By Perry Wu
As I have been predicting in this column for some time, overseas investor interest in Chinese Internet website companies was bound to increase. And now it has: financial news reports around the world covered the recent wildly successful listing of Baidu.com. Then just this past week, there were news reports all over the world of American-based Yahoo (YHOO) buying a US$1 billion stake in Alibaba.com, one of China's leading e-commerce companies.

But how fitting that the latest Chinese Internet sensation is named Alibaba. Alibaba is one of the characters in "A Thousand and One Nights", a collection of stories well-known in China. As it happens, the Chinese translation for this book is "tian fang ye tan" which has come to refer to anything nonsensical or foolish. Given the foolishly optimistic picture that many analysts have painted of this acquisition, Alibaba is just the right name.

With all the fanfare about online auctions, investors should realize that online auctions have not fully caught on in China. And news reports that have billed Yahoo's acquisition as a move to become the eBay (EBAY) of China make for a very poor comparison. I remember a Chinese company five years ago called ClubCiti that billed itself as the eBay of China and received enormous amounts of press attention, but little user attention–the business world is cyclical.

While many eBay customers, especially in America, rely on only eBay for their entire online shopping needs, Alibaba.com is qualitatively different. At best, it is only a business-to-business portal where Chinese and foreign online consumers can gawk at potential purchases. It is really just a sophisticated online directory–a big yellow pages. Alibaba is often only the starting point for Chinese online shopping, as much of the transactions are done between companies and away from the Alibaba website. The continuing challenge for Alibaba and its CEO, Jack Ma, is to guarantee that the transactions will take place within the Alibaba world.

Realizing these limitations, Alibaba has recently launched Taobao.com, which is a genuine online auction platform modeled on eBay. But the jury is still out on this. Online auctions have yet to catch fire in China, and it is an open question if they ever will. Auction sites require a level of trust among ordinary buyers and sellers that may not exist in China. Furthermore, since we are still years away from saturation in the Chinese online auction market, it should be relatively easy for newcomers to enter the online auction market in China. If Taobao can strut into the sector last year, why can't others?

Even with Taobao.com, it is certain now that Alibaba does not have anywhere near the power of eBay. While it is a stretch to call eBay an online auction monopoly in the United States, it is accurate to say eBay is the premier destination for online auctions in America. Alibaba's Taobao.com can not even come close to claiming such a status in China.

But Yahoo's purchase of Alibaba's stake was also to ensure that Yahoo's China website could continue to develop. With recent departures from Yahoo's China management team, Yahoo needed a reliable company to continue to build the Yahoo brand in the Middle Kingdom. But something just doesn't click, or double-click, with this part of the deal.

Yahoo says they are now a full-fledged media company, right? If we view the Yahoo.com online media property through the eyes of an offline magazine publisher, this is how the business deal would work:

1) Yahoo wants to build a Chinese version of its website.

2) It seeks potential partners in China to deal with the Chinese localization, regulatory environment, management, and advertising sales.

3) Once it finds a Chinese partner, the partner pays Yahoo a fee of some sort to buy the rights to Yahoo's brand for a certain number of years.

So, with this traditional publishing and media business model, which is also used for many websites, why is Yahoo paying Alibaba? Shouldn't Alibaba pay Yahoo? I'm sure there are many companies in China that would gladly pay Yahoo to run its services. The biggest reason I can see for Yahoo to pay others is that the Yahoo brand, counter to the company's own statements that it is one of China's top sites, in China is suffering and a potential liability. Is this so?

The high hopes that Yahoo has for Alibaba are as fantastic as the stories in "A Thousand and One Nights".

About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.