The Shame and Glory of Yahoo’s China Adventure
In 2005, Yahoo got lucky when it made a deal with Jack Ma for a huge chunk of Alibaba stock. It also got humiliated when it revealed a dissident to the authorities
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A decade ago, few in the U.S. had heard of Jack Ma, the founder of the Chinese Internet company Alibaba. But Jerry Yang, the co-founder of Yahoo, was widely celebrated. Today, Yang has left the company, and Ma is one of the world’s most powerful businesspeople. In a new biography of Ma, Duncan Clark gives the deep background of a billion dollar investment that Yahoo made in Alibaba, a stake that now comprises the bulk of the American company’s value. He also describes a dark episode in Yahoo’s past, when the company shared information that helped China identify a political opponent, who wound up in prison.
— Steven Levy
The Yahoo-Alibaba deal originated in a May 2005 meeting between Jack Ma and Jerry Yang at the Pebble Beach golf course in California. Before a steak-and-seafood dinner with other tech luminaries from the United States and China, the two founders took a stroll outside. Jack recalled, “It was extremely cold that day, and after ten minutes I couldn’t bear it anymore. I ran back indoors. [But] in those ten minutes we exchanged some ideas. I told him clearly that I wanted to enter the search business, and my opinion was that search engines would play a very important role in e-commerce in the future.”
From this initial discussion, the outlines of a deal — which Yahoo called Project Pebble — started to take shape two weeks later when Jerry held further meetings with Jack and Joe on the sidelines of the Fortune Global Forum, hosted that year in Beijing.
A deal with Alibaba was attractive on a number of levels. It was a private company, and this meant a deal could be struck quickly. Yahoo and Alibaba had a common shareholder: SoftBank owned 42 percent of Yahoo and 27 percent of Alibaba. Another positive was good chemistry. Jerry and Jack had known each other for seven years, since their first meeting in Beijing, when Jack played tour guide. The two men hadn’t stayed in regular contact, but they had established a rapport.
Yet the logic of the combination was not immediately obvious. Yahoo, a consumer content company, was to hand over its China assets to a company that was essentially a B2B business information company with two newer businesses, Taobao and Alipay, tacked on. Yahoo CFO Sue Decker recalled Yahoo’s concerns: “At the time this seemed like a big leap of faith: More than half the value of the venture — more than two billion dollars — was attributed to Taobao and Alipay, both of which were losing money.” The decision to hand over Yahoo’s China business was a gutsy move, as Decker recalled, “We realized we needed to be willing to give up all operating control. It also meant we would leave all employee issues to our partner and allow our code to be used by people with no previous connection to the company. Scary.”
Jack’s charisma and vision for Alibaba also played an important role, as Jerry recalled a decade later, “It was probably in retrospect a big bet, but if you met Jack, and having got to know him and seeing what his vision was, you certainly thought it was worth it. And he really had an inside track on being a very dominant commerce platform in China, so that really gave us a lot of comfort.” Asked about which company got the better side of the deal, he answered, “If you look at that partnership over ten years, clearly Alibaba was a beneficiary of a very strong vote of confidence back in 2005, and now Yahoo as a company is a beneficiary of that investment.”
With the deal, the New York Times crowned Jack as “China’s New Internet King.”
The final ownership of Alibaba would be Yahoo, 40 percent; SoftBank, 30 percent; and existing management, 30 percent. Did Jack feel any seller’s remorse about parting with this 40 percent stake? A decade later he again looked back on the deal: “I asked for one billion dollars, and they gave us one billion dollars. I thought the war between Taobao and eBay would last for a long time, so we needed enough cash to fight.” In the end, $1 billion was enough to scare off eBay. “We asked a lot. But we did not know when we got the money eBay would run away. So the money [wasn’t used].” Jack said he would do the Yahoo deal again but “in a better, smarter way,” adding, “Nobody knows the future. You can only create the future.”
When the deal was announced, Jerry Yang told the media that although Alibaba was taking over Yahoo in China, this didn’t mean the end of the Yahoo brand in the country. Yet under Alibaba’s management the Yahoo brand would rapidly fade and indeed eventually disappear entirely from China. Within a year of the deal, local media started to refer to Yahoo China as the unwanted “orphaned child,” with Alibaba more focused on nurturing its own baby, Taobao. In May 2007, Alibaba changed the name of the business from Yahoo China to China Yahoo, an apt reflection of who was in charge.
But even after it sold its China business to Alibaba, Yahoo’s image would be tarnished in the United States by the case of imprisoned Chinese journalist Shi Tao. The affair would illustrate the unpredictable risks that awaited any foreign company planning to build a business in China’s Internet sector.
Shi Tao was an editor and reporter at a newspaper in Changsha, the capital of Hunan Province, called Contemporary Trade News (Dangdai Shang Bao). He was also a customer of Yahoo Mail. On April 20, 2004, Shi participated in an internal editorial meeting, convened by the newspaper’s deputy general editor, to discuss a classified document sent from Beijing with instructions on how to avoid social unrest in the run-up to the fifteenth anniversary of the June 4 Tiananmen Square crackdown. Although copies of the document were not handed out, Shi Tao took notes during the meeting later that evening using a Yahoo China email account, then emailed them to a Chinese, prodemocracy website based in New York. Two days later, Yahoo China was requested by the government to hand over details of the account owner, which they provided that day.
On November 23, 2004, Shi was detained by the State Security Bureau in Changsha. On December 15 he was arrested and charged with revealing state secrets. After a trial lasting two hours in March 2005, Shi was found guilty and sentenced to ten years’ imprisonment.
Shi’s case was quickly taken up by activist groups32 who accused Yahoo of being a “police informant.” The publicity and appeals, launched by Shi’s journalist friends and his mother, Gao Qinsheng, were unsuccessful in reversing the verdict. After what Amnesty International alleged was intense harassment from the Chinese government, Shi’s wife divorced him.
It was a nightmare for Shi and his family. For Yahoo it was a black eye. For Alibaba, although it now ran the China business, the case had happened on Yahoo’s watch. Jack was asked to comment on the case and said, “As a business, if you cannot change the law. . . . We’re not interested in politics. We’re just focused on e-commerce.”
On September 10, 2005, at Alibaba’s Alifest in Hangzhou. Jerry Yang was to appear onstage with Jack as part of the celebrations. The icing on the cake was Jack’s invited keynote speaker that year: former U.S. president Bill Clinton. Clinton did not refer to Shi’s case but discussed more generally the economic cost of censorship and the need for China to develop greater tolerance for dissent.
After Clinton left the room with his Secret Service and Chinese government security detail, Jerry Yang took the stage for a Q&A session to talk about the deal with Alibaba. Washington Post reporter Peter S. Goodman asked Jerry Yang directly about Yahoo’s role in handing over the information that led to Shi Tao’s incarceration.
Yang answered, “To be doing business in China, or anywhere else in the world, we have to comply with local law. . . . We don’t know what they want that information for. . . If they give us the proper documentation and court orders, we give them things that satisfy both our privacy policy and the local rules.” He added, “I do not like the outcome of what happens with these things. . . . But we have to follow the law.”
The audience, made up mostly of Chinese Internet executives and investors, erupted into applause, what seemed like an inappropriate response given the seriousness of the case, but thanks to the Great Firewall few in the audience had even heard of Shi Tao. Things would get much worse for Jerry Yang after that, culminating in a public skewering in Washington, D.C., in 2007 when he was summoned to appear before Congress to answer questions about the case. The committee chairman, California congressman Tom Lantos, opened the session by introducing Shi Tao’s mother. Jerry Yang, wearing a dark suit and tie, bowed solemnly to her three times as she sat behind him sobbing. Lantos lambasted Yahoo for its “inexcusably negligent behavior at best and deliberately deceptive behavior at worst” and concluded, “While technologically and financially you are giants, morally you are pygmies.”
Yahoo later settled out of court a lawsuit filed by Shi’s family, paying an undisclosed amount. Shi Tao was released in September 2013 after serving eight and a half years in prison, his ten-year sentence having been earlier reduced by fifteen months.
Speaking in 2015, Jerry Yang took stock of the China Internet market: “Maybe in the next ten years some American or Western brands will be successful in China. But in that 2000–2010 time frame there just weren’t any.”
Western Internet companies trying to crack the China market came to experience firsthand the old adage that in China “it is better to be a merchant than a missionary.” And the biggest merchant of all was Alibaba.
From ALIBABA by Duncan Clark. Copyright © 2016 by Duncan Clark. Reprinted courtesy of Ecco, an imprint of HarperCollins Publishers.
