2005 was a tough year for Alibaba. Because of the US$100 million investment in China by eBay, Alibaba and its subsidiary – Taobao fell into a severe price war against eBay which hindered the profitability of the group and much more capital was needed for operational and technological improvement in order to win the battle.
Under this circumstance, Alibaba formed a partnership with Yahoo! Inc. Yahoo invested US$1 billion in Alibaba and transferred the ownership of Yahoo! China to Alibaba. In return, Yahoo got a 40% stake and 35% voting rights in Alibaba.
Beside the cash injection, another reason for the initiation of the partnership was that Alibaba valued much on the importance of search engine for its e-commerce work. At that time, owing Yahoo! China was a competitive advantage of Alibaba against eBay.
At that time, Yahoo had much strategic value to Alibaba due to its large capital base and technology to help Alibaba safeguard its market share under eBay’s attack.
However, the operation of Yahoo! China under Alibaba was unsatisfactory. Since 2005, Yahoo! China has been losing its market share and lagging behind its rivals. Although Alibaba tried to re-orientate it as more business-oriented to grasp the market niche, the effort was in vain. The influence of Yahoo! China in the search engine market in China diminished. Hence, it failed to draw attention of potential customers of Alibaba and was not capable to bring enough benefit to Alibaba leading to a fall in strategic value of Yahoo!.
Even for the parent of Yahoo! China – Yahoo! Inc., the story was more or less the same. The net income of Yahoo dropped 78% in the first quarter of 2009 which resulted in a massive layoff. Due to the low profitability, Yahoo formed a 10-year agreement with Microsoft. Under this contract, Yahoo had to adopt Microsoft’s search technology (Bing) instead of its own technology in all...