Rumors flying everywhere. Outside of China, the rumors are about Yahoo buying Alibaba, But the Chinese press seems to believe that Alibaba is “acquiring” Yahoo! China.

More details from Pacific Epoch

Chinese business to business website Alibaba will transfer a 35 percent stake of the company to Yahoo and in return gain control of Yahoo China’s core businesses, reports Sina quoting an inside source. The deal will not involve cash and Alibaba CEO Jack Ma might be appointed Yahoo China president, said the source. Softbank, one of Alibaba’s investors, is also participating in the negotiations. Yahoo’s China businesses currently include a Chinese Internet portal, the search engine Yisou, online auction website 1pai (a joint venture with Sina (Nasdaq: SINA)) and instant messaging service Yahoo Messenger.

This sounds more plausible given that Zhou Hongyi, Founder of 3721 & ex-President of Yahoo China, left or was forced out of Yahoo! China recently. Yahoo currently believes a local Chinese is best suited to run its business China and is actively seeking an replacement. Furthermore, Jack Ma has notoriously big ego ambitions so this will definitely be something he’ll be interested in. A minority stake by Yahoo! will also not preclude an eventual IPO (although not likely) which will keep the VC’s as well as Jack happy on that front too. Ofcourse, does Yahoo! want to create another Yahoo! Japan situation where its essentially a separate business with its own agendas. Ceding the fastest growing internet market to a minority owned subsidiary is not exactly the smartest thing to do for Yahoo’s global ambitions. Thus, if this moves forward, I’m sure Yahoo will include a buyout clause where it is allowed to buy Alibaba at a certain premium to its expected IPO pricing to take it whole thing off market and back into the fold. (You gotta admire Jack Ma’s negotiation skills to turn a potential acquisition by Yahoo to the current configuration where he gets the best of both worlds - money, position, visibility)

Expect Alibaba to move aggressively into other markets (portal, gaming, IM, etc) creating another huge mess. Remember Alibaba is certainly not afraid of being an new entrant in a market with entrenched players, think Taobao vs. EachNet.

From China Digital Times

In this stifling atmosphere, it was hard to see how the nascent blogosphere could possibly grow and develop. But over the next few months, the concept of blogging received a boost from an unexpected source.

A magazine writer in Guangzhou in southern China, who wrote under the name Mu Zimei, began keeping a sex diary on blogcn.com. “I have a job that keeps me busy, and in my spare time I have a very humanistic hobby – making love,” she wrote. “The partner I take in my hobby is one I choose and always changes. I rely on a large supply pool. I do not need to take any responsibility for them; neither should I give them love. They will not cause me problems. They are like CDs, which will not make a sound unless I play them.”

With explicit details and sometimes even publishing real names, Mu Zimei’s sex diary was a hit. By mid-November 2003, more than 160,000 people had logged on to her site and the number was growing by 6000 a day. While her explicit writing and lifestyle challenged traditional morals, causing heated debate in the Chinese media, Mu Zimei also made bo ke a familiar word for hundreds of millions of people.

As the Mu Zimei debates raged, the number of users on blogcn.com leapt from 20,000 to 160,000. Other blog sites saw similar increases.

Episode II is here from

Global Voice Online

2 Sexy Blogger. In year 2003 Blogchina didn’t have much influence and there are very few people who were bloggers. It was sexy bloggers, who post her almost naked photos and described the details of their sexual life, that made the name “blog” widely known to mass population of netizens. MuZiMei, a pioneer in this field, published her dairies about her sexual activities and gained her fame overnight , which instantly became hot discussion on both online and offline communities. Blogchina made use of the opportunity, copying those diaries on its own websites. It attracted ten of million visitors daily. And this year another similar phenomenon happened when FuRong JieJie(Sister Lotus) triggered off public interest. Just before authorities put a stop to it, Blogchina had been the major power promoting her.

So some Chinese bloggers were unsatisfied with the behaviors made by Blogchina thinking that it used those sexy bloggers for its own propaganda and attracted visits. Ironically Blogchina has initiated an anti-pornography movement before, aiming at the pornographic photo and information on Chinese internet.

Metcalfe’s Law was the mantra of the dot-com generation. With it, spawned dozen of more mundane but more digestible corollaries: winner takes all, network effects, first mover advantage, time-based competitive strategy, time to market advantages, etc. While it certainly lost some of its luster, its impact on the technology industry can not be understated. Entire venture capital firm, read Benchmark, has made innumerable billions investing in “network effects” or as Bill Gurley calls it “Increasing Marginal Utility” ventures. Companies like eBay, Keen, uShip, Zopa, Betfair, Dropshop, Shopping.com, WorldWinner, Ingenio, Open Table (wow thats long list) were founded/funded based on the “law” by Benchmark.

So what happened to Metcalfe in China? Before Taobao, EachNet had 80% of the market. Before Baidu, Google had similar domination. A few years later, both former leaders are losing market share and fighting teeth and nail to recover its former glory. Both companies were typical network effects business models - eachNet with its marketplace, Google with its advertising network. Certainly Metcalf law does tilt the scale in favor of the incumbent, but it doesnt mean the game is over. In fact, what happened in China deserves deep introspection for entrepeneurs working at Web 2.0 companies taking on Web 1.0 incumbents. Here are some of the things I gleamed (I’m sure there are more, especially for those on the inside)

1. Metcalf’s law is less powerful when the incumbent owns a large percentage of a small nascent market. Overall Internet penetration was/still very low in China when eachNet and Google achieved its leading position. With a large percentage of the total addressable market still up for grabs, late entrants still have an opportunity to gain marketshare and match the critical mass achieved by incumbents in a short (or even shorter) amount of time based purely on the fact that adoption rate are often expotential. This is key, in that, given an exponential growth rate of a small emerging market, late entrants can actually “catch-up” to the incumbents quickly if they are able to acquire these new users (which is still hard to do given Metcalf’s law). So how can they capture these novice users? That brings me to the next point.

2. More importantly the total addressable market is highly heterogeneous- that the market is segmented into various groups which is very different on a attitudinal, behavioural, and demographic basis. This allows new entrants to creat tailored solutions which offer a particular segment more bundled value than that offered simply through network value. (think localization & more) In China, these new users were different enough from the early adopter that using Taobao or Baidu’s solution made much more sense than eachNet or Google. In fact, the brand awareness of the incumbents was low enough in the total addressable market, that the “law” conferred much less advantage than previously thought.

3. Heterogeneity must also exist in the way users make their purchase/adoption decision. In typical marketing parlance, the awareness-consideration-purchase funnel must be decidedly different in the target segment for the late entrants (from the segment which the incumbent owns) to enable them to effectively market/sell to that segment. In China, the later adoptors were much less affluent, much less web-literate, and live in less urban areas outside of Beijing and Shanghai. By putting more feet on the ground, being more scrappy, and messaging in a decidedly different channel geographically/offline/online, late comers were able to convince users to use their solutions instead.

Paypal China is now online. Despite articles (Reuters & WSJ) which says the service will be launched by “end of the year,” the service is now available online. Couple of interesting notes,

1. Looks like the service is free for merchants and for p2p transactions, eBay is getting aggressive with pricing to compete with Alibaba
2. Partners with the same banks as Alipay - China Merchants Bank and China Construction Bank
3. No escrow, instead it’s betting that Buyer Protection is good enough to compete for “trust”
4. The lack of escrow will also translates to transaction simplicity/ease of use which Paypal hopes to be a competitive advantage
5. Alipay claims to process US$12M in payments a month, so Paypal will have a ways to go
6. Paypal brand name in Chinese is “treasure” “spelled backwards” - ie the two Chinese characters are switched. Interesting to note that while it is a phonetic translation - its sounds like PayPal in English, the name also plays on the word “treasure” which is a prominent brand word/character that Taoboa (”Find Treasure”) and AliPay (”Payment Treasure”) employs prominently. Dont think its a coincidence despite the phonetic similarity to English that the PayPal Chinese team decided to use the word “treasure.”

The Chinese internet industry is going through an interesting phase of expansion circa US 1998 under the backdrop of new applications of web 2.0/3.0 and learnings of the dot-com bubble. With overall Internet penetration rate still low, none of the leading players in the industry have achieved the critical mass neccessary to fend off competitors encroaching into their own industry. Furthermore, with valuation sky high, and user numbers impressive many companies are desperate to find ways to

1. Justify their valuation
2. Expand into new segments
3. Find a viable business model

For sures, the recent success of Taobao against an once seemling entrenched player with critical mass, EachNet, has created the business environment (and maybe hubris?) that nothing sacred. (The economic impact of Taobao vs. Eachnet goes much much beyond their immediate auction industry.) Many of the leadings players in online portal, mobile portal, SMS, IM, MMOG, Auctions, and search have all announced initiatives and encroachment into each other’s application or end user segment. See :

Tencent GS Report
S&P on Shanda

both via billsdue

But really what makes this much more interesting than 1998 is the fact that all this is taking place under the adjacent & bleed-in innovations of Web 2.0 in the US (Search, Blog, RSS, Tag etc) and arguably Web 3.0 in Japan/Korea(Ultra Broadband, IP Ubiquity, Mobile, MMOG, Virtual Commodities,“1st Degree Blogging”). There are a lot more moving parts than there were in the US in 1998.

Given the increased complexity I’m not certain that all players will eventually find the business model or the growth they are looking for. With no players gaining critical mass given the hyper competition, very few players will be able to gain scale (critical in the tech world) to amortize their R&D investments to become highly profitable businesses. Furthermore, many unique structural innovations require some sort of platform gorilla company company with highly profitable businsses to jump start (Web 2.0 would not have happened without Google’s adsense/adword AND eBay’s distributed business model learnings: the long tail). I am certainly not convinced this landgrab in China is healthy and rational behavior but I have no way of knowing. Competition in most cases is good, but as I have learned in the dot-com days, many times, competition can be very destructive. Perhaps a similar crash will take place and clean out the “weeds” allowing surviving companies to scale and new innovations to take place. Like I have learned from the dot-bomb days, in the end, the crash wasnt such a bad thing after all.