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October 07, 2011

Could eBay's worst nightmare come true?

Yahoo!'s problem, could be...eBay's problem

There's a ton of press about poor ole beleaguered Yahoo! and what the company is going to do post Carol Bartz.  I'm not an expert on Y!, but it appears that 30-40% of Yahoo! is locked up in Alibaba stock (and they own 40% of Alibaba) and Alibaba has some kind of a right of first refusal that would allow them to block a deal they don't like.  Also, Jack Ma, the crazy smart, sly like a fox CEO of Alibaba recently was reported as saying

(when asked about yahoo) ...Alibaba is "very interested in Yahoo" and then asked to clarify if he wants to buy the Y! Alibaba stake or ? he said: "The whole piece of Yahoo. China is already ours, right? It's already in my pocket. I cross my fingers , just to say we are very, very interested."

If this happened, I firmly believe this could be eBay's worst nightmare coming soon and I haven't seen anyone in the press or Wall St. thinking this through, so wanted to share some thoughts on this topic and get feedback.  One of the benefits of being in the biz for 10yrs+ now is I was first hand at a lot of these happenings.

Ni Hao, Alibaba - a quick primer on China's e-commerce giant

Headquartered in China (Hangzhou to be specific), Alibaba has rapidly built a massive e-commerce company with many subsidiaries.  Here are the very brief highlights: (here is more info)

  • Alibaba Group - Parent company to all of the below.
  • Alibaba.com - B2B (business to business) site for sourcing goods from China.
  • Taobao -C2C ( consumer to consumer) marketplace - the GMV here is bigger than eBay's global footprint, coming in at $120b - that's 2X eBay.  Seems crazy high, but what you have in China is a) a larger marketplace share and b) Taobao owns the market.
  • Taobao mall (tmall) - B2C (business to consumer) marketplace - their GMV is included above I believe.  Tmall has done a great job of recruiting a ton brands to the marketplace.
  • Alipay - Alibaba's payment system that cuts across all of these sites and also is accepted off-network like Paypal merchant services.  A testament to the scale of Alipay is that Amazon.cn takes it as a payment option!  I don't think Alibaba discloses the TPV (Total Payment Volume) of Alipay, but I imagine the bulk of Taobao's $120b goes through here as well as a big chunk of off-Alibaba sites as well, so I'd guess it's > $100b.
  • eTao - Alibaba's search engine - competes with Baidu.
  • AliExpress - US-based B2b portal for US companies to buy pallets of items from China vs. Alibaba which is truck loads.
  • Aliyun- Their cloud computing (think Amazon EC2/S3/AWS) .
  • Yahoo China - Their portal in CN.
  • Other assets - Alibaba is building a huge fulfillment network (think Amazon FCs on steroids) for China, investing billions.

eBay and Alibaba - a long history of butt-kickin' (and it wasn't Alibaba's)

At the height of the Meg Whitman regime's hubris, Meg decided that eBay was going to conquer China.  They acquired a local auction company and proclaimed victory.  AFTER eBay was dominant, Ma started Taobao and essentially kicked eBay out of the region with the exception of some CBT today in 3-4 years.

During the battle, some of the best Meg and Ma quotes surfaced as the two duked it out toe to toe.  Here are my personal favorites that really illustrate the Meg regime and the cleverness of Ma:

  • Meg Whitman at a Wall St. meeting in 2005 when asked about China and are they worried about Alibaba/Taobao: "A bunch of small competitors are nipping at our heels".
  • Jack Ma in response (He's channeling Sun Tzu here): "We want to be the world's largest consumer site." "eBay may be a shark in the ocean, but Alibaba is a crocodile in the Yangtze River.  If we fight in the ocean, we lose - but if we fight in the river, we win."

 If you want a detailed exceptional read of how this played out, Stanford has a great business case study with all the gory details here.  Here's my quick summary of the battle and how eBay lost.

  • 2002 - eBay acquires Eachnet for $180m and is the leader in China overnight.
  • 2003 - Alibaba launches Taobao to deal with the perceived eBay threat - what will become the death blow - Taobao is free for sellers vs. eBay's standard 10% take rate.  Prices are lower by about 10% on Taobao, selection mushrooms, etc.
  • 2003/2004 - Alibaba launches Alipay (2% take rate) and Tmall (also has  fees) - this gives them the monetization to keep Taobao free.
  • 2002-2004 - eBay performs a series of miscues that lead to decreased marketshare such as replatforming Eachnet, a failed payment system and not reacting to Taobao's free structure  - Eachnet goes from 80% market share to 40%.  Meg vows to spend 200m to win in China and spends a month there to help the local team duke it out - famously says: "Free is not a business model." when asked about Taobao.
  • 2005 - eBay Live, eBay kicks Alibaba out of the show at the last minute (classic Cobb/Whitman) at the show eBay announces Global Sources as their premier China partner. In response, Alibaba gave EVERYONE a bright orange bag that were everywhere at the show. You could see smoke coming out of Meg's ears. eBay tried to stop people from entering the hall with them, but gave up when they realized pretty much everyone had them.
  • 2006 (Dec) - eBay capitulates and sells the remaining consumer-facing pieces of eBay China to Tom's online.  Many believe that China+Skype caused Meg's final ousting @ eBay.
  • 2006-2009 - A relatively quiet time where Alibaba completed their dominance of the Chinese market and grew the Alibaba/Tao/Alipay trifecta.
  • 2010 - Alibaba quietly acquires two of the smb-oriented eBay-only selling tools - Vendio and Auctiva and now has a big chunk ebay listings, sellers and buyers flowing through their systems.
  • 2010 - JD goes to China with a white flag for AliFest to talk about wanting to partner with Alibaba - there are some awkward height jokes and Jack admitting he feels guilty for crushing eBay so bad -  JD is very quiet during that part (about 4mins in).
  • 2011 - Paypal drops AliExpress - reports cite Paypal's concern over the growing consumer nature of transactions on the platform.

So we had a lot of activity in '02-05 and it's been relatively quiet lately as the companies stayed in their relative geographies.  Now with Yahoo! in play and Alibaba as a likely buyer/player, we could be looking at another intense period of competition.

The Aligator is coming to the Ocean - why should eBay be worried?

They say a picture is worth a thousand words. Here's what happened to eBay when Taobao turned the model upside down in China:

Taobao_marketshare

So in three years you saw that the battle was over and then by four  years it was totally done.

Based on what we've seen historically, here is the foundation for the 'nightmare scenario':

  1. Alibaba buys Yahoo! (Which Ma has said he wants to do AND he has a ROFR).
  2. Alibaba launches Taobao (probably different name) in the US - with a free or very low business model - say 1-2%. (Ma has stated they want to be the WORLDs largest marketplace).
  3. Alibaba launches Alipay, maybe it has something disruptive like free ACH payments. (No-brainer)

Now you have a proven marketplace as a platform, but to bring it to life you need supply and demand.

Supply

  • More than half of eBay's listings go through the API (and vendors like ChannelAdvisor) - including Vendio and Auctiva.   
  • Alibaba owns Vendio+Auctiva - perhaps they offer free services and zero listing fees to sell on Taobao US.   They could also offer a "click here to list this product on Taobao for 10% less since you aren't paying any fees!" button.  
  • In very short order, Taobao would have a very large selection overlap with eBay.
  • Alibaba has had great success with Tmall and that idea of segmenting b2c/c2c inventory they could easily leverage here. Instead of free, maybe it's 5%  -half off eBay/Amazon and other marketplace's fees.
  • Maybe they build a large FC network - eBay is reticent to do this, Alibaba doesn't seem to have the same concerns as they want the best buyer experience possible and don't have a high margin legacy business to protect.

Demand

  • Alibaba leverages the Yahoo! assets (top three visited site on the internet) to route traffic through these assets (heck maybe they also take on google with eTao?).  Also, Yahoo has Yahoo Shopping and Stores which would be very valuable assets in this game.
  • A marketplace with prices 10% cheaper than eBay would automatically draw a fair amount of supply (see Supply) and offer lower prices to consumers, which has worked very well for Taobao in CN.
  • Alibaba could run a very aggressive campaign promoting their "10% less than eBay" new marketplace to appeal the value buyers out there.  They have the Yahoo! ad network and all those assets to leverage.

This isn't a stretch or unproven strategy, it's the exact same playbook they used in China and that also worked in Japan for Softbank.

But eBay is really PayPal so who cares?

Most folks on Wall St. view eBay really as Paypal plus a marketplace and there's a lot of analysis that demonstrates that eBay doesn't get much credit for the marketplace if you do a sum of the parts.  What's really interesting about Alibaba+Yahoo getting in the game though is you have the first competitive threat to not only the eBay marketplace, but to Paypal.  

Alipay is multi-lingual, multi-currency and even has some features that Paypal doesn't offer.  It could also be leveraged to help US brands sell more into China which Paypal is effectively locked out of as their CBT flows out of China.

What should eBay do?

Well, as you can see, I think eBay has a strong vested interest in keeping Yahoo out of Alibaba's hands.  So you  could see:

  • eBay buying Yahoo! (long shot)
  • eBay helping a group buy Yahoo!
  • eBay has a huge lobbying team - that team could lobby congress to stop such an acquisition.

If eBay isn't able to block the merger, they should batten down the hatches and prepare for some choppy seas.

What do you think?

Readers, what do you think? Should eBay be concerned or am I making a mountain out of a mole hill? Should they make a run at Y!? Sellers - would you sell on Taobao US? One thing is for certain - the Chinese proverb - 'May you live in interesting times' is definitely in play!

SeekingAlpha Disclosure - I am long Google and Amazon. eBay is an investor in ChannelAdvisor where I am CEO.

 

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