One country, two online models

- Eachnet and Taobao are going head to head to control the budding auction sector, but with very different business strategies

5 October 2004
Published by South China Morning Post

Eachnet and Taobao.com are squaring off in a battle of the business models, with each laying claim to the potentially lucrative internet auction market in China.

Eachnet, backed by eBay, the world's biggest online auction house, believes that what works elsewhere in the world will also work on the mainland. It charges a fee for listings and takes a cut on the final sale.

Taobao, however, has not come up with a cash-generating model - its listings are free. Nevertheless, the company steadfastly believes mainland consumers will not take to the eBay way of doing business.

"We think Eachnet is weaker than it looks. It uses the American model but we think the China market has its own characteristics," said Porter Erisman, a vice-president at Alibaba.com, which founded Taobao last year.

"People in China don't like middlemen collecting transaction fees. The online markets should make money by other means."

At stake are the hearts and minds of a rapidly growing number of Chinese online shoppers. According to the China Internet Network Information Centre, 37.8 per cent of the nation's 87 million internet users - or about 32.8 million - have shopped online. That should nearly triple by next year.

Even before eBay acquired Eachnet last year, the mainland company mimicked its American counterpart by charging listing fees and commissions.

Last year, US$124 million in merchandise was traded over the company's website and the figure is forecast to climb to $241 million this year. EBay recently integrated Eachnet into its global operations, giving mainland sellers access to bidders worldwide.

Eachnet commands 60 to 70 per cent of the mainland market, although just 6.6 per cent of Chinese internet users are registered Eachnet customers. In the United States, 29.6 per cent of the internet population is registered with eBay.

Taobao claims it is too early to charge transaction fees because mainland internet users are not familiar with internet auctions.

Alibaba vice-president Jin Jianhang said: "It discourages people from participating in online trading. It hurts the growth of the industry in the long run." He would not disclose how Taobao planned to eventually collect revenue, but said the chosen method would be acceptable to users.

For a clue, look to the operating history of Alibaba, a business-to-business e-commerce site.

The company did not charge fees for three years after its 1999 launch, but now generates revenue from valued-added services such as verifying the legal registration of a company.

Eachnet chief executive Shao Yibo said charging listing fees had improved the auction experience by forcing sellers to be more selective about what items they put up for bid.

In the second quarter of 2001, the last quarter before Eachnet began charging fees, just 12 per cent of listed items found a buyer.

This compared with 45 per cent in the second quarter of this year.

Taobao would not reveal what percentage of its listings resulted in a sale.

Mr Shao said there were differences between China and the US. For example, payment systems were not as developed on the mainland, with buyers and sellers often meeting in person to exchange cash and goods.

But this did not mean Eachnet had to significantly alter its paid listings model.

"There is no difference between people in China and those in the US," he said.

Eachnet also expected mainland shoppers to warm to conveniences such as PayPal, an eBay-owned service which allowed consumers to send online payments to each other.

No firm can survive on a business model that excludes the ability to collect fees from customers.

"Competitors come and go. One of our key advantages is that we are able to charge," Mr Shao said.

Taobao has been reliant on Alibaba to stay afloat, taking US$54 million from its parent.

Mithras Group consultant T.R. Harrington said Eachnet had an advantage because it was already collecting fees, while others still faced the challenge of charging fees for a product consumers were accustomed to receiving free.

According to Mr Shao, Eachnet is still losing money after five years of operations due to continuous investment in technology platforms and marketing efforts.