Ma Huateng and Tencent Book Extract – Fighting to become the King of Online Business

On 10 May 2003, the Alibaba Group’s subsidiary, Taobao, was born. Unlike the B2B business model, Taobao was a cross between a B2C and C2C e-commerce platform.

If Alibaba was for businesses, and particularly SMEs, to build a platform for trading all over the world, Taobao was aimed at the individual, a platform for people-to-people trading. Many online companies were eyeing the market, looking to claim their own slice of the pie. On 12 June 2004, a very important moment in the history of the Chinese internet occurred: the West Lake Network Conference. More than 1,000 Chinese network operators gathered in Hangzhou at a conference hosted by the China e-Commerce Association and Alibaba. Many major brands, such as Walmart, LG, Samsung, Sears and GlaxoSmithKline made their Chinese procurements through Alibaba.

Clearly, e-commerce had become one of the internet’s hottest businesses. Naturally, Ma could not miss such a golden opportunity. He had discovered that many Chinese users, being accustomed to physical shopping, would merely refer to a simple web page when shopping online, which often failed to show the real characteristics of the product and made it harder for the purchaser to trust it. He decided to put Tencent’s speciality to work: strengthening online communications.

Ma’s philosophy was that communication and mutual trust were crucial in e-commerce, and all the more important in the C2C industry. QQ was seen as just the right tool to compensate for the lack of communication in C2C transactions.

Ma even applied for a patent on his combination of QQ and e-commerce, whereby dialogue boxes, allowing buyers and sellers to communicate, would appear on- line. Of course, Ma realized many e-commerce sites had their own instant messaging so ware; however, QQ’s were superior.

The next step was to consider how to bring buyers together. This was an easy problem to resolve: QQ’s huge pool of users was a large market in itself.

Though there were 400 million registered and over 170 million active users, this did not preclude making an ini- tial incursion into the C2C platform. Ma knew that e-com- merce was still in its initial stages, and it was simply a mat- ter of time before their scope could expand.

On 12 September 2005, Ma released his C2C platform: Paipai. Like Taobao and Alipay, it ensured the security of online transactions. e environment was challenging, given that Taobao was fairly mature and well established at this time, and there was also eBay to contend with.

Initially, trials of Paipai were planned to see if it was ready to be transferred to an operational state. In order to give users a sense of intimacy, Ma sent a letter through Paipai. Since the 2002 fee controversy, Ma had become very cautious with users, and made every e ort to ensure they were satisfied, and that there was a sense of openness and transparency in Tencent’s plans.

Paipai Formally Launched

On 13 March 2006, Paipai entered its operational phase. Relying on the support of 170 million active users, it had 9 million registered users after its official launch. Based on surveys, most users welcomed the chat function. Relevant data showed that 70% of the C2C market was already taken and that there seemed to be little space for expansion; but Ma felt that there was still potential to establish links with many users who remained unconnected.

Paipai’s network architecture was very advanced: users could enter online shops, interact with avatars, see star ratings of sellers, and sellers could make buyers into VIP customers, who could then enjoy discount offers.

On 10 May 2006, Taobao – which had gained the advantage during its competition with eBay – started to charge sellers, by providing a competing fee-paying ranking service, Zhao Cai Jin Bao.

This service meant that all qualified Taobao goods could be presented at the highest positions on Taobao. After the promised three-year free period, this fee-paying value-added service was widely considered to be an effective means of charging sellers, and also proved the most significant re- form of Taobao since its establishment.

However, sellers were angry about the policy. They believed it would see sellers’ products being placed far towards the end of Baidu search results, leading to a turnover rate of nil.

The CEO of Taobao stated that the model was completely new to C2C, and that users would understand its benefits after using it. He used data to back up this claim: 20 days after its launch, 100,000 sellers had already taken part.

For many, though, the words were empty: those who did not participate in the bidding saw their businesses take a nosedive. By 30 May 2006, an online petition had attracted 39,326 signatures. If there was no response to their collective strike by 1 June, they would cease sales and withdraw their Paypal funds.

Ma could see that Taobao’s initiative not only hurt sellers, but was also affecting buyers. He decided to use the opportunity to develop his own Paipai. Soon after, Paipai initiated a campaign called ‘Home-Moving Ants’ with the slogan, “heavy rain comes and the ants are moving”. This seemed an apt motto since, at that time, ants were Taobao’s mascot. Clearly, Ma intended to lure Taobao sellers to move to Paipai with the free slogan. In order to increase its publicity, this campaign was promoted throughout the QQ platform. Paipai even promised that it would accept sellers’ prior credit records from third-party platforms and provide recommended positions for newly opened shops. It was a clear challenge to Taobao.

In order to attract more sellers to Paipai, Ma also introduced a policy of special incentives users could participate in, such as third-party transfers and shopper rewards.

On 6 June 2006, Paipai was officially launched, with users being able to utilize its services free of charge for three years. With more and more users online, sellers also wanted to find a prime position for selling their products, and Ma hoped that that the measures the company had installed would attract them.

According to reports, in the second quarter of 2006, China’s C2C had a market size of ¥5.71 billion, showing a strong momentum of development and growth. From September 2005 to August 2006, Paipai grew rapidly, its registered users exceeding 2 million a year and online sales breaking the 4.5 million mark.

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