Yahoo and Alibaba

3. How has the strategic value of Yahoo to Alibaba changed over time since 2005? 2005 was a tough year for Alibaba. Because of the US$100 million investment in China by eBay, Alibaba and its subsidiary – Taobao fell into a severe price war against eBay which hindered the profitability of the group and much more capital was needed for operational and technological improvement in order to win the battle. Under this circumstance, Alibaba formed a partnership with Yahoo! Inc. Yahoo invested US$1 billion in Alibaba and transferred the ownership of Yahoo! China to Alibaba.

In return, Yahoo got a 40% stake and 35% voting rights in Alibaba. Beside the cash injection, another reason for the initiation of the partnership was that Alibaba valued much on the importance of search engine for its e-commerce work. At that time, owing Yahoo! China was a competitive advantage of Alibaba against eBay. At that time, Yahoo had much strategic value to Alibaba due to its large capital base and technology to help Alibaba safeguard its market share under eBay’s attack. However, the operation of Yahoo! China under Alibaba was unsatisfactory.

Since 2005, Yahoo! China has been losing its market share and lagging behind its rivals. Although Alibaba tried to re-orientate it as more business-oriented to grasp the market niche, the effort was in vain. The influence of Yahoo! China in the search engine market in China diminished. Hence, it failed to draw attention of potential customers of Alibaba and was not capable to bring enough benefit to Alibaba leading to a fall in strategic value of Yahoo!. Even for the parent of Yahoo! China – Yahoo! Inc. , the story was more or less the same.

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The net income of Yahoo dropped 78% in the first quarter of 2009 which resulted in a massive layoff. Due to the low profitability, Yahoo formed a 10-year agreement with Microsoft. Under this contract, Yahoo had to adopt Microsoft’s search technology (Bing) instead of its own technology in all Yahoo’s website. Similarly, Yahoo agreed to use Google’s search engine in Yahoo! Japan (search ads platform). In other words, it surrendered its own searching technology which Alibaba valued most. Search engine is important to e-commerce companies.

As many people use search engine like Google, Yahoo, Bing etc. to get appropriate results of their queries, a smart search engine can allocate much traffic to the e-commerce website by placing their website on the top of result pages so that potential customers can be created. Now that Yahoo lost its own search engine, it may only be able to provide support to Alibaba under Microsoft’s constraints which was unlikely to be what Alibaba wants and thus lowering Yahoo’s strategic value. Unlike the poor performance of Yahoo, the profit of Alibaba surged after the partnership.

Apart from being the market leader in China, Alibaba started to expand its business overseas in 2008. For instance, it formed a partnership with Informedia India Limited; set up Alibaba Japan, a joint venture with Softbank to foray and launched AliExpress in US etc. All these new strategies had no correlation with its partner – Yahoo! Inc. These revealed that Alibaba was keen on developing new relationships with overseas companies to enter foreign markets. Due to the poor relationship with Yahoo, Alibaba no longer seek cooperation with it and the strategic value of Yahoo further diminished.

Because of the poor performance of Yahoo! China, Alibaba started to provide Sogou (a local search engine) in addition to Bing for its customers. This probably made Yahoo’s market share further decrease as customers no longer need to choose Yahoo! China’s Etao as the only access to Alibaba and they can opt for Sogou Shopping instead. Even Alibaba loses Yahoo! China, it still has its new channel to reach its potential customers. It seems that Yahoo has lost its role as an exclusive search engine of Alibaba and lost its strategic value meanwhile.

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