Tom Online: eBay’s Last China Card

Ebay’s (EBAY) long-expected retreat from the online auction business in China finally looks certain. eBay chief executive officer Meg Whitman has flown to Shanghai to take part in a 90-minute press conference and conference call to take place at noon, local time, Dec. 20 [11 p.m. Eastern Time], when she is expected to announce a new joint-venture with Beijing-based online portal and wireless operator Tom Online (TOMO).

Tom who? That’s probably the reaction of U.S. investors who know plenty about eBay, but little about the ins and outs of China dot-coms. So here’s the skinny on Whitman’s new partner. Tom Online and its parent Tom.com are controlled by Hong Kong billionaire Li Ka-shing, who has superb guanxi [connections] on the mainland and an uncanny sense of timing for deals. For its part, Tom Online is keen to diversify away from wireless value-added services, which currently account for about 90% of its earnings.

Tom Online was originally founded in 2000 as an Internet portal by its parent Tom.com during the height of the Internet boom. When advertising revenues failed to deliver on their original promise, as they did for other portals such as Sina.com (SINA) and Sohu.com (SOHU), Tom Online moved into providing services to mobile-phone users in the fast growing fields of instant messaging and music downloads. It was spun off in the first quarter of 2004 with dual listings in Hong Kong and Nasdaq.

A Host of Alliances Tom Online has been able to leverage the connections of its media parent [now renamed Tom Group] and has proved nimble in striking several strong alliances with content providers including Sony (SNE), EMI, Warner Chappell, Universal, and BMG to offer wireless Internet content. “Its key strength is in wireless valued-added services and online portal-entertainment,” says Liu Bin, principal Internet analyst at Beijing-based consulting firm BDA China.

In the second quarter it formed a joint venture with Skype which now has close to 25 million users. Although Skype China has not been licensed to charge users for connection to fixed lines, Tom Online has said it plans to run ads on the Skype pages.

Through its parent Tom Group, Tom Online also has an agreement with UMPay, an online payment service similar to eBay’s Paypal, in which Tom Online will help promote a system called “mini wallets” which enables users to top-up prepaid cards for amounts under $5.

The tie-up with Tom Online will give eBay some of the on-the-ground expertise it needs to compete with the likes of Jack Ma, the mainland entrepreneur whose Taobao auction site has given eBay fits. Tom Online’s CEO Wang Lei Lei has shown considerable skill in negotiating the regulatory shoals thrown in his way. Though a clampdown on how service providers bill users for services such as ringtone downloads and short message services caused revenues to fall 22% to $39 million in the third quarter, Tom Online’s wireless services were 60% greater than its nearest competitor, Sina.com (SINA).

eBay Takes a Back Seat Tom Online is a bona fide player. Yet the fact remains that the world’s largest online auctioneer will be taking the back seat to a tiny company with no experience in online auction sites and which had revenues of just $173 million last year. The move speaks volumes for just how far the mighty have fallen. “It’s an attempt at a graceful exit,” says Duncan Clark, managing director of Beijing consulting firm BDA China. “But it’s really kind of throwing up its hands, with a minority play with [an] entrenched local company.”

To be sure, Whitman will bravely try to put a positive spin on the partnership. But what it really signals is another failed attempt by a U.S. behemoth to extend its dominance to Chinese cyberspace.

Indeed, other U.S. Goliaths have met their Davids in the Middle Kingdom. Google (GOOG) lags market leader Baidu.com (BIDU) in the search business. Yahoo! (YHOO) China has suffered numerous management missteps and now trails competitors by a wide margin [see BusinessWeek.com, 12/28/06, "How Yahoo Missed Out on the Mainland"], since it teamed up with local company Alibaba.

Squandered Dominance Sources close to the deal say that the two companies are flying in about 20 Chinese reporters to Shanghai for the conference, and that a press release is scheduled for 9 a.m. local time Dec. 20. By the time Whitman takes the podium on Wednesday, there will be little element of surprise. Details of the deal have leaked out through various media outlets and blogs, saying that eBay will take a 49% stake in a new joint venture while Tom Online will take 51%. Officials from Tom Online refused to comment on media rumors, and eBay China could not be reached for comment.

It wasn’t supposed to happen this way. Still smarting from its humbling pullout from Japan in 2002 , where it was trounced by Yahoo! Japan, eBay was determined not to repeat those mistakes in China. So when eBay paid $180 million in 2003 for China’s EachNet, the country’s first online auction site and the market leader, the pressure to succeed was very high indeed.

But an inability to adapt its U.S. model and management style to local conditions caused eBay to squander EachNet’s dominance at the hands of rival Taobao, founded by Alibaba CEO and founder Jack Ma, one of China’s most nimble Net entrepreneurs. Last year TaoBao grabbed 72% of China’s $1.7 billion in online auctions, measured by the value of goods sold, compared to eBay’s 27%, according to the China Internet Development Research Center. TaoBao stole the lead by offering its services for free. Although eBay copied that model in January, it did little to slow its eroding market share.

Blame It On Hubris Analysts blame eBay’s problems on hubris at headquarters, which blinded executives to the need for localizing practices. “They came in arrogant and said we know how it works, and our technology is the best,” said one Hong Kong-based China technology analyst with a European investment bank.

EBay had also struggled to find an executive with strong local expertise ever since Eachnet founder Shao Yibao stepped down in September, 2004. The job was left vacant for a year until Martin Wu left Microsoft China, where he was chief marketing officer, to become CEO, but he only held the post 12 months before resigning in September. If, as is expected, management of the new joint venture will fall to Tom Online, then Wu’s successor, Liao Guangyu, may be out of a job by January.