of Microsoft’s websites. Yahoo expected the deal would boost its income from operations by US$500 million annually and realise US$200 million in savings. The global rollout of Bing to Yahoo’s websites was scheduled to be fully implemented by the end of 2010. Bartz said: “This agreement comes with boatloads of value for Yahoo, our users, and the industry. And I believe it establishes the foundation for a new era of internet innovation and development.”39 However, this sentiment was not shared by Alibaba.

Why do we need a financial investor with no business synergy or technology? The biggest thing that has changed is Yahoo lost its own search-engine technology. The biggest reason for such a partnership doesn’t exist.

- David Wei, chief executive of Alibaba.com Limited40

Yahoo Selling All Direct Shares of Alibaba.com Yahoo regularly evaluates its financial investments and the value of its 1% direct IPO investment in Alibaba.com has increased substantially. This increase is why Yahoo sold this financial position.

- A company statement from Yahoo Inc41

Since the beginning of 2009, Alibaba.com’s share price had recovered rapidly from the economic downturn [see Exhibit 17B]. By early September the same year, it had increased more than 300% year to date, and 50% since Yahoo bought a 1.14% stake in Alibaba.com during its IPO in November 2007. In that first week, Ma sold less than 5% of his holdings in Alibaba.com for US$34 million. “I have no need for the money, I did it to give other people a chance to share my opinion about what a good company this is,” said Ma.42 Around a week later, on Tuesday, 15 September, Yahoo sold its entire direct shareholding of Alibaba.com for US$147 million. Yahoo’s stake in Alibaba was unaffected, but this transaction triggered a 10.5% drop in Alibaba.com’s share price that day, and more than 100 million shares were traded as compared to an average daily volume of 16 million over the previous 30 days.43

37 BBC (29 July 2009) “Microsoft and Yahoo Seal Web Deal”. 38 The two companies would maintain their own separate display advertising business and sales force, and Yahoo would continue

to use its search technology in its other areas such as enhancing display advertising technology. See: Yahoo Inc (29 July 2009) “Microsoft, Yahoo! Change Search Landscape”, http://yhoo.client.shareholder.com/releasedetail.cfm?ReleaseID=399702 (accessed 27 March 2011).

39 BBC (29 July 2009) “Microsoft and Yahoo Seal Web Deal”. 40 Lococo, E., Lee, M. and Engle, S. (10 September 2010) “Alibaba Doesn’t Need Yahoo as Partner without Search Technology”,

Bloomberg. 41 Hille, K. and Menn, J. (16 September 2009) “Yahoo Offloads Alibaba.com Holding”, Financial Times. 42 Young, D. and Lee, M. (15 September 2009) “Alibaba Dives after Yahoo’s Surprise Stake Sale”, Reuters. 43 Ibid.

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Yahoo’s move also came as a surprise to Alibaba, which was only informed of it on Thursday the week before—on the day of Alibaba’s 10th anniversary. According to someone close to Alibaba, the message of Yahoo’s decision was relayed through a low-level executive, while Yahoo’s former chief executive Yang was present at Alibaba’s anniversary celebration. “It’s like telling your wife she looks fat on her birthday,” commented this anonymous source.44 On the other hand, analysts did not regard Yahoo’s sale as an indication of a fundamental weakness in Alibaba.com’s business. “At Alibaba.com’s Alifest [anniversary celebration] last week, they [the company’s management] were quite bullish on the outlook as well, so I think Alibaba.com’s growth will still be strong,” said Dick Wei, an analyst at JP Morgan. 45

Meanwhile, Ma told the media during the 10th anniversary celebrations that Alibaba had not yet decided if and how to manage the algorithm of its search engine in China after the Yahoo- Microsoft cooperation agreement, even though the deal was considered to be global.46 The search market share of Yahoo China registered a new low at 2.9% in 2009.47

Fallout from Google’s Dispute with the Government We condemn any attempts to infiltrate company networks to obtain user information. We stand aligned with Google that these kinds of attacks are deeply disturbing and strongly believe that the violation of user privacy is something that we as Internet pioneers must all oppose.

- A company statement from Yahoo Inc48

In January 2010, Google’s global network experienced a series of highly sophisticated cyber- attacks, allegedly coming from China. Besides Google, the hackers targeted more than 30 global companies in such sectors as finance, technology, media and chemical. They were mainly going after the companies’ intellectual property, including software codes, engineering schematics and corporate strategy plans. Google said its investigation revealed that accounts of China human rights activists who used Google’s Gmail services in Europe, China or the United States had been routinely accessed using malicious software loaded on the users’ computers. Google thus heightened the IT security by changing the default settings for Gmail users to automatically encrypt messages. Security experts investigating these incidents of cyber-attacks found similarities between them and another series of attacks originating from China on about 100 US companies in mid-2009, but the scope of these attacks was unprecedented with a “significant leap in the amount of planning and strategy” and with variants of malicious software tailored for different victims.49

Although Google did not mention the suspect involved, its referral to Chinese human rights activists as specific targets indirectly suggested that the Chinese government might be the mastermind. Moreover, the company said it would stop censoring50 its search results in China and threatened to quit its operation on the mainland. Most other companies victimised by this series of attacks remained silent, except Adobe Inc. According to people familiar with the situation, Yahoo was also targeted, but it did not publicly acknowledge it. Instead, Yahoo

44 Ibid. 45 Ibid. 46 Wauters, R. (14 September 2009) “Yahoo Sells $150 Million Worth of Alibaba.com Shares as Tensions Lurk”, TechCrunch,

http://techcrunch.com/2009/09/14/yahoo-sells-150-million-worth-of-alibaba-com-shares-as-tensions-lurk (accessed 16 February 2011).

47 (2010 3 23 ) “2009 ” [Analysys International (23 March 2010) “China’s Search Engine Market in 2009”], http://www.enfodesk.com/SMinisite/index/articledetail/type_id/2/info_id/102306.html (accessed 20 February 2011).

48 Sorkin, A. (19 January 2010) “Alibaba Criticizes Investor Yahoo for Google Support”, New York Times. 49 Chapman, G. (13 January 2010) “China Google Cyberattack Part of Spying Campaign: Experts”, Agence France Presse. 50 In January 2006, Google launched a website hosted on China-based servers and offered a new version of its search engine

optimised for the simplified Chinese language used on the mainland. However, in order to comply with regulatory requirements, this site was censored for sensitive information that might offend the government.

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issued a company statement that supported the stance of Google in protecting user privacy. In response, Alibaba’s spokesman John Spelich said executives at the company were angry because Yahoo appeared to follow Google in suggesting the Chinese government was behind the cyber-attacks.51

Alibaba Group has communicated to Yahoo! that Yahoo’s statement that it is “aligned” with the position Google took last week was reckless given the lack of facts in evidence. Alibaba doesn’t share this view.

- A company statement from Alibaba Group Holding Limited 52

In June 2010, at Alibaba’s annual shareholders meeting, its chief financial officer Joe Tsai said that the company would like to buy back Yahoo’s stake. But Yahoo was not interested in selling.

Yahoo Japan and Alibaba Switching to Competitors’ Search Engines At the present time, we feel there are quite a few areas where Microsoft is not yet ready. Google is one step ahead in Japanese-language services.

- Masahiro Inoue, chief executive of Yahoo Japan Inc53

In Japan, Yahoo Japan was the top player in internet search with a 53.2% market share, leading Google (37.3%) and Microsoft (2.6%) by a wide margin.54 Its success was attributed to its rich and diverse content. In July 2010, the company announced that after a year of careful analysis, it had reached a licensing deal with Google on using Google’s search engine for Yahoo Japan’s search advertising platform. In return, Google would receive up-to-the- minute content updates from Yahoo Japan to refresh the Google search results. Yahoo Japan would be able to customise the Google search results to fit the internet users in Japan. Therefore, what the company built on top of Google’s technology was exclusive to Yahoo Japan, and the two companies remained competitors in Japan’s search market.

In August 2010, Alibaba and Yunfeng Fund, a private equity fund in which Ma owned a significant stake, bought a 16% stake of Sohu.com’s search engine Sogou. Sohu.com was the fourth most popular internet portal in China, but its search engine occupied only a 0.8% market share in Q2 of 2010, trailing far behind Baidu (70%) and Google (24.2%). 55

“Alibaba’s resources will help the development of Sohu’s search engine. Sogou hasn’t been able to gain any significant market share on its own, so the tie-up will make it more competitive,” commented Nelly Jin, an internet analyst at the research firm iResearch Inc.56

On 29 October 2010, Alibaba distanced itself further from Yahoo by announcing that its e- commerce customers could opt for the Sogou search engine in addition to the Bing search engine made available through the Yahoo-Microsoft deal.57

51 Sorkin, A. (19 January 2010) “Alibaba Criticizes Investor Yahoo for Google Support”, New York Times. 52 Ibid. 53 Tabuchi, H. (27 July 2010) “Yahoo Japan Teams with Google on Search”, New York Times. 54 Ibid. 55 Fletcher, O. (11 August 2010) “Sohu, Alibaba Mum on Search Deal”, Wall Street Journal. 56 Lee, M. (9 August 2010) “Sohu, Alibaba Reach Agreement on China Search Engine”, Bloomberg. 57 Lee, M. (29 October 2010) “Alibaba Says It Now Offers Sohu’s Search Engine”, Bloomberg.

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Direct Competition between Yahoo and Alibaba We were surprised to read it in the paper. If Yahoo begins to compete with Alibaba in China, we will have to re-evaluate our relationship with Yahoo in light of their intentions.

- John Spelich, spokesman for Alibaba Group Holding Limited 58

Hong Kong was a city located in southern China with 7 million people. It was formerly a British colony that was handed over to China in 1997 under a “one country two system” policy, under which Hong Kong would preserve its own legal, judicial and governmental systems for 50 years. This included maintaining its own border control, even for travel to and from the mainland. Many Hong Kong residents flocked to Shenzhen, the Chinese city right across the border, to purchase goods and services. This was because goods and services on the mainland were much cheaper, except for luxury items. Around 160,000 people travelled to and from Shenzhen on a daily basis.

On 6 September 2010, a newspaper in Hong Kong reported that Yahoo’s Hong Kong office started recruiting advertisers in Shenzhen at the beginning of the year. Seminars were hosted for small and medium enterprises (“SMEs”) to introduce Yahoo’s Hong Kong portal as a useful advertising tool to reach their target customers. As Yahoo’s Hong Kong portal was very popular, with 3.42 million unique visitors each month, the company had successfully signed up over 60 new Shenzhen-based online advertisers by September. These advertisers were happy with the results. For example, a wedding-photo studio, “100 Year Impression”, boosted its business by 20% in the first half of the year after using Yahoo’s search marketing. 59 In light of this initial success, Yahoo planned to expand this advertiser recruitment programme to other major cities in China’s Pearl River Delta region, and eventually also to the United States and other Western markets.

This news came as a surprise to Alibaba. Alibaba.com’s chief executive David Wei said: “If they [Yahoo’s management] want to do anything in China, they have to respect the agreement they signed in 2005.”60 Yahoo viewed the matter in a different light. “We’re not exactly going to compete with Alibaba.com because it is a business-to-business platform used by registered members. What we’re offering is simply another online advertising and marketing platform, through Yahoo in America, for mainland SMEs to reach their target audience,” said Alfred Tsoi, managing director of Yahoo Hong Kong.61 However, Tsoi did not mention the timeline of launching this initiative in the United States.

Yahoo’s CEO Shunned from the Board of Alibaba On 17 September 2010, Alibaba disclosed that Yahoo had again rejected its offer to buy back Yahoo’s stake in Alibaba. The next day, Bartz told the media that the ideal time for Yahoo to exit from Alibaba would be after Taobao and Alipay went public, and that she would probably join Alibaba’s board the following month when Yahoo got a second seat on the fifth anniversary of its 2005 agreement with the company.62 The market value of Taobao alone was estimated at US$7 billion by Goldman Sachs [see Exhibit 22].63 Wang Shuai, chief marketing officer of Taobao, promptly clarified on 19 September that Alibaba had no plan for Taobao to

58 Chao, L. and Efrati, A. (10 September 2010) “Another Yahoo-Alibaba Spat”, Bloomberg. 59 Perez, B. (6 September 2010) “Yahoo HK Spreads Mainland Net Wider”, South China Morning Post. 60 Perez, B. (11 September 2010) “Partner or New Competitor?”, South China Morning Post. 61 Ibid. 62 China Daily (20 September 2010) “Alibaba Says No to Yahoo’s CEO”, http://news.xinhuanet.com/english2010/china/2010-

09/20/c_13520578.htm (accessed 16 February 2011). 63 Young, D. and Chen, G. (9 November 2010) “PE Group Approaches Alibaba’s Ma on Yahoo Bid”, Reuters.

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go public. He also shrugged off the proposal by Bartz about her joining Alibaba’s board, saying: “Perhaps it would not be a bad idea for her to concentrate her efforts on improving Yahoo’s current situation.”64 Eventually, Yahoo did not name a second director for Alibaba’s board on 24 October 2010, the agreement’s fifth anniversary. According to sources close to the company, it might take some time before a suitable person could be identified.65 At that time, analysts estimated that Yahoo’s Asian assets, including its stakes in Yahoo Japan and Alibaba, accounted for at least half of Yahoo’s US$22 billion market value.66 The analyst firm Stifel, Nicolaus & Company put that figure as high as 85%, calling Yahoo in effect an Asian internet player that also had a US business.67

Yahoo’s Stance on Its Stake in Alibaba In mid-November 2010, Ma told the media that he was invited to join a private equity group concocting a bid to buy Yahoo, and that Ma himself was exploring the feasibility of setting up a special fund to buy back Yahoo’s stake in Alibaba.68 A few days later, Bartz reiterated in a technology conference that Yahoo had no interest in getting rid of Alibaba. She said: “Yahoo was smart to put a billion on Jack Ma and let him operate. It has turned into many billions. We get credit for it in the stock market. We’d get more credit if it were liquid. Increasingly as people understand China, we get credit for our strategic decision to invest without risk.”69

Analysts estimated that Yahoo’s stake in Alibaba was worth US$4 to 10 billion [see Exhibit 22]. Regarding a question on whether Ma wanted to divorce Alibaba from Yahoo by buying back Yahoo’s stake, as rumoured in a three-way deal with AOL, Bartz responded: “Did Jack say that? . . . Don’t believe everything you read.”70 Moreover, she explained what Yahoo stood for as follows:

Yahoo’s story is pretty clear . . . content, communications, media, technology, innovation. . . . I think that Yahoo has always stood for those words. . . . I think it went off track when people thought Yahoo was a search company. Search is a hard problem.

- Carol Bartz, chief executive of Yahoo Inc, November 201071

Competitive Landscape for E-commerce in 2010

Repositioning of China’s E-commerce Players in Boosting B2C Business China’s B2C segment expanded more than fourfold from US$3.3 million in 2009 to US$15.6 million in 2010, and was estimated to reach US$97.6 million in 2013 [see Exhibit 9A]. Many C2C players repositioned themselves to ride on the growing trend of online shopping through B2C marketplaces. During the year, Alibaba had registered a separate website domain (http://www.tmall.com) for its B2C marketplace “Taobao Mall”, which was first launched in April 2008 as Taobao’s sub-domain (http://tmall.taobao.com). The group also started a new

64 China Daily (20 September 2010) “Alibaba Says No to Yahoo’s CEO”, http://news.xinhuanet.com/english2010/china/2010-

09/20/c_13520578.htm (accessed 16 February 2011). 65 Oreskovic, A. (22 October 2010) “Yahoo to Take Time Finding 2nd Alibaba Board Member”, Reuters. 66 Ibid. 67 Lacy, S. (12 September 2010) “Bartz in a China Shop”, TechCrunch, http://techcrunch.com/2010/09/12/bartz-in-a-china-shop-

has-yahoos-ceo-wrecked-the-valley%E2%80%99s-most-valuable-chinese-relationship (accessed 15 February 2011). 68 Young, D. and Lee, M. (11 November 2010) “Alibaba.com Sees Slower Growth after Record Q3 Profit”, Reuters. 69 Yarow, J. (16 November 2010) “Carol Bartz Doesn’t Rule out Private Equity for Yahoo”, Business Insider,

http://www.businessinsider.com/live-carol-bartz-20-2010-11 (accessed 18 February 2011). 70 Catacchio, C. (17 November 2010) “Yahoo! CEO: ‘We Have No Interest in Getting Rid of Alibaba’”, The Next Web,

http://thenextweb.com/asia/2010/11/17/yahoo-ceo-we-have-no-interest-in-getting-rid-of-alibaba (accessed 16 February 2011). 71 Catacchio, C. (16 November 2010) “CEO Bartz: Yahoo! ‘Stands for Fun’”, The Next Web,

http://thenextweb.com/us/2010/11/16/ceo-bartz-yahoo-stands-for-fun (accessed 16 February 2011).

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11/503C Yahoo: Relationship Crisis with Alibaba in China

B2C marketplace “LP” ( , http://lp.taobao.com), under Taobao’s website. LP, whose Chinese name literally meant “nameless premium products”, served Chinese merchants who previously only manufactured quality products to be marketed by foreign companies overseas but did not sell their own branded products. Tencent, which operated the second biggest C2C website Paipai, re-branded its B2C site “QQ Members’ Official Shop” (QQ ) as “QQ Mall” (QQ ), which sounded more high-end. The fourth C2C player Baidu resorted to forming a joint venture in order to win this e-commerce battle.

Baidu’s Expansion into B2B2C through Joint Venture with Rakuten In January 2010, Baidu reached an agreement with Rakuten Inc (“Rakuten”) to invest US$50 million over three years in a joint venture to build an online B2B2C marketplace in China, serving both B2B and B2C customers. Rakuten owned 51% of this joint venture, and Baidu held the remaining 49%.72 This marketplace, named Rakuten Ichiba China, was launched in October the same year. Rakuten was founded in 1997 as a B2B2C company. It was the biggest e-commerce player in Japan. The company also operated online retail marketplaces in places such as the United States, the United Kingdom, France, Spain, Taiwan, Thailand and Indonesia.73 Its US subsidiary, LinkShare Corporation, offered full-service online marketing solutions in the areas of affiliate marketing, search marketing and lead generation.

Baidu’s chief executive Robin Li elaborated on the potential impact of this joint venture on the company’s search business: “The majority of the users are lazy. They usually want to rely on one search box to satisfy their information needs. I don’t see significant build up in organic traffic from those vertical search services, going forward I still believe the super majority of users will first come to Baidu.”74 Because Baidu had a 75% market share for China’s search revenue in Q4 of 2010, its alliance with Rakuten might have posed a big threat to Alibaba and other e-commerce players. “[Baidu’s executives] have always wanted to leverage their shared search traffic to help the e-commerce revenue, but they have never successfully done that. I think the JV with Rakuten will be a success,” commented Fiona Zhou, an analyst at Pacific Epoch.75

Alibaba Investing US$4.5 Billion in Logistics Infrastructure in China As competition in the B2C segment heated up, Alibaba told the media in October 2010 that it planned to expand its logistics network from 20 cities to 52 cities in two years. In the following month, the company acquired Shenzhen One-Touch Enterprise Service Limited, which provided export services such as customs clearance, logistics, cargo insurance and currency exchange for small business exporters. Alibaba also announced in January 2011 that it would invest up to US$4.5 billion to establish a network of warehouses and supporting logistics firms across China. Around one-third of this sum would be directly funded by Alibaba, and the remaining would come from a fund set up with private equity and venture capital firms. With a fragmented logistics market in China, Ma believed that customer service for goods bought on the internet could be improved, saying: “Hopefully within 10 years’ time, anyone placing an order online from anywhere in China will receive their goods within eight hours, allowing for the virtual urbanisation of every village across China.”76

72 Wauters, R. (27 January 2010) “Baidu and Japan’s Rakuten to Invest $50 Million in Giant Online Shopping Mall”,

http://techcrunch.com/2010/01/27/baidu-rakuten (accessed 24 March 2011). 73 Rakuten’s other businesses in Japan included an online auction site, an online travel service, an e-bank, a credit card, a

personal consumer credit service and an online securities brokerage. 74 Oreskovic, A. and Lee, M. (21 October 2010) “Baidu Posts Robust Outlook, E-commerce Set to Soar”, Reuters. 75 Ibid. 76 Lee, M. and Yin, L. (19 January 2011) “Alibaba, Partners to Spend up to $4.5 Billion on Logistics”, Reuters.

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11/503C Yahoo: Relationship Crisis with Alibaba in China

Alibaba’s huge investment in logistics infrastructure was a game-changing move. Other top B2C players such as Dangdang, 360Buy and Redbaby all rushed to develop their backend logistics capabilities. Wu Yung, the founder of a B2C marketplace for digital consumer products, GouHB.com, analysed their strategies by saying: “They all pursue a similar development path: integrating the four core elements of hardware, software, media, and content (product) in their supply chain. This will gradually increase their types of transaction and enlarge their comprehensive [e-commerce] platforms. The ultimate goal is probably to do big-dollar-value transactions.”77

Alibaba’s Strategic Moves in Going Global Before this financial crisis [in 2008], we were helping China’s products abroad. Now we are thinking about helping SMEs in the other parts of the world. Help them sell across the nations. Help them to sell to China. In the next 10 years, we are moving from a pure China exporting centre to a global platform for SMEs to exchange products.

- Jack Ma, founder and chairman, Alibaba Group Holding Limited 78

As Alibaba had established strong footholds in China, it began ramping up its expansion overseas in 2008 [see Exhibit 15]. In April that year, the company formed a partnership with Infomedia India Limited, a leading media company in offline Yellow Pages and physical media in India. This enabled Alibaba to leverage the partnering company’s customer base to develop business in this populous country that had relatively low internet penetration. In the following month, Alibaba set up a B2B joint venture, Alibaba Japan, with Softbank to foray into the Japanese market.

In April 2010, Alibaba launched AliExpress, a B2B marketplace for US merchants. AliExpress adopted eBay’s online payment system PayPal. Ma and eBay’s chief executive John Donahoe said that they were both keen to find more ways to work closely together after this strategic lineup.79 Then in June, Alibaba acquired Vendio Services Inc (“Vendio”), a B2C e-commerce start-up based in California. This company served around 80,000 small- and medium-sized US businesses annually. Its award-wining multi-channel platform and applications allowed businesses to sell their products through many e-commerce channels, including the Vendio-supported online store, Amazon, eBay, Google and Shopzilla. Two months later, Alibaba bought Auctiva.com (“Auctiva”), a California-based third-party developer of tools for eBay sellers.80 Auctiva also had a B2C marketplace serving 170,000 merchants. After the acquisition, this marketplace would be integrated with AliExpress, and its merchants could continue to list their products on eBay through Auctiva. Regarding the purchases of Vendio and Auctiva, Alibaba said: “The connection of these two platforms with our [B2B] marketplaces will help integrate the e-commerce value chain between B2B and B2C, fully realising the B2B2C model. Business integration is underway as we are now working on further matching criteria like product categories in demand, quality and scale of suppliers etc between the buyers and our AliExpress suppliers.”81

Alibaba had set aside US$100 million for developing AliExpress, including funding acquisitions such as Vendio and Auctiva. According to David Wei, Alibaba.com’s chief

77 (2011 2 28 ) “B2C ” [Nanfang Daily (28 February 2011) “The B2C Battle Was Escalated at

Last”], http://www.eguan.cn/cache/1247/97736.html (accessed 20 February 2011). 78 Hille, K. (19 January 2009) “The Monday Interview: Jack Ma”, Financial Times. 79 Perez, B. (11 September 2010) “Partner or New Competitor?”, South China Morning Post. 80 Auctiva’s product offerings included eBay auction management tools, templates for e-marketplaces, image hosting, online

scheduling, and a user-friendly one-page listing tool. 81 Steiner, I. (12 November 2010) “Alibaba Comments on Vendio and Auctiva Acquisitions”, AuctionBytes.com,

http://www.auctionbytes.com/cab/cab/abn/y10/m11/i12/s04 (accessed 18 March 2011).

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executive, the United States was the top priority in the company’s investment list and it was the company’s biggest market outside China in terms of users. Alibaba was seeking to acquire more US companies, but it was not trying to enter into direct competition with Amazon and eBay. “We go to help merchants on eBay and Amazon to improve their profit. So far, we have no ambition to serve consumers in the US,” added Wei.82 In fall 2010, at a conference in China, eBay’s chief executive Donahoe appeared on stage with Ma, calling Ma a good friend, and Ma said, “We have the same dream, the same purpose, face the same group of SME clients. . . . This is the case today, and even more so tomorrow. I believe the Alibaba team and the Taobao team are always cooperating with the eBay team, and I think in the future we will cooperate more closely.”83

Patching Up

If Alibaba cannot become a Microsoft or Walmart, I will regret it for the rest of my life.

- Jack Ma, founder and chairman, Alibaba Group Holding Limited84

Ma believed that Alibaba had the potential to be bigger than Walmart Inc (“Walmart”) because Alibaba targeted both business customers and consumers in e-commerce, while Walmart only sold to consumers.85 In the quest to expand his business empire, Ma ramped up efforts in forming strategic alliances. In mid-February 2011, he made a trip to Silicon Valley in the United States to meet with several big companies about potential partnerships with Taobao. However, according to sources close to the company, a meeting with Yahoo, whose headquarters was located in Sunnyvale in Silicon Valley, was specifically not on the agenda.86

Moreover, as reported by Forbes, Ma said in March that he was disappointed about Yahoo and did not trust this US shareholder after working with it for years.87

Facing this awkward business situation, Yahoo’s board of directors planned to conduct a thorough review of the company’s strategies and approach in handling the partnership with Alibaba. What went wrong in the first place, and what should be done to mend the ties? Moreover, what roles could Yahoo play in realising Ma’s dream of grooming Alibaba to become a company bigger than Walmart? Moreover, in January 2011, Ma said in an e-mail to Alibaba’s employees that the group’s two subsidiaries, Taobao and Alipay, were not yet mature enough for initial public offerings, and Alibaba would instead speed up investment in e-commerce infrastructure over the next few years.88 So, should Yahoo yield to Alibaba’s request to sell its stake back to Alibaba, or should it wait until Alibaba’s two subsidiaries go public? Alternatively, would it be better off keeping this investment in order to maximise Yahoo’s shareholder value in the long run?

82 Salamat, R. and Lee, M. (11 August 2010) “China’s Alibaba.com Targets More U.S. Acquisitions”, Business Week. 83 Boom News (15 February 2011) “Jack Ma Flies Thousands of Miles to Palo Alto, Still Doesn’t Want to See Carol Bartz”,

http://boomnews.info/jack-ma-flies-thousands-of-miles-to-palo-alto-still-doesn%E2%80%99t-want-to-see-carol-bartz (accessed 16 February 2011).

84 Thomas White International (5 October 2010) “Emerging Leaders: Jack Ma, Chairman, Alibaba”, http://www.thomaswhite.com/explore-the-world/emerging-leaders/jack-ma.aspx (accessed 15 February 2011).

85 Ibid. 86 Boom News (15 February 2011) “Jack Ma Flies Thousands of Miles to Palo Alto, Still Doesn’t Want to See Carol Bartz”,

http://boomnews.info/jack-ma-flies-thousands-of-miles-to-palo-alto-still-doesn%E2%80%99t-want-to-see-carol-bartz (accessed 16 February 2011).

87 Lee, M. (25 March 2011) “Alibaba’s Ma ‘Called for the Heads’ of Wei and Lee”, Bloomberg. 88 China Business News (28 January 2011) “Alibaba Group Shelves Listing Plans for Taobao, Alipay”,

http://cnbusinessnews.com/alibaba-group-shelves-listing-plans-for-taobao-alipay (accessed 20 February 2011).

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EXHIBIT 1: NUMBER OF INTERNET USERS IN CHINA (2002 TO 2010)

Year Internet Users in China Internet Penetration Rate (%) Number (million) Growth Rate (%)

2002 59 NA 4.6 2003 80 35.6 6.2 2004 94 17.5 7.2 2005 111 18.1 8.5 2006 137 23.4 10.5 2007 210 53.3 16.0 2008 298 41.9 22.6 2009 384 28.9 28.9 2010 457 19.0 34.3

0 50

100 150 200 250 300 350 400 450 500

2002 2003 2004 2005 2006 2007 2008 2009 2010

In te

rn et

U se

rs (m

ill io

Source: Fu, R. (9 February 2011) “China Internet Users by Numbers: Feb 2011”, China Internet Watch, http://www.chinainternetwatch.com/926/china-internet-users-2011 (accessed 20 February 2011).

EXHIBIT 2: INTERNET PENETRATION RATE IN CHINA AND OTHER MAJOR MARKETS

Market Internet Penetration Rate (%) North America 77.4

Australia 61.3 Europe 58.4

China (mainland) 34.8 Latin America 34.5 Middle East 29.8

Asia 21.5 Africa 10.9

Note: The original data came from DCCI.

Source: Resonance China (7 February 2011) “China’s Internet; 450M: Only 35% Potential Capacity”, http://www.resonancechina.com/2011/02/07/chinas-internet-450m-only-35-potential- capacity (accessed 20 February 2011).

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EXHIBIT 3: TOP TEN LANGUAGES USED ON THE INTERNET IN 2010

Language Internet Users Internet Penetration Rate by Language (%)Number (million) % of World Total

1 English 536.6 27.3 42.0 2 Chinese 445.0 22.6 32.6 3 Spanish 153.3 7.8 36.5 4 Japanese 99.1 5.0 78.2 5 Portuguese 82.5 4.2 33.0 6 German 75.2 3.8 78.6 7 Arabic 63.4 3.2 18.8 8 French 59.8 3.0 17.2 9 Russian 59.7 3.0 42.8

10 Korean 39.4 2.0 55.2 Top 10 Languages 1,616.0 82.2 36.4 Remaining Languages 350.6 17.8 14.6 World Total 1,966.5 28.7

Note: The original data came from Internet World Statistics.

Source: Wilhelm, A. (21 December 2010) “Chinese: The New Dominant Language of the Internet”, The Next Web, http://thenextweb.com/asia/2010/12/21/chinese-the-new-dominant- language-of-the-internet-infographic (accessed 20 February 2011).

EXHIBIT 4: EQUIPMENT USED BY NETIZENS TO ACCESS THE INTERNET IN CHINA

73.4

60.8

30.7

0.5

73.6

65.9

36.8

0.8 0

Desktop Computer

Mobile Phone Notebook Computer

Others

U sa

ge R

at e

by N

et iz

en s

(% )

December 2009 June 2010

Note: The original data came from China Internet Network Information Centre.

Source: Resonance China (14 September 2010) “Chinese Use Mobile to Access Internet More than Desktops”, http://www.resonancechina.com/2010/09/14/comparsion-of-internet-access- equipment-200912-201006 (accessed 20 February 2011).

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EXHIBIT 5: TOP TEN WEBSITES WITH THE HIGHEST HIT RATE IN CHINA (As of February 2011)

Company Website Major Business 1 Tencent Holdings

Limited http://www.qq.com Internet portal

2 360buy http://www.360buy.com E-commerce (B2C) 3 Beijing Guangyu

HuaXia Sci-Tech Company Limited

http://www.gyyx.cn Online games and entertainment

4 China Mobile Limited http://10086.cn Telecommunication services 5 Taobao http://www.taobao.com E-commerce (B2C and C2C) 6 China Unicom http://www.chinaunicom.com.cn Telecommunication services 7 Shanda Interactive

Entertainment Limited

http://www.snda.com Online games and entertainment

8 Lenovo China http://www.lenovo.com.cn Computer and smartphone 9 Dangdang http://www.dangdang.com E-commerce (B2C) 10 SINA Corporation http://www.sina.com.cn Internet portal

Source: , “ ” [Analysys International, “Hit Rate Ranking of Vendors”], http://www.enfodesk.com/SMinisite/index/vendors-menuid-1-submenuid-3.html (accessed 24 February 2011).

EXHIBIT 6: INTERNET ADVERTISING MARKET SHARES IN CHINA

Company Major Business Internet Advertising Market Share From Q1 to Q3 of 2010 (%)

1 Baidu Inc. Internet portal 30.0% 2 Google Inc. Internet portal 10.7% 3 SINA Corporation Internet portal 8.5% 4 Alibaba Group E-commerce 8.2% 5 Sohu.com Inc. Internet portal 6.0% 6 Tencent Holdings

Limited Internet portal 6.0%

7 NetEase Internet portal 1.9% 8 Youkou.com Inc. Online video streaming 1.6% Others 27.1%

Note: The original data came from Meihua Information.

Source: Resonance China (5 January 2011) “Baidu and Google Lead in China Internet Market Share”, http://www.resonancechina.com/2011/01/05/baidu-and-google-lead-in-china-internet- market-share (accessed 20 February 2011).

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EXHIBIT 7A: MARKET SIZE OF INTERNET SEARCH IN CHINA

Year Market Size of Internet Search Change (%) US$ million1 Rmb million 2006 236.0 1,571 NA 2007 438.8 2,921 86.0 2008 773.6 5,150 76.3 2009 1,071.9 7,136 38.6 2010 1,745.5 11,620 62.8 2011F2 2,445.4 16,279 40.1 2012F 3,429.7 22,832 40.3 2013F 4,721.8 31,433 37.7

1 US$1=Rmb 6.657 on 15 November 2010. 2 “F” stood for forecast data.

Source: [Enfodesk], http://www.enfodesk.com (accessed 20 February 2011).

EXHIBIT 7B: MARKET SHARES OF CHINA’S MAJOR SEARCH ENGINES

Search Engine

Market Share in Search Revenue (%) 2005 2006 2007 2008 2009 2010 Q4

Baidu 33.1 53.3 59.3 62.2 60.9 75.5 Google 13.0 16.1 23.4 27.8 31.8 19.6 Yahoo 27.0 15.0 11.0 5.8 2.9 NA1

Sogou 10.9 6.6 2.2 0.9 0.8 1.0 Zhongsou 5.4 3.3 2.0 0.9 NA 0.5 Sina 5.4 2.0 0.6 0.4 NA NA NetEase 0.9 0.9 0.6 0.4 NA 0.3 Soso - - NA 0.6 0.7 0.6

1 Yahoo’s market share was not separately listed in Q4 of 2010. This implied that the figure was less than 0.3%, the market share of NetEase.

0 10 20 30 40 50 60 70 80 90

100

2005 2006 2007 2008 2009 2010 Q4

M ar

ke t S

ha re

(% )

Baidu Google Yahoo

Source: [Enfodesk], http://www.enfodesk.com (accessed 20 February 2011); Analysys International], http://www.analysys.com.cn (accessed 20 February 2011).

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EXHIBIT 8A: MARKET SIZE OF B2B E-COMMERCE IN CHINA

Year Market Size of B2B E-commerce Change (%) US$ million1 Rmb million2

2003 45 300 NA 2004 75 500 66.7 2005 135 900 80.0 2006 270 1,800 100.0 2007 526 3,500 94.4 2008 751 5,000 42.9 2009 886 5,900 18.0 2010 1,097 7,300 23.7 2011F3 1,277 8,500 16.4 2012F 1,517 10,100 18.8

1 US$1=Rmb 6.657 on 15 November 2010. 2 The original data source was denoted in units of Rmb 100 million. 3 “F” stood for forecast data.

0 100 200 300 400 500 600 700 800 900

1,000 1,100 1,200 1,300 1,400 1,500 1,600

2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F

(U S$

m ill

io n)

B2B

Source: (2010 1 4 ) “2012 B2B 101 ” [Analysys International (4 January 2010) “China’s B2B Online Transaction Value Expected to Reach Rmb 10.1 Billion in 2012”], http://www.aliresearch.com/data/3065/ (accessed 20 February 2011).

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EXHIBIT 8B: MARKET SHARES OF MAJOR B2B MARKETPLACES IN CHINA

B2B Marketplace Company Market Share in Q4 of 2010 (%)

1 Alibaba.com Alibaba Group Holding Limited 69.7 2 Globalsources.com Global Sources 4.9 3 Made-in-china.com Focus Technology Company Limited 2.7 4 Toocle.com Toocle Trading Circle 2.4 5 HC360.com HC360.com 2.1 6 Emedchina.cn Beijing Emedchina Pharmaceutical

E-Commerce Company Limited 2.1

7 315.com.cn Beijing 315.com Network Technology Holdings Company Limited

1.9

8 B2B.cn B2B.cn 1.6 9 DHgate.com DHgate.com 1.2 10 BusyTrade.com BusyTrade.com Limited 0.3 Others 11.2

Source: (2011 1 19 ) “ 2010 4 B2B ” [Enfodesk (19 January 2011) “Industry Statistics: Steady Development for Online B2B Market in Q4 of 2010”], http://www.eguan.cn/cache/1338/96403.html (accessed 20 February 2011).

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EXHIBIT 9A: MARKET SIZE OF B2C AND C2C E-COMMERCE IN CHINA

Market Size % of Total B2C

(US$ million)1 C2C

(US$ million) Total

(US$ million) Change in Total (%)

B2C (%)

C2C (%)

2003 90 166 256 NA 35.2 64.8 2004 195 612 807 215.2 24.2 75.8 2005 346 2,071 2,416 199.4 14.3 85.7 2006 556 3,855 4,411 82.6 12.6 87.4 2007 691 7,030 7,721 75.0 9.0 91.0 2008 1,217 16,839 18,056 133.9 6.7 93.3 2009 3,305 34,655 37,960 110.2 8.7 91.3 2010 15,623 62,340 77,963 105.4 20.0 80.0 2011F2 29,740 87,820 117,560 50.8 25.3 74.7 2012F 54,080 103,130 157,210 33.7 34.4 65.6 2013F 97,640 111,910 209,550 33.3 46.6 53.4

1 US$1=Rmb 6.657 on 15 November 2010. 2 “F” stood for forecast data.

100

110

120

2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F

(U S$

b ill

io n)

B2C C2C

Source: (2011 1 4 ) “2010 B2C ” [Analysys International (4 January 2011) “B2C E-commerce Market Exceeded Rmb 100 Billion in 2010”], http://www.analysys.com.cn/cache/1215/95026.html (accessed 1 March 2011).

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EXHIBIT 9B: MARKET SHARES OF MAJOR C2C MARKETPLACES IN CHINA

C2C Marketplace

Company Market Share From January To June 2010 (%)

1 Taobao.com Alibaba Group Holding Limited 83.5 2 Paipai.com Tencent Holdings Limited 11.5 3 Eachnet.com eBay Inc 4.4 4 Youa.Baidu.com Baidu Inc 0.6 Total Close to 100

Source: (2010 8 5 ) “2010( ) ” [China e-Business Research Centre (5 August 2010) “Statistical Report on China’s E-commerce Market in 2010 (First Half)”], http://b2b.toocle.com/zt/down/2010jc.pdf (accessed 25 March 2011).

EXHIBIT 9C: MARKET SHARES OF MAJOR B2C MARKETPLACES IN CHINA

B2C Marketplace

Company Market Share From January To

June 2010 (%) 1 360buy.com 360buy.com 34.5 2 Dangdang.com E-commerce China Dangdang Inc 9.0 3 Amazon.cn Amazon.com Inc 8.8 4 Newegg.com.cn Newegg Inc 6.1 5 Redbaby.com.cn Beijing Redbaby Internet Technology

Company Limited 3.8

6 Vancl.com VANCL 2.5 7 M18.com MecoxLane Inc 2.4 8 Icson.com Icson.com 1.5 9 Coo8.com Beijing Coo8 Technology Company Limited 1.1 10 Suning.cn Suning Corporation 0.8 Others 29.5

Note: The market share of Taobao’s B2C sub-domain, Taobao Mall (http://tmall.taobao.com), was counted in the C2C market by the quoted source. Therefore, Taobao was not ranked in the above table. Another source from Analysys International stated that the Taobao Mall was the top B2C website with 33.5% market share in Q3 of 2010, followed by 360buy.com. See: E

(2011 1 7 ) “ 2010 B2C 4 ” [Ekesn.com (7 January 2011) “Taobao Said Its B2C Business Grew Four Folds in 2010”], http://www.ekesn.com/index.php?ctr=News_Details&Fstr=91,4007 (accessed 25 March 2011).

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EXHIBIT 10: MARKET SHARES OF CHINA’S MAJOR ONLINE PAYMENT COMPANIES IN 2010

Online Payment Channel

Company Market Share in 2010 (%)

1 Alipay Alibaba Group Holding Limited 51.2 2 Tenpay Tencent Holdings Limited 23.3 3 99Bill 99Bill Corporation 6.3 4 ChinaPay China UnionPay 5.5 5 PayPal eBay Inc 4.5 6 IPS Shanghai Huan Xun E-commerce Company Limited 4.3 7 Chinabank

Payment Chinabank Payment (Beijing) Technology Company Limited

1.2

8 PayEase PayEase 0.6 Others 3.1

Source: (2011 1 28 ) “2010 ” [Analysys International (28 January 2011) “Alipay Continued to Be the Single Dominant Player in China’s Online Payment Market in 2010”], http://www.analysys.com.cn/cache/1338/96823.html (accessed 1 March 2011).

EXHIBIT 11A: FINANCIAL PERFORMANCE OF YAHOO (2002 TO 2010)

Revenue Revenue by Segment

Income from Operations

Net Profit Attributable to Shareholders

US$ ‘000 Change (%)

Int’l1

(%) US (%)

US$ ‘000 Change (%)

2002 953,067 NA 15 85 88,188 NA 42,815 NA 2003 1,625,097 70.5 17 83 295,666 235.3 237,879 455.6 2004 3,574,517 120.0 26 74 688,581 132.9 839,553 252.9 2005 5,527,668 54.6 30 70 1,107,725 60.9 1,896,230 125.9 2006 6,425,679 16.2 32 68 940,966 (15.1) 751,391 (60.4) 2007 6,969,274 8.5 32 68 695,413 (26.1) 660,000 (12.2) 2008 7,208,502 3.4 28 72 12,963 (98.1) 424,298 (35.7) 2009 6,460,315 (10.4) 27 73 386,692 2883.0 597,992 40.9 2010 6,324,651 (2.1) 30 70 772,524 99.8 1,231,663 106.0

1 “Int’l” stood for international markets.

Note: The financial year of Yahoo ended on 31 December.

Source: Yahoo Inc (2003 2010) “Annual Report: Form 10-K”.

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EXHIBIT 11B: QUARTERLY FINANCIAL PERFORMANCE OF YAHOO (2008—2009)

Quarter Revenue Income from Operations

Net Profit

US$ ‘000 Change1

(%) US$ ‘000 Change1

(%) 2007 Q1 1,671,850 6.7 169,027 (16.0) 142,424 (10.9)

Q2 1,697,920 7.7 184,957 (19.4) 160,567 (2.3) Q3 1,767,506 11.8 150,192 (25.8) 151,286 (4.6) Q4 1,831,998 7.6 191,237 (37.9) 205,723 (23.4)

2008 Q1 1,817,602 8.7 120,617 (28.6) 536,840 276.9 Q2 1,798,085 5.9 100,521 (45.7) 131,161 (18.3) Q3 1,786,426 1.1 70,174 (53.3) 54,348 (64.1) Q4 1,806,389 (1.4) (278,349) NC1 (303,428) NC

2009 Q1 1,580,042 (13.1) 100,685 (16.5) 117,558 (78.1) Q2 1,572,897 (12.5) 75,753 (24.6) 141,387 7.8 Q3 1,575,399 (11.8) 91,499 30.4 186,093 242.4 Q4 1,731,977 (4.1) 118,755 (142.7) 152,594 (150.3)

2010 Q1 1,596,960 1.1 188,021 86.7 310,191 163.9 Q2 1,601,379 1.8 175,372 131.5 213,321 50.9 Q3 1,601,203 1.6 189,155 106.7 396,131 112.9 Q4 1,525,109 (11.9) 219,976 85.2 312,020 104.5

1 This referred to year-on-year change for each quarter. 2 “NC” stood for non-comparable. This was because one of the numbers was negative.

Source: Yahoo Inc (2005 2010) “Annual Report: Form 10-K”; Yahoo Inc (2005 2010) “Quarterly Report: Form 10-Q”.

EXHIBIT 11C: SHARE PRICE OF YAHOO

Source: Bloomberg (16 February 2011) “Yahoo! Inc. (YHOO:US)”, http://www.bloomberg.com/apps/quote?ticker=YHOO:US (accessed 16 February 2011).

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EXHIBIT 12: MAJOR PRODUCT OFFERINGS OF YAHOO FOR WEB USERS

Major Category

Revenue Source Major Sub- categories

What Users Can Do

Communities • Display advertising Yahoo! Groups • Members in self-formed groups have shared access to information, e-mails, calendar, photos, etc

Yahoo! Answers • Ask and answer questions Flickr • Share photos

Search • Display advertising • Sponsored search

results

Yahoo! Search • Conduct online search Yahoo! Local • Search for local business

listings and related content Yahoo! Yellow Pages

• Search for phone numbers

Yahoo! Maps • Get maps with traffic and driving information

Communications • Display advertising • Fees charged for

some services

Yahoo! Mail • Get e-mail service Zimbra Mail • Get messaging and

collaboration services for institutional users

Yahoo! Messenger

• Get instant messaging service

Audience • Display advertising • Fees charged for

some services

Yahoo! News • Get online news from major news agencies

Yahoo! Finance • Access to financial data, information, analyst reports and tools for making financial decisions

Yahoo! Sports • Watch free and fee-based sport games

• Obtain sport news, real-time statistics and scores

Others • Get information on autos, food, games, health, kids, movies, music, personals, real estate, shopping, technologies, travel, TV, etc

Connected Life • Display and search advertising on mobile phones

• Fees from mobile operators and device manufacturers

Yahoo! Mobile • Access to the internet and Yahoo’s content through mobile phones and other mobile devices

Yahoo! Connected TV

• Access to the internet and Yahoo’s content through television

Note: Yahoo’s product offerings to users were reorganised into four major categories in 2009: integrated consumer experiences, applications (communications and communities), search, and media products and solutions.

Source: Compiled from Yahoo Inc (2008) “Annual Report: Form 10-K”.

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EXHIBIT 13: MAJOR EVENTS AT YAHOO

Date Major Event at Yahoo 1994 Jan The Yahoo website was founded by Jerry Yang and David Filo when they

were studying as postgraduate students in Stanford University. 1995 Mar Yahoo was incorporated in the United States. 1999 Yahoo entered the market on the Chinese mainland with the establishment

of a local office. 2003 Dec Yahoo bought Chinese company 3721, whose website was used by

netizens in China to conduct search in Chinese characters. 2005 Oct Yahoo invested US$1 billion in Alibaba for a 40% stake, and Alibaba

took over the operation of Yahoo’s portal in China. 2007 Jun Jerry Yang replaced Terry Semel as Yahoo’s chief executive. 2008 Jan Microsoft offered to acquire Yahoo for US$44.6 billion (US$31 per share)

in a hostile takeover. The offer price was later increased to US$47.5 billion (US$33 per share) in April.

May Microsoft abandoned its takeover attempt of Yahoo because Yahoo insisted on a higher price.

Jun Billionaire investor Carl Icahn launched a campaign to oust Jerry Yang and Yahoo’s entire board.

Jun Yahoo reached an agreement with Google to use Google’s search engine technology, and Google’s advertisements would appear on some Yahoo search results.

July Yahoo reached an agreement with Carl Icahn to stop his campaign by allowing him into Yahoo’s board.

Nov Google abandoned the deal with Yahoo due to antitrust barriers from US regulators. Jerry Yang announced that he would step down as Yahoo’s chief executive when a new candidate was found.

2009 Jan Carol Bartz from Autodesk became Yahoo’s chief executive. Apr Yahoo announced plans to lay off 5% of its employees after a sharp drop

in net profit in Q1. Jul Yahoo reached an agreement with Microsoft to use Microsoft’s search

engine Bing, to be fully implemented worldwide by the end of 2010. Sept Yahoo sold its entire stake of 1.14% of Alibaba.com for around US$147

million. Alibaba was informed of this sale one day in advance. 2010 Jan In Google’s incident of experiencing a series of highly sophisticated

cyberattacks originating from China, Yahoo said it was aligned with Google in protecting users’ privacy. Alibaba publicly criticised Yahoo as reckless for its stance in supporting Google.

Jul Yahoo Japan reached an agreement with Google to use Google’s search engine instead of the Bing search engine from Microsoft.

Sept 10 Yahoo disclosed to the media that it had started soliciting advertisers located in southern China to place advertisements on its website in Hong Kong.

Sept 17 Yahoo rejected Alibaba’s offer to buy back its 39% stake from Yahoo. Sept 19 Alibaba turned down the suggestion of Yahoo’s chief executive Carol

Bartz for her admission into the board of Alibaba. Oct Alibaba announced that users on its website can use the search engine

Sogou from Sohu.com in addition to the Bing search engine from Microsoft.

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EXHIBIT 14: MAJOR MILESTONES AND EVENTS AT ALIBABA

Date Major Milestone or Event at Alibaba 1999 Mar 10 Jack Ma and other 17 founders started a B2B website (www.alibaba.com).

Sept 9 Alibaba (China) Technology Company Limited was established in Hangzhou. It was later renamed as Alibaba Group Holding Limited.

Oct The investment bank Goldman Sachs invested US$5 million in Alibaba. 2000 Jan Softbank Corp (“Softbank”) invested US$20 million in Alibaba. 2002 Dec Alibaba began to make a profit. 2003 May 10 Alibaba launched a C2C marketplace, Taobao (www.taobao.com).

Oct 18 Alibaba launched Alipay, an online payment service. 2004 Jan Alibaba invested US$37 million to build the Alibaba (China) Software

R&D Center in Hangzhou. Mar Alibaba launched its Keywords Bidding service and Excess Products

Auction service. 2005 Oct Yahoo invested US$1 billion in Alibaba for a 40% stake, and Alibaba

took over the operation of Yahoo’s portal in China. 2006 Oct Alibaba acquired Koubei.com, a classified listing and community website. 2007 Jan Alibaba launched Alisoft, a subsidiary that provided web-based enterprise

management software and instant messaging for business users. Nov Alibaba listed around 27% of its B2B subsidiary, Alibaba.com, on the

Hong Kong Stock Exchange. Alibaba launched Alimama, a subsidiary for online advertising exchange.

2008 Apr Alibaba launched a new sub-domain under Taobao, Taobao Mall (http://tmall.taobao.com), which was a B2C marketplace. Alibaba formed a partnership with Infomedia India Limited, a leading media company in India in offline Yellow Pages and physical media.

May Alibaba formed a B2B joint venture, Alibaba Japan, with Softbank to expand into the Japanese market.

2nd half Alibaba launched an “Export to China” program that offered non-Chinese sellers virtual Chinese language storefronts on Alibaba.com.

2009 Nov Alibaba acquired HiChina Web Solutions, a company in China that provided domain name registration, hosting services, e-mail services and website creation. This company had 200,000 business customers.

2010 Apr Alibaba launched AliExpress, a B2B marketplace for US merchants. Jun Alibaba acquired Vendio Services Inc, a B2C e-commerce start-up in the

United States with 80,000 e-commerce merchants as customers. Aug Alibaba acquired Auctiva.com, a third-party tools developer for eBay

sellers and a B2C marketplace with 170,000 e-commerce merchants. Alibaba and a fund set up by Jack Ma bought a total of a 16% stake of Sogou, the search engine of China’s fourth largest portal Sohu.com.

Oct Alibaba began offering Sogou to its online customers as an alternative search engine to Microsoft’s Bing.

Nov Alibaba acquired Shenzhen One-Touch Enterprise Service Limited, a Chinese company offering export services such as customs clearance, logistics, cargo insurance and currency exchange for small exporters.

Nov Alibaba registered an independent web domain for Taobao Mall (http://www.tmall.com).

Dec Alibaba launched a new sub-domain under Taobao, LP (http://lp.taobao.com), as a B2C marketplace for less well-known brands.

2011 Jan Alibaba announced a plan to invest up to US$4.5 billion over three to five years on logistics for B2C e-commerce.

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EXHIBIT 15: MAJOR BUSINESSES OF ALIBABA

Subsidiary Business Area

Website Name URL Start Date

Alibaba.com B2B Alibaba ( http://www.alibaba.com Sept 1999 http://china.alibaba.com Sept 1999 http://www.alibaba.co.jp May 2008

AliExpress http://www.aliexpress.com Apr 2010 Taobao C2C Taobao Net ( ) http://www.taobao.com May 2003

Classified listing

Koubei Net ( ) ttp://www.koubei.com Oct 2006

B2C Taobao Mall ( )

http://tmall.taobao.com1 Apr 2008 http://www.tmall.com Nov 2010

LP ( ) http://lp.taobao.com Dec 2010 Alipay Online

payment Alipay ( ) http://www.alipay.com Oct 2003

Yahoo! China

Internet portal

Yahoo China ( )

http://cn.yahoo.com Oct 2005

Alisoft Online enterprise software

Alisoft ( ) http://www.alisoft.com Jan 2007

Instant messaging

Aliwangwang ( )

http://im.alisoft.com

Alimama Advertising exchange

Alimama ( ) http://www.alimama.com Nov 2007

1 The sub-domain of Taobao Mall under the Taobao website became an independent web domain in November 2010.

EXHIBIT 16: FINANCIAL PERFORMANCE OF ALIBABA

Year Ended Sept 30

Revenue Income from Operations

(US$ million)

Net Income Attributable to Alibaba

(US$ million) US$ million Change (%)

2006 182.3 NA (67.6) (58.8) 2007 290.2 59.2 (59.6) (58.9) 2008 456.8 57.4 (58.0)1 1,870.12

2009 730.3 59.9 (39.5) (57.3) 2010 1,298.2 77.8 (14.4) (10.7)

1 To facilitate year-on-year comparison, this figure excluded Alibaba’s impairment loss of US$178 million on goodwill and intangible assets for which the company had no basis in its investment balance.

2 The net income of US$1.87 billion was primarily due to Alibaba’s sale of an approximately 27% ownership in Alibaba.com from Alibaba.com’s IPO in November 2007, which raised US$1.7 billion.

Source: Yahoo Inc (2007 2010) “Annual Report: Form 10-K”.

For the exclusive use of B. Al-Marri, 2022.

This document is authorized for use only by Balsam Al-Marri in International Business Negotiations-2022 taught by SALI LI, University of South Carolina from Sep 2022 to Mar 2023.

11/503C Yahoo: Relationship Crisis with Alibaba in China

EXHIBIT 17A: FINANCIAL PERFORMANCE OF ALIBABA.COM LIMITED

Year Ended Dec. 31

Exchange Rate1

(US$ to Rmb)

Revenue Net Profit Net Margin

(%)

Revenue as a % of Alibaba3

(approx.)

US$ million

Rmb million

Change2

(%) US$

million Rmb

million Change2

(%)

2006 7.9942 170.6 1,363.9 NA 27.5 219.9 NA 16.1 93.6 2007 7.6161 282.7 2,153.3 57.9 122.0 929.3 322.6 43.2 97.4 2008 6.8592 438.0 3,004.1 39.5 168.3 1,154.5 24.2 38.4 95.9 2009 6.8259 567.6 3,874.7 29.0 148.4 1,013.0 (12.3) 26.1 77.7 2010 6.8129 815.7 5,557.6 43.4 215.7 1,469.5 45.1 26.4 62.8

1 Rmb had appreciated substantially in 2006 and 2007. Exchange rates on 30 June of each year were used in converting the original data denoted in Rmb to US$.

2 This column represented the year-on-year change of revenue denoted in Rmb, but not for the data denoted in US$ due to different exchange rates used for different years.

3 This column was compiled by the case writer by dividing the revenues of Alibaba.com (denoted in US$) in the above table by the revenues of Alibaba Group in Exhibit 16. The original data source of Exhibit 16 was denoted in US$. Due to discrepancies in exchange rates used in the two sets of data, Alibaba.com’s revenue as a percentage of that of Alibaba Group were just ballpark figures for reference on the trend and should not be interpreted in absolute terms.

Source: Alibaba.com (2007 2010) “Annual Report”.

EXHIBIT 17B: SHARE PRICE OF ALIBABA.COM LIMITED

Source: Bloomberg (16 February 2011) “Alibaba.com Limited (1688:HK)”, http://www.bloomberg.com/apps/quote?ticker=1688:HK (accessed 16 February 2011).

For the exclusive use of B. Al-Marri, 2022.

This document is authorized for use only by Balsam Al-Marri in International Business Negotiations-2022 taught by SALI LI, University of South Carolina from Sep 2022 to Mar 2023.

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For the exclusive use of B. Al-Marri, 2022.

This document is authorized for use only by Balsam Al-Marri in International Business Negotiations-2022 taught by SALI LI, University of South Carolina from Sep 2022 to Mar 2023.

11/503C Yahoo: Relationship Crisis with Alibaba in China

EXHIBIT 19: TAOBAO’S VOLUME OF E-COMMERCE TRANSACTIONS

Year Ended Dec 31

Taobao’s Volume of E-commerce Transactions US$ million1 Rmb million Change (%)

2007 6,309 43,300 NA 2008 14,564 99,960 130.9 2009 30,349 208,300 108.4

1 For simplicity, a single exchange rate was used in the above table despite appreciation of Rmb during the recorded period. US$1=Rmb 6.8634 on 31 December 2009.

Source: (2010 12 26 ) “ ” [China Business Media (26 December 2010) “Fight Over Control of Alibaba”], http://tech.sina.com.cn/i/2010-12- 26/13225028177.shtml (accessed 25 March 2011).

EXHIBIT 20: MARKET SHARE OF MAJOR SEARCH ENGINES IN THE UNITED STATES

Month Share of Internet Search Traffic in the United States (%) Google Yahoo Microsoft1 Ask.com

Dec 2006 63.15 21.62 9.80 3.72 Dec 2007 65.98 20.88 7.04 4.14 Dec 2008 72.07 17.79 5.56 3.15 Dec 2009 72.25 14.83 8.92 2.54 Dec 2010 69.67 15.172 10.60 (not listed) Feb 2011 66.69 14.992 13.49 (not listed)

1 Starting from May 2009, Microsoft’s search services in the United States were powered by its Bing technology.

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Note: All data came from surveys conducted by Hitwise. These surveys were based on four-week rolling periods with a sample of 10 million US internet users.

Source: Marketing Charts, “Percentage of US Searches among Leading Search Engine Providers”, http://www.marketingcharts.com (accessed 31 March 2011); Hitwise, “Press Archive”, http://www.hitwise.com (accessed 31 March 2011).

For the exclusive use of B. Al-Marri, 2022.

This document is authorized for use only by Balsam Al-Marri in International Business Negotiations-2022 taught by SALI LI, University of South Carolina from Sep 2022 to Mar 2023.

11/503C Yahoo: Relationship Crisis with Alibaba in China

EXHIBIT 21: BIOGRAPHY OF CAROL BARTZ

(The following information was posted on Yahoo’s website about its management team)

Carol Bartz: Chief Executive Officer

Ms. Bartz has served as our Chief Executive Officer and as a member of our Board of Directors since January 2009.

Ms. Bartz served as the Executive Chairman of the Board of Autodesk Inc., a computer-aided design software provider, from May 2006 to February 2009, as Chairman, President and Chief Executive Officer of Autodesk from April 1992 to April 2006 and as a director of Autodesk from April 1992 to February 2009. From 1983 to April 1992, Ms. Bartz served in a number of positions at Sun Microsystems Inc., a provider of computer systems, software and services (now a subsidiary of Oracle Corporation), including as Vice President of Worldwide Field Operations and as an executive officer.

Currently, Ms. Bartz also serves as the lead director of Cisco Systems Inc., a networking technology company, as a director of the National Medals of Science and Technology Foundation and as trustee of the Paley Center for Media. Ms. Bartz previously served as a director of BEA Systems Inc., a provider of database-related software (now a subsidiary of Oracle Corporation), Intel Corp., a semiconductor chip design and manufacturing company, and NetApp Inc., a provider of data-storage and data-management tools.

Ms. Bartz holds a Bachelor’s degree from the University of Wisconsin.

Source: Yahoo Inc, “Carol Bartz”, http://pressroom.yahoo.net/pr/ycorp/carol-bartz.aspx (accessed 30 March 2011).

EXHIBIT 22: MARKET VALUE ESTIMATES (AS OF NOVEMBER 2010)

Market Capitalisation Yahoo US$22 billion Alibaba.com US$9.75 billion

Estimate of Market Value Taobao US$7 billion1

Yahoo’s 40% stake of Alibaba US$4 to 10 billion

1 This estimate was made by Goldman Sachs.

Source: Young, D. and Chen, G. (9 November 2010) “PE Group Approaches Alibaba’s Ma on Yahoo Bid”, Reuters.

For the exclusive use of B. Al-Marri, 2022.

This document is authorized for use only by Balsam Al-Marri in International Business Negotiations-2022 taught by SALI LI, University of South Carolina from Sep 2022 to Mar 2023.

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adatti per visualizzare e stampare documenti aziendali in modo affidabile. 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De gemaakte PDF-documenten kunnen worden geopend met Acrobat en Adobe Reader 5.0 en hoger.) /NOR <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> /PTB <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> /SUO <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> /SVE <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> /ENU () >> >> setdistillerparams << /HWResolution [600 600] /PageSize [612.000 792.000] >> setpagedevice