HONG KONG, Dec.

z1 - EBuy`s decIsIon Lo cIose ILs Web sILe In CIInu

und Luke u qq percenL sLuke In un e-commerce venLure wILI u CIInese
compuny Is LIe IuLesL sIgn LIuL IocuI knowIedge und connecLIons muLLer
In LIe CIInese murkeL.
WIIIe eBuy`s new purLner, TOM OnIIne nc., Ius suIIered u serIes oI
commercIuI seLbucks In LIe IusL LIree yeurs, no one quesLIons LIuL IL
knows LIe CIInese murkeL und Ius poIILIcuI InIIuence.
TOM OnIIne Ius been u IuIrIy smuII, sLruggIIng compuny unLII now. L
eurns neurIy qo percenL oI ILs revenue Irom provIdIng ceIIpIone servIces,
muInIy sendIng LIe IuLesL enLerLuInmenL news und weuLIer In sIorL LexL
messuges or muILImedIu messuges Lo ceIIpIone users. MosL oI LIe resL oI
ILs revenue comes Irom udverLIsIng on u YuIoo-IIke nLerneL porLuI LIuL
specIuIIzes In CIInese enLerLuInmenL news.
TIe compuny`s Ieuvy dependence on vuIue-udded ceIIpIone servIces,
wILIouL ucLuuIIy beIng u ceIIpIone servIce provIder, Ius mude IL
especIuIIy vuInerubIe. Over LIe IusL coupIe oI yeurs, CIInese reguIuLors
Iuve sLepped up LIeIr poIIcIng oI LIe IndusLry Lo cruck down on cerLuIn
bIIIIng prucLIces und wIuL oIIIcIuIs cuII InupproprIuLe conLenL und oLIer
unwunLed servIces.
usL summer, Lo ensure LIuL cusLomers reuIIy wunLed u vuIue-udded
servIce, uII compunIes were requIred Lo oIIer Iree LrIuIs und Lo requIre
Lwo cusLomer conIIrmuLIons beIore sLurLIng u servIce.
TOM OnIIne Iud Lo udjusL ILs subscrIpLIon servIces, und so IL wus
especIuIIy Iurd-IIL becuuse sucI wIreIess servIce uccounLs Ior so mucI oI
ILs revenue. ProIILs uL TOM OnIIne prompLIy pIunged q percenL In LIe
LIIrd quurLer Irom u yeur eurIIer us u resuIL, Lo $.z8 mIIIIon, wIIIe
revenue dropped 1.z percenL, Lo $8.q mIIIIon.
TIe compuny`s reIIunce on sucI servIces Ius prompLed some experLs Lo
quesLIon Iow IL wIII Iure In eIecLronIc commerce. TOM OnIIne`s IIne oI
busIness Is noL compuLIbIe wILI eBuy`s, suId Iu BIn, un unuIysL uL BDA
CIInu, u LecInoIogy und medIu consuILIng IIrm In BeIjIng, und LIey wIII
need some LIme Lo Ieurn Lo work LogeLIer.
BuL wIIIe TOM OnIIne muy be sLruggIIng now, IL Ius LIe poIILIcuI
connecLIons LIuL remuIn crucIuI In CIInu. I Ku-sIIng, Hong Kong`s
weuILIIesL Lycoon und u mun wIo Ius cuILIvuLed cIose reIuLIonsIIps wILI
Lop CommunIsL Ieuders on LIe muInIund Ior decudes, conLroIs LIe
compuny. Wung eI eI, LIe cIIeI execuLIve oI TOM OnIIne und now LIe
cIIeI execuLIve oI LIe joInL venLure, Is LIe grundson oI u PeopIe`s
IberuLIon Army generuI und known Ior IIs poIILIcuI connecLIons.
Mr. Wung presenLed LIe broud reucI oI TOM OnIIne`s ceIIpIone servIces
- LIe compuny suys IL serves ;o mIIIIon subscrIbers - us un usseL. TOM
OnIIne brIngs Lremendous experLIse In wIreIess und reucI In CIInu Lo LIe
joInL venLure, Ie suId uL u news conIerence Wednesduy In SIungIuI.
SIures oI TOM OnIIne ure Lruded on LIe GrowLI EnLerprIse MurkeL In
Hong Kong und on Nusduq. BuL LIe compuny ILseII Is bused In BeIjIng,
wIIcI Is crucIuI uL u LIme wIen CIInese Ieuders ure sLurLIng Lo become
more cuuLIous ubouL weIcomIng IoreIgn InvesLmenL.
TIe cenLruI governmenL musL muInLuIn ubsoIuLe conLroI over IndusLrIes
LIuL concern nuLIonuI securILy und economIc suIeLy, suId I Rongrong,
LIe dIrecLor oI LIe CIInese governmenL`s powerIuI SLuLe-owned AsseLs
SupervIsIon und AdmInIsLruLIon CommIssIon, uL u news conIerence In
BeIjIng on Tuesduy. He cILed LeIecommunIcuLIons us weII us cIvII
uvIuLIon, sIIppIng, power LrunsmIssIon, couI, peLrocIemIcuIs und
urmumenLs.
EBuy Ius uIreudy run InLo probIems In CIInu Irom noL beIng u CIInese
compuny. By requIrIng domesLIc conLroI over IInuncIuI servIces
compunIes, CIInese reguIuLIons Iuve IImILed LIe IInuncIuI LrunsucLIons
LIuL eBuy`s puymenL mecIunIsm, PuyPuI, cun oIIer. TIe CIInese
governmenL pIuns Lo Issue 1o IIcenses nexL yeur Ior onIIne IInuncIuI
servIces, buL Is wIdeIy expecLed Lo grunL LIem onIy Lo compunIes In wIIcI
CIInese purLners exerL u IIgI degree oI conLroI.
Meg WIILmun, eBuy`s cIIeI execuLIve, ucknowIedged LIe Issue durIng LIe
sume news conIerence In SIungIuI LIuL Mr. Wung uddressed. We wIII
see wIuL Iuppens over LIe nexL Iew weeks und monLIs, sIe udded, buL
we ure very commILLed Lo PuyPuI Iere In CIInu.
Ms. WIILmun uIso suggesLed LIuL TOM OnIIne wus u nuLuruI purLner Ior
eBuy becuuse TOM OnIIne uIreudy owned 1 percenL oI LIe nLerneL
pIone servIce Skype CIInu wIIIe eBuy owned LIe resL. TIe joInL venLure,
TOM-Skype, Iormed In SepLember zoo, Ius more LIun 1. mIIIIon
regIsLered users, und Is guInIng new ones uL un exLremeIy rupId cIIp.
WILI decIsIons mude In CIInu und CuIIIornIu, eBuy uIso reucLed more
sIowIy In CIInu LIun ILs rIvuI, AIIbubu. TIree yeurs ugo, AIIbubu seL up u
rIvuI eIecLronIc commerce sILe, Tuobuo, wIIcI Ius sInce pussed eBuy Lo
domInuLe LIe murkeL LIrougI sLeps IIke LukIng LIe Ieud In eIImInuLIng
user Iees.
TIIs week AIIbubu weIcomed eBuy`s new upproucI. We Iuve Iong
expecLed LIuL eBuy wouId cIunge ILs modeI In CIInu, und u drumuLIc
cIunge wouId be u greuL LIIng Ior eBuy und AIIbubu, becuuse ruLIer LIun
compeLIng, we wouId ruLIer Iocus on cooperuLIon beLween eBuy U.S. und
AIIbubu`s InLernuLIonuI Web sILe, suId PorLer ErIsmun, u vIce presIdenL
uL AIIbubu.
More und more eBuy power seIIers buy In voIume on AIIbubu und seII on
eBuy U.S., buL LIe compeLILIon beLween Tuobuo und eBuy In CIInu Ius
uIwuys prevenLed deeper cooperuLIon. So uny new deuI wIere eBuy
cIunges ILs modeI In CIInu wouId be greuL Ior boLI compunIes becuuse
we now cun work ouL wuys Lo cooperuLe, Ie udded.
TIe TOM OnIIne uIIIunce couId IeIp eBuy move more quIckIy, us Mr.
Wung Ius u repuLuLIon Ior decIsIveness und bIunL words. n one oI TOM
OnIIne`s muny eIIorLs Lo IInd u wInnIng IormuIu, LIe compuny seL up u
unIL In zoo Lo oIIer muILIpIuyer onIIne vIdeo gumes, onIy Lo sIuL IL
down LIe nexL yeur wIen IL IuIIed Lo guIn murkeL sIure.
Duncun CIurk, LIe cIuIrmun oI BDA CIInu, suId LIe conLrusL beLween
TOM OnIIne`s quIck commercIuI reIIexes und eBuy`s sIower movIng
seurcI Ior consensus umong execuLIves In CIInu und CuIIIornIu wus
eusIIy uppurenL uL Lwo recenL meeLIngs.
WIen eBuy munugers guLIered uL LIe Grund HyuLL In SIungIuI, LIey
renLed u Iurge room Lo IoId wIuL LIey IubeIed us u Lown IuII meeLIng
Ior u dIscussIon oI busIness pIuns by u Iurge group oI IocuI munugers und
execuLIves IIown In Irom CuIIIornIu, Mr. CIurk suId.
BuL wIen Mr. Wung recenLIy uLLended u sepuruLe InvesLor conIerence
uIso IeId In SIungIuI und wus usked wIuL Iuppened Lo empIoyees In LIe
onIIne gume dIvIsIon wIen IL wus cIosed, Ie bIunLIy suId LIuL Ie IIred
LIem, Mr. CIurk recuIIed.
A TOM OnIIne oIIIcIuI suId LIuL some empIoyees muy Iuve IosL LIeIr jobs
LIen, buL LIuL LIe compuny LrIed Lo IInd jobs Ior LIe empIoyees In oLIer
dIvIsIons.
To be sure, LIe InILIuI sIze oI LIe joInL venLure beLween eBuy und TOM
OnIIne Is LIny: eBuy Is conLrIbuLIng $qo mIIIIon und ILs IIedgIIng CIInese
operuLIons In excIunge Ior u qq percenL sLuke In LIe joInL venLure. TOM
OnIIne Is conLrIbuLIng $zo mIIIIon und ILs munugemenL experLIse und
reIuLIonsIIps wILI CIInese reguIuLors und oLIer oIIIcIuIs In excIunge Ior
1 percenL oI LIe joInL venLure. HuvIng occupIed u commundIng posILIon
In LIe CIInese e-commerce murkeL us recenLIy us zooq, eBuy Is now In
LIe posILIon oI beIng u gIobuI nLerneL gIunL reucIIng ouL Ior IocuI IeIp Lo
wIuL Is, by compurIson, u smuII nLerneL pIuyer.
BuL Ms. WIILmun wus cureIuI Lo presenL LIe deuI In more posILIve Lerms.
We don`L see IL us u IuIIure, sIe suId. We see IL us un evoIuLIon oI our
sLruLegy Iere In CIInu.
Houcrd W. Irench cnd Rujun Shen contributed reportin jrom
Shcnhci.
According to Shaun Rein of the China Market Research Group in a post on SeekingAlpha.com, the
reason eBay is losing ground in China may have more to do with perceptions of poor customer
service than its competitor TaoBao, an Alibaba company. Respondents to a survey of young
consumers did not like eBay's lack of a phone number that consumers could call when they had a
problem. n addition, customers preferred TaoBao's Alipay payment system as well as the real-time
haggling and bargaining on Taobao (unlike eBay, it allows buyers and sellers to contact each other
directly). However, respondents overwhelmingly felt that items auctioned on eBay were more likely to
be real because eBay did a better job of "policing" the site. There's much more worth reading in the
SeekingAlpha article, link follows.
How eBay Iost the China market
Published: 09 Aug 2009 20:02:01 PST
By Sherman So and J. Christopher Westland
Editor's note:
This article has been adapted from Red Wired: China's Internet Revolution co-authored by Sherman So
and J. Christopher Westland. The to-be-published book is aimed at helping readers gain a firsthand
understanding of how the Chinese combined successful components from their Western counterparts
with innovation, to accommodate the unique characteristics of the Chinese market.
Many believe Taobao beat global online auction king eBay in China by being free, but not EachNet founder Bo
Shao who sold the company to eBay in July 2003. A key catalyst was "migration, the decision to terminate
EachNet's homegrown technology platform and move all EachNet users to the eBay US platform, said Shao.
On the day of the migration, traffic to eBay China dropped by half. Despite the serious customer losses, Meg
Whitman, then CEO of eBay, only learned about it a month after it occurred, on a visit to Shanghai.
Whitman was shocked and very upset. Apparently, even the head of eBay nternational at the time, who was one
of the most ardent proponents of migration, did not tell Whitman about it.

By 2003, eBay's global expansion plan had reached China. t completed its acquisition of the country's dominant
auction player, EachNet, for $180 million in July 2003. EachNet at the time had more than 2 million users and
about 85 percent of the market.
EachNet's market dominance was so strong that Shao started charging listing and transaction fees in 2001,
despite the existence of free competing sites. He believed that as long as the site had the most buyers and made
money for sellers, the sellers would be willing to pay. According to Shao, fees did not affect user loyalty; in fact,
EachNet's dominance increased after it started charging.
After the acquisition, Shao retired from daily operations of eBay China and moved to the US in late 2003 with his
family. eBay sent in a number of expatriates from Germany, the US, Korea, and Taiwan to run the China division
and hired a number of senior executives from other multinational corporations in China.
The company thought everything would be fine. After all, EachNet, now eBay China had an overwhelmingly
dominant position and it planned to spend an extra $100 million to improve its technology platform and promote
eBay's brand in China. Any new competitors would be easy to crush.
However, nothing went according to plan. A new rival came out of nowhere and eBay retreated from China four
years later.
#ise of Taobao
After Alibaba started making profits on its main B2B site, its founder Jack Ma took aim at the potentially much
bigger C2C (consumer-to-consumer) market. Ma gathered a small team working in secret. By May 2003, the
website Taobao, which means "looking for treasure in Chinese, was launched.
While eBay was busy consolidating EachNet into its global operation, Alibaba was plugging Taobao as a new
online shopping destination. And unlike its American-owned competitor, Taobao was free!
But levying listing fees and transaction fees was not the only reason eBay lost its dominance to Taobao, said
EachNet co-founder Shao, who, after selling the company to eBay in July 2003, stayed on as a consultant for
over a year.
"At first, even with Taobao making a lot of noise, our users and traffic did not change much, said Shao.
Despite having to pay fees, the larger user base of eBay China was more than enough to keep sellers coming.
Similarly, most buyers stayed on, as there were more sellers and products offered.
n fact, latecomers seldom posed a serious threat to the dominant online auction player. They might capture
some market share, but rarely a big chunk. Latecomer Yahoo's free auction service in the US had scarcely any
effect on eBay's market dominance.
What really caused eBay to lose its dominance in China was its decision to move its technology platform from
China to the US, said Shao.
nternally, it was called "migration, which was the project to terminate EachNet's homegrown technology platform
and move all EachNet users to the eBay US platform in October 2004.
Whitman, then CEO of eBay, had a vision she wanted all eBay users, wherever they were, to be able to trade
with each other. For example, users in the US could be able to see products offered by users in China and bid for
them.
To implement her global vision, eBay's technology platforms in different countries had to be moved to the
headquarters, consolidated and put under the control of the company's chief technology officer.
The former EachNet management supported the vision, according to Shao, but felt that it was premature to
migrate EachNet users to the US platform, which was not yet flexible enough to accommodate the China-specific
features that EachNet needed to compete in China. EachNet's technology team was also concerned about
transmission speed issues across the Pacific. Such concerns, however, were downplayed during the eBay
technology team's presentation to Whitman.

The beginning of the end
"On the day of the move, traffic (of eBay China) dropped by half, recalled Shao.
What had been information flow within China now became traffic across borders and across the Pacific Ocean.
However, the nternet infrastructure between China and the US was not very good. The loading speed of eBay
China's webpage, one of the most important user issues, slowed dramatically.
What's more, the Chinese government by then had built its "great firewall to block any traffic of which it
disapproved. The censorship was quite tight anything that looked suspicious would be blocked and the foreign
computer server that processed the problematic information would be banned for anywhere between 24 hours to
several days.
The slow and unstable services frustrated users and caused them to leave eBay China in droves. The presence
of Taobao as a better alternative, further sped up its popularity.
But, the news did not get to Whitman until a month later, said Shao. The head of eBay nternational at the time
was a maj or proponent of migration and did not tell her about the crisis. t was only when she visited China with
Shao and met with the local team that she learned the truth.
Whitman cared a great deal about China and treated eBay China as a strategic priority. Shao recalled that
Whitman was shocked and upset when she found out about the problems.
Moreover, the move of the technology platform brought the development of eBay China to a screeching halt.
"n order for the eBay US platform to catch up to EachNet's China-specific features, development on the site was
frozen for a year before the platform was moved, said Shao. For an entire year beginning in October 2003,
EachNet could not develop any new features or make significant changes to existing features.
After the move, the local team lost most of its control on the site. "t took nine months to implement any major
changes and nine weeks to even change a word on the website as everything had to go through the
headquarters technology development team, said Shao.
"This is unthinkable, said Shao. "Fast reaction to user demands is crucial in this market.
eBay's downfall
Taobao, meanwhile, was quickly adding new features and making its design more and more appealing to the
Chinese users. t added an online chat function that allowed buyers and sellers to communicate virtually before
trading. t implemented an online payment solution called Alipay. t made its page design more feminine to appeal
to a growing number of female users.
Slow and unstable services and a lack of updates caused eBay China to lose users fast. Three months after the
platform moved, eBay China's market share had dropped to the almost the same level as Taobao, said Shao.
"After that, there was no more reason for users to stay (with eBay China), said Shao. eBay China had fewer
users and worse services than Taobao, and it charged people too.
Six months after the move, Taobao turned the tables on eBay China, capturing 60 percent of the market while its
rival languished at 30 percent.
eBay significantly cut its prices to try to compete, and in late 2005 it stopped charging altogether, but it was too
little too late. ts market share dropped from 85 percent when it purchased EachNet in 2003 to about 30 percent
in late 2005.
By the fall of 2005, although eBay still had more registered users, Taobao had 57 percent of the market
transaction volume to eBay's 34 percent, according to Beijing market research firm Analysys nternational.
After investing nearly $300 million ($180 million for acquiring Eachnet and $100 million as extra budget for its
China push), eBay all but threw in the towel. t folded its China operation into a joint venture with Tom Online, a
leading mobile value-added services provider in China at the end of 2006.
Tom Online could not turn the situation around, either. eBay's market share had shrunk to 7 percent by the
second quarter of 2007, while Taobao held 82 percent of the market, according to Analysys nternational.

Chart: Market share of C2C market (2008)

Source: Analysys International
Note: by transaction volume
Chart: Gross trading volume of China online shopping market (2004-2011)

Source: i#esearch
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