Digital Winner in China’s Online C2C Marketplace – taobao.com
eBay and Alibaba were both trying to win the online C2C marketplace. The local knowledge and flexibility of Alibaba prevailed.
A powerful dragon cannot crush a snake in its old haunts. – Chinese adage
Founded in April 2003 as a secret subsidiary of the successful Alibaba.com, taobao.com was taking on a formidable competitor from the Silicon Valley – eBay. Starting from a website built by a nine-person team in a month, quickly became the dominant online marketplace in China, driving eBay to irrelevance[1]. Taobao.com reportedly booked $15 billion worth of online transactions on the few days surrounding November 11, 2016 alone.[2] Meanwhile, November 11 was no longer a random date on the calendar. Since 2011, Taobao has given meaning to the day 11 by dubbing it the “double-eleven shopping festival”, a day of online shopping craze fueled by media promotion and large discounts. “Double-eleven” is now a registered brand of Alibaba.com. Both Taobao and eBay were backed by strong technology and capital, and eBay had a massive head start. Numerous researchers and commentators have done the post-mortem analyses this online-marketplace battle.
A “Dragon” poised to strike
Founded in 1995 and went IPO in 1998, eBay withstood the dot-com bubble market crash that destroyed many silicon valley companies in 1999. In 2003, eBay was growing from strength to strength. It just finished acquiring Paypal, the online payment company that was a keystone to eBay’s business, and entered China by acquiring a local online auction player, EachNet.com.
EachNet.com was founded in 1999 by a team in China inspired by eBay’s success. It almost replicated the business model of eBay, allowing users to put up second-hand items online for auction. It also encountered the same challenge as eBay, like the lack of secure online payment and fraud. While Paypal in the US resolved these challenges for eBay, EachNet attempted unsuccessfully to launch a similar service in China, hence many transactions took place offline, and buyers and sellers were thus limited to transact within the same city. Since EachNet was not able to complete transactions online, this partly contributed to the company’s struggle to monetize the marketplace. In addition, when EachNet tried to charge its users for listing, many customers turned away. The eBay-copy was not able to copy the success of the originator, but provided a good starting point for eBay in the Chinese market.
The “Snake” prepares in its cave
Alibaba.com built its success through providing a B2B service platform, listing small businesses on its website to gain exposure to potential customers. While Alibaba and eBay had no overlap business in the short term, Alibaba’s founder, Jack Ma, saw eBay as a threat. “In China, there are so many small businesses that people don’t make a clear distinction between business and consumer. Small business and consumer behavior are very similar. One person makes the decisions for the whole organization. We launched Taobao not to make money, but because in the U.S. eBay gets a lot of its revenue from small businesses. We knew that someday eBay would come in our direction.”[3]
While eBay entered China through a conspicuous acquisition, Alibaba summoned a team of nine dedicated employees, made them sign very strict NDAs that forbade them to tell even their family about an upcoming secret project. Then the team told the “mission”, and was locked down in a separate location from Alibaba’s office to create an eBay competitor, named “taobao”, meaning “searching for treasures” in Chinese. The website slowly gained momentum, registering ten thousand users twenty days after its launch. The secret was well-kept even from most Alibaba’s employees. In June 2003, Jack Ma received a brief internal email: “Attention! A new website named Taobao has emerged!” Soon after, Ma publicly acknowledged the affiliation between Taobao and Alibaba, and announced $12 million investment into this platform.
The war begins
eBay integrated the Chinese platform to the worldwide system for centralized maintenance and design, and aim to infuse the “eBay formula” into the website, namely charging users for insertion, sale, and advertising, though at lower rates than outside China. eBay also invested in advertising through major websites, signing contracts that exclude its competitors.
In the contrary, Taobao launched a fee-free model for limited years, but extended it for multiple years. It also advertised through a large number of computer bulletin board services (BBS) in China. While the loss-making approach was dismissed by eBay as unsustainable, taobao was gaining popularity.
The Payment Battle
While paypal had significant difficulty launching its services in China, Taobao created Alipay, and resolved the trust and payment problem. Taobao eventually prevailed.
[1] Taobao story
http://www.51report.com/news/mba/3016087.html
[2] Alibaba 2016/11/11 sales
http://www.bbc.com/zhongwen/simp/china/2016/11/161111_alibaba_singles_day_e-shopping_2016
[3] Jack Ma quote:
http://www.internetnews.com/ec-news/article.php/3425421
I’m still curious what the key differentiator is between Taobao and eBay, and why it won so easily in the Chinese market. What did eBay fail to understand about this market that led to their irrelevance? What are the key differentiators between the two platforms? Why is it that Taobao hasn’t spread into the US? It’s interesting how two platforms which very similar features could have such dramatically different outcomes.
Great article and very enlightening, thanks!
I am trying to think about whether or not this is a unique concept to China. We saw similar failed attempts of American companies to conquer the China internet market (Facebook banned even before it started, but also Google and even Amazon). Do you think other companies, with a less centralized governing system, are capable of replicating this defense mechanism?
Good post Hao!
Do you think C2C business model is still valid (or more appropriately will still have growth) given the rise of B2C business such as Tmall, JD.com?
Also what’s adage you quoted in Chinese? 🙂
Great questions on why Taobao won, and why Taobao didn’t come abroad. I ran out of space to explain the former question…
Firstly, eBay integrated EachPay into a world-wide platform. Though arguably good for the long run, it made eBay China inflexible and unable to adapt to local conditions. Taobao, on the otherhand, functioned like a well-funded start-up. This alone made a huge difference.
Secondly, eBay charged users like it did outside China, but Taobao pledged free service for five years since 2003, and extended this pledge repeatedly, way after eBay exited the market. While eBay dismissed Taobao’s approach, calling it “not a business model”, it did steered users away from eBay, which did not offer anything superior to justify its cost. This move also pre-empted Taobao’s competitors who are less well-funded, and gained it tremendous user base. In 2012, it opened TMall, a premium service as part of Taobao, for branded sellers. Sellers of branded products pay to gain official recognition on TMall, starting the era of monetization. Taobao has recognised value of the network effect and invested for nine years to “cultivate the market”.
Thirdly, as mentioned in the main text, the payment escrow system competition greatly in the game. Paypal, under the wing of eBay, tried to enter China to replicate its business, through joint venture with “An Fu Tong”, a local escrow service. They encountered issues like regulatory hurdles, partly because of the international payment service it was trying to do, and confusing UI, due to switching between An Fu Tong and Paypal websites during payment. Taobao created Alipay that is dedicated to and well-integrated with Taobao.
Regarding why Taobao did not come abroad, my answer is they are doing so more gradually. Many of Taobao’s success factors are mainly based in China: dominance of alipay, incredibly abundant and densely-populated seller and buyer communities, and strong integration with delivery network. These resources do not give Taobao an edge against Amazon and Paypal in their home turf. Recently Taobao did start services abroad, first targeting neighboring countries frequented by Chinese travelers, through streamlining international shipping logistics, and setting up Alipay in shops frequented by Chinese customers. Noting that the world is much more than just China and the US, I bet when Alibaba’s service is gaining momentum in the US, chances are it has already taken over the rest of the world.
Thank you for sharing, Hao.
eBay / Alibaba battle is fascinating – deep knowledge of local markets and customization of C2C business model to the realities of China proved pivotal in this case and allowed Alibaba win over eBay.
Alibaba is slowly expanding internationally by acquiring local players and currently follows similar strategy – backing up ventures with capital and support, but maintaining the core of the businesses it acquired (example – Lazada in South East Asia). So far, this has proven to be successful and the strategy seems to be working, allowing Alibaba faster execution and capture of new markets. I wonder, however, how much capital is wasted by building these businesses from the grounds up vs using a more modular approach of replicating Alibaba “Chinese” model in new markets. Path to profitability is very long given the big logistics costs and lack of infrastructure in developing markets, and it would be interesting to see if Alibaba changes its approach going forward.