A Break in Yahoo's China Clouds?

An IPO for part of its Alibaba.com venture could offset its otherwise poor mainland showing and woes due to copyright and human rights lawsuits

Now that he has taken over as chief executive officer of the company he co-founded, Jerry Yang has plenty of problems to fix. The new CEO of Yahoo! (YHOO) isn't going to find any quick Google-(GOOG)slayer. Fortunately for Yang, though, Yahoo might soon get a bit of good news from China, one battleground that has up till now been almost as much trouble as Google.

In 2005, Yahoo took a 40% stake in Alibaba.com and, although the Chinese Internet company won't comment on rumors about an initial public offering, most observers believe that a listing is imminent. According to buzz in the market, the IPO won't be for the whole company but just the most successful pieces, first of which is Alibaba's business-to-business marketplace (also called Alibaba).

If the IPO does take place it could rival that of Baidu.com (BIDU), the Chinese search engine that went public on Nasdaq in August, 2005, and has enjoyed a 34% increase in its stock price since then.

An Alibaba IPO would provide a welcome Chinese break for Yang, who has helped steer Yahoo through what has been up to now a pretty dismal run in the Middle Kingdom. The company has not only suffered from a lackluster Chinese portal and an also-ran Chinese language search engine but has lost a high-profile lawsuit brought by international record companies for providing links to Web sites carrying unauthorized versions of songs.

Low-Profile Successes

Yahoo China has also gone through many top managers, with an embarrassing departure last year of its president after barely a month on the job. And Yahoo has been a target for human rights campaigners alleging that the company has been complicit in enabling the Chinese government to imprison dissidents who used Yahoo e-mail accounts to circulate information embarrassing to Beijing.

Despite these problems, Alibaba does run some very successful, albeit lower profile, businesses. They don't generate the same type of headlines, but subsidiaries like Alibaba.com have helped Alibaba become the dominant business-to-business company in China.

Alibaba.com's revenue comes largely from service fees that it charges customers. They're mostly small and mid-sized businesses, either based in China, or based overseas and involved in trade with Chinese partners. These Alibaba users pay anywhere from $300 for a no-frills package to $10,000 for top-of-the-line service. Customers paying that top price get priority status on Alibaba search results as well as training from Alibaba staff on how to do online marketing, and help in producing online videos.

The business-to-business operation has many fans among people who follow the industry. "It's running well," says Liu Bin, an analyst in Beijing with consulting firm BDA China. "China has a large number of small and mid-sized enterprises, so they can continue to see sustainable growth. In the long term, it's a profitable business."

A Black Eye to eBay

It has to be, since that business-to-business operation is what's subsidizing many of Alibaba's other ventures. For instance, the company operates the most popular consumer-to-consumer site in China, Taobao.com, which commands about 65% of the market for such transactions. The success of Taobao forced eBay (EBAY) to retreat from the Chinese market.

Although eBay's Meg Whitman had pledged to invest tens of millions of dollars in China to develop the company's business there, eBay was a distant No. 2 in the market by the time last year it announced it was changing strategies and forming a joint venture with Tom Online, controlled by Hong Kong billionaire Li Ka-shing.

Unfortunately for Alibaba chairman and founder Jack Ma, though, Alibaba has yet to figure out a way to translate Taobao's popularity into revenues: The site is free and Ma, after an unsuccessful attempt to launch some paid services last year, has pledged to avoid any charges until next year at the earliest.

Liu of BDA is hopeful that Ma will figure out a way to start generating some revenue from Taobao. "One problem has been that this generation of Chinese Internet users is not used to paying," he says. However, adds Liu, "They will change. They will form habits to pay for services."

Censorship Issues Remain

The remaining question mark is Yahoo China. Although Ma has said that he intends to become more competitive against Baidu and Google's Chinese service, the company remains a distant third in the search market, with about 5% of the market compared to about 60% for Baidu and 20% for Google. Yahoo China's brand-name recognition "is much lower than its two major rivals," says Liu. "The company has spent a lot promoting its search business but it only has had limited improvement."

In the meantime the headaches continue to mount. Yahoo's willingness to follow Beijing's policies regarding Internet censorship have led to a lawsuit filed in April by a human rights group, World Organization for Human Rights USA. A month later, Shi Tao, the Chinese reporter jailed for 10 years after Yahoo provided the Chinese government with information about his Yahoo! e-mail account, sued Yahoo, and Alibaba as well.

In other legal battles there have been mixed results. In December, Yahoo China won the unfair competition lawsuit it brought against Qihoo.com, operated by former Yahoo China general manager Zhou Hongyi, which had been targeting Yahoo's toolbar as malware—short for malignant software, which is similar to spyware.

But in April the company lost a suit in Chinese court brought by international recording companies such as EMI (EMI) that alleged Yahoo China helped facilitate copyright infringement by providing the links to Web sites carrying unauthorized songs. Rival Baidu had successfully defended itself against a similar lawsuit. Yahoo is appealing the ruling. A successful IPO of Alibaba.com would give Yahoo and Yang a welcome boost.

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