eBay and the New Refugees

In the Hutong
Listening to the Princeton Hip-Hop Symposium
2013 hrs.

Reading the Wall Street Journal article breaking the story that eBay is passing its China operations to Tom Online in return for a shareholding, I like many others cannot help but be struck by the overt similarities between this and other such deals that have preceded it – especially Yahoo!’s handoff of Yahoo! China to Alibaba.

Indeed, eBay now joins a growing and distinguished list of U.S. Internet businesses that have been driven unceremoniously from China’s shores. Three choice examples:

* AOL: AOLegend? Gone. Cut and ran.

* DoubleClick: Swaggered in on high hopes in 1999. Packed it up and handed their China business to TechSolutions.

* Yahoo!: Spin it how you want, Yahoo! bailed and dumped headaches on Alibaba in a deal that was a sweet one for Alibaba’s shareholders.

Where Did It All Go Wrong?

They left for a simple reason, the same reason eBay is handing over the keys to Tom – China was not core to any of their businesses. They came over here believing that China would be important to them in the long term, and decided they needed to be here big time. In other words, they bought into the great fallacy sold regularly to foreign businesses – get in here now, and get in big, or surrender forever any potential to do business here.

But in reality, their businesses were growing and evolving so quickly in markets that were ready now, today that they could ill afford to distract their time, attention, and capital to a major effort to fight regulators, competition, and the sheer tempo of the market to build a leading position in China (or even the internal capability to get them there.)

If you think about it, this is not a bad template to apply to almost any foreign company operating in China. Simply ask the question “is China genuinely key to the success of this business, or is it merely “important?” If the former, success is about doubling-down, with focus and energy more than capital and head count. If the latter, success is about getting out now and handing the business to someone who will give it their full time and attention.

The China Online Dead Pool

I see two categories of refugees joining this parade of online notables.

The first is those who have yet to show, but are coming. Driven by the hype, by the Olympics, and the narrow window of opportunity for their own businesses, they are on their way.

* MySpace: is China really core to their business? Do they offer something that can’t be readily replicated? I cannot shake the feeling that MySpace is showing up now because Rupert has the online bug and Wendi is bored.

* YouTube: Late. Strong competitors. And frankly, Google has enough to worry about here.

The second is those who are here, but who have challenges elsewhere that place China on the back burner. The first are eBay units:

* PayPal: Will pack up and leave with eBay, taking the hassles of trying to do a banking business in China with them. They have bigger fish to fry than sit around in Beijing waiting for a possible issuance of online payment licenses. And let’s face it – anyone who is handicapping in this race is betting that the first online payment licenses go to organizations closely affiliated with Chinese banks. Not even Tom has that kind of pull.

* Skype: This belongs to Tom already. The Skype business in China is Tom’s business, not eBay’s.

In addition, there is the big question:

* Google: They’re investing huge, and piling up warm bodies firewood before a blizzard. But many people in this town – including a few in the Hutong – are not convinced this is going to translate into success. Make no mistake – the jury is out, and Baidu is keeping the pressure on.

At some point, Google’s investment in China is going to have to start showing meaningful results. eBay’s move may hasten the day when a) Wall Street analysts start asking some very pointed questions about the China operations, and b) vocal activists in Google’s core markets find one or more choice opportunities to resume their vilification of Google as an abettor of repression.

When that day comes, The Boys In The 767 may decide that China is more trouble than it is worth, and work out a deal with the Baidu guys.

The countdown will begin when we hear of the next high-level departure from Google China.

Prepare for the Tsunami

The online businesses will not be alone in this mass retrograde movement.

In the last five years, a lot of companies across a wide swath of industries have come to China, many of them propelled by little more than a nagging feeling that “China is going to be huge” and “we have to be there.”

Most of them will stick it out through the Olympics. But mark my words – 2009 is the morning after, and between now and then a lot of CEOs are going to start rethinking whether the hassle of China is really worth it to them.