Yahoo's Fiasco in China - Introduction

Chapter 1: Losing from the Starting Line

Jerry Yang was late. When Yahoo entered China, domestic competitors were already ahead of him.

As the first generation netizen, founder of Sina, Wang Zhidong (Translator: A legendary entrepreneur and executive in Chinese technology industry.) witnessed Yahoo's complete development in China. He believed it was too late for Yahoo to enter China market full-heartedly. "Not like other technology industries where (Chinese companies) were several steps behind (foreign companies), the development of Internet in China has been in par with the world. At the end of 1990's, international investment, foreign talents, and internationalized business operation have already participated in Chinese local Internet companies. Sina's successful Nasdaq IPO in 2000 signaled Chinese domestic Internet companies have been way ahead of foreign companies (in China market)." Wang said.

Indeed, Yahoo had had its opportunity. However during the infancy of China Internet market, seeing no immediate profitability, Yahoo chose to watch passively.

In the Era of "Big Three"

Before entering mainland China, Jerry Yang had experience with Chinese websites. Very few people in the industry know that Yang invited two founders of Sinanet.com - the predecessor of Sina - to help him build Yahoo China. On May 4th, 1998, Yahoo launched its 13th non-English site - Chinese Yahoo, which became the ancestor of all of Yahoo's Chinese websites, including Yahoo Hong Kong, Yahoo Taiwan and Yahoo China.

Though there was no office in mainland China, Yahoo started selling Internet advertisement in China as early as 1998. Coincidentally, one of who helped selling Yahoo ads in the early days, Yun Ma, later became Yahoo China’s CEO today.

In April 1995, Ma founded one of the earliest Internet companies in China - China Yellow Page. Building homepages for enterprises, Ma's profit topped 5 million RMB in the third year. In 1997, invited by Ministry of Commerce of China (MOFCOM), Ma and his founding team came to Beijing. They built the MOFTEC website for Ministry of Commerce's China International E-commerce Center.

In 1998, Cofortune Inc., a subsidiary of China International E-commerce Center signed an agreement with Yahoo. Cofortune would help Yahoo to develop China business. And a team was established to exclusively sell Yahoo's Chinese and English ads in mainland China. Cofortune was led by Ma at that time.

The first person hired by Ma to communicate with Yahoo headquarter was Lei Zhou (Zhou recently founded his own company, IFindU). Zhou's everyday job was to communicate with Yahoo's global ad coordinators using Yahoo Messenger. Yahoo was selling Internet ads globally. To prevent conflict, Yahoo's coordinators communicate with worldwide selling agents on daily basis.

At the end of 1990's, Internet advertisement was new to China, while Yahoo had already been profitable with this thing in the US. Therefore, all websites in China copied the Yahoo model - even the size of the banner ads was directly copied. At that time, what now known as the "big tree" portals were still in their infancy. In 1998, Stone Group and Sinanet.com just created Sina.com; Sohu was in its third year; and Netease was only 1 year old.

As a brand new industry, Internet changed with eye blinks. Local big-three portals grew rapidly to replace Yahoo's leading position and left Yahoo China way behind.

The Big Blow

On May 8th, 1999, Chinese Embassy in Yugoslavia was bombed by US Air Force. Sina was the first website that reported the event, and became THE online news destination since. Netizens nationwide started to get the habit of "logon to Sina for news". Being recognized by netizens, Sina replaced Yahoo China to become the number one Chinese portal site.

The ever changing nature of Internet market made it cruel to some extend. According to a survey by China Internet Network Information Center (CNNIC), in January, Yahoo was still the number one website in China. While only two months after the bombing incidence, Yahoo was already behind the "big three" on CNNIC's ranking.

Advertisement customer only cares about traffic. They only buy ads inventory from whomever netizens like. Lei Zhou clearly remembered, a customer and buddy of him told him at that time that they would pick two websites to publish their ads, one would be Sina for sure, and the other one would be either Sohu or Yahoo.

Although competition in mainland China Internet market showed some unpromising signs, Jerry Yang still made the decision to enter this market because the acceptance by early ad customers. However, Chinese law in 1999 prohibited any form of foreign investment into Internet Content Providers (ICP). To get around the policy barrier, Jerry Yang worked with Xuan Wang, the former CEO of Founder Group, who was also a fellow of China Academy of Science and Academy of Engineering. The agreement between Yang and Wang was that Yahoo would provide technology and platform, and Founder Group would take care of sales.

In September 1999, Yahoo quietly changed its simplified Chinese website's name to Yahoo China. And the URL was changed from gbchinese.yahoo.com to www.yahoo.com.cn and cn.yahoo.com. First CEO of Yahoo China, Heping Zhang, confidently spoke up their slogan "Find everything, Communicate everyone". In November, the joint venture between Founder Hong Kong holding company and Yahoo, Found Interactive Network Technology Corporation, was created. Many domestic brand names start to publish branding ads and other promotional materials on Yahoo China.

When the curve ball was played for Yahoo to get into China, the talks between United States and China about China's reentering of WTO happened to be in its critical moment. Chinese government was alert about the launch of Yahoo China. Former minister of Ministry of Information Industry, Chuanji Wu, directly targeting Yahoo, reiterated harshly that foreign investment could not enter China information market. Authoritative media reported at that time that Yahoo China's future would be unknown.

Even worse, when Yahoo entered China, it was the most bubbly time of the Internet history.

Dropped into the Third Squad

Comparing to Yahoo's low-key and practical style, local companies were fully charged in a war for top portal positions. The war was highlighted by high visibility ad campaigns. With the fourth largest US portal, Lycos, launched in China in 2001, the already busy China portal market became overly-crowded.

Internet concept helped local companies like China.com, Sina, Netease, and Sohu to land successful IPOs at Nasdaq. Highly lucrative Internet market attracted other companies such as Tom, and Legend (FM365.com) to enter with overwhelming amount of money. However Jerry Yang's attitude was still to watch. (Translator: Legend was know for acquiring IBM’s Think Pad division.)

Internet analyst Ran Wang (now CEO of China eCapital) pointed out at that time that although seemingly successful, China Internet company did not have a clear monetizing model. They were simply burning money! On the other hand, Yahoo chose to be prudent. As the first CEO of Yahoo China, Heping Zhang's task was to copy Yahoo's globally proven successful model to China. Therefore, Yahoo China was essentially a Chinese version of Yahoo.  News channel was a Chinese translation of Yahoo US, and other translated features included Yahoo mail, messenger, photos, brief case, chat room and English-Chinese dictionary.

Comparing to local portals, the amount of news content on home page from Yahoo China's News channel was pathetic. Though Yahoo was strong at news image editing, Chinese netizens appeared to be more willing to accept bombarding by huge amount of news contents from local portals. Comparing to Yahoo China where one a few people were maintaining news, local portals hired hundreds even thousands of editors to produce news, like workers on a manufacturing line, although most news were copy and paste.

Lei Zhou believed not giving enough focus to news was a fatal mistake for Yahoo China. He told IT Time: "In United States, information industry is rather developed. The problem that web surfers face was how to search the information they need. Therefore Yahoo's category based navigation model worked in the US. However in China, the most critical problem in front of the first generation Chinese netizens was the lack of information." Therefore, the "news super market" strategy embraced by "big three" Chinese portals quenched Chinese netizens thirst for information. And their position in the squad of China Internet was quickly established.

Indeed, Heping Zhang (and his successor Huanshou Chen) saw this demand from Chinese netizens. He did not want to build his product blindly. However Yahoo headquarter did not understand this: " Yahoo had been successful worldwide (with then category model), why can't you in China?"

Similarly, American had difficulty to understand the service sectors in China market. When "big three" built up huge cash flow via text messaging and gaming services, Yahoo became a bystander again. Even Jerry Yang later on acknowledged, the monetizing model for text messaging service in China was very different to other countries, which was difficult for foreign Internet companies to understand.

Although Heping Zhang run Yahoo China, it was very difficult to convey the voices of China market to Yahoo headquarter. As a professional executive who understood China market deeply, he helplessly watched Yahoo being passed by local portals. So he quitted. In addition, during the bust of the dotcom bubble in 2001, with its stock price crashed, Yahoo became vulnerable itself. The headquarter believed, the goal in China market should be to get profitable rather than long term investment. All those factors caused that the number one portal of the world could not even squeeze into the second tier in China. And management shakeout happened frequently.

In fact Yahoo had their chance. It was only because their arrogance and therefore ignoring the China market, Yahoo gave up the opportunity to partner with Sina. "If Yahoo got humble and cooperated with Sina, the whole story might be different." Zhidong Wang said. Many believed it was government's policy barrier that hindered Yahoo China's development; Wang believed this was only an excuse. Sina, which was a joint venture between Stone and Sinanet who also had deep root in the US, was a counterexample for Jerry Yang's self-defense.

With its economic take off, China became the market where global companies had to fight for. Yahoo started to get serious about China too. They were considering winning back their worldwide number one position in this market.


(Stay tuned for Chapter 2: To Invest More or Not?)