In The News

For Internet firms, the East is green

By Ellen Lee
CONTRA COSTA TIMES
Fri, Aug. 12, 2005

Yahoo Inc.'s decision to invest $1 billion in China's Alibaba.com underscores the massive push by Internet companies to secure a place in the world's second-largest Internet market.

From Amazon.com to Google, and now Yahoo, the Internet's major players have been busy jockeying for the best position as China's Internet economy takes wing.

"China is already the second largest Internet market in the world," said Scott Kessler, an Internet equity analyst with Standard & Poor's. "And the growth is going to be pretty substantial. ... China has the makings of (becoming) the largest Internet market in the world."

China, according to published reports, has more than 103 million Internet users while the United States has approximately 137 million.

Yahoo, after several days of speculation, announced Wednesday night that it is paying $1 billion in cash to buy a 40 percent stake in Alibaba.com, China's largest e-commerce company. That makes it one of the largest Chinese Internet deals ever.

But it is certainly not the last.

"There is a window of opportunity," said Ken Marlin, managing partner of New York investment bank Marlin & Associates . "There are (only a few) Chinese companies that have established a degree of critical mass and have brand recognition. Once they're gone, they're gone. There's a frenzy among Internet companies to identify the relevant companies (in China) to come to an agreement with before someone else does first."

The examples are many: Mountain View's Google owns a small percentage of Baidu.com Inc., the so-called "Chinese Google" that just last week made headlines as it skyrocketed 354 percent on its first day on the Nasdaq. Earlier this year, Monster.com paid $50 million for a 40 percent stake in ChinaHR.com Holdings Ltd., a Chinese recruitment Web site with 3.2 million registered users. Last year, Amazon.com bought Joyo.com, the largest online book, music and video retailer in China, for $75 million. And three years ago, eBay bought a 33 percent stake in EachNet for $30 million, before finally purchasing it completely a year later for $150 million.

Yahoo will incorporate Alibaba.com into a combined entity that includes Yahoo's other Web sites in China, such as the Yahoo! China portal and its keyword search site, 3721, which Yahoo purchased two years ago. Alibaba.com encompasses AliPay, along the lines of a Chinese PayPal, and Taobao, a consumer auction site that competes against eBay. Altogether, Alibaba.com sites have more than 15 million registered users.

Investing in an established Chinese Internet company is critical for the success of Yahoo and the other U.S. Internet companies since it helps them navigate China's complex business and political landscape, as well as target local markets, said Steven Weber, a political science professor at UC Berkeley. And should the relationship between the United States and China deteriorate, it ensures that they already have a stake in China.

"You need to be local on the ground," he said. If not, "you could be shut out of the market."