GLOBAL BUSINESS STRATEGY(BUS 7070) Case Studies For this assignment, following APA style, answer as comprehensively as possible the questions after each case summary. Based on your reading of the case identify the main issues of the case and answer the questions in your own words. To better understand the case, you may also research the Internet, journals, and library reference materials and provide an up to date analysis. Case Study Analysis #1: Australia and New Zealand: Doing Business with Indonesia (Due date: 2015 Dec 12, Minimum 2pages required for all questions in Case Study # 1 as per APA format with not more than 10% Plagiarism) Please refer to Australia and New Zealand: Doing Business with Indonesia Case Study on page 106 and answer the following questions: 1) Using this case and the cultural dimensions explored in this chapter, discuss some of the ways in which citizens of Australia and New Zealand are members of cultures very different from any other in Asia. 2) In what respects is the Indonesian archipelago unique in Asia? 3) What characteristics of Indonesian workplaces are referred to in this profile? 4) How does the population appear to be socially stratified? 5) What are some business opportunities in Indonesia for foreign direct investment? Case Study Analysis #2: MTV Networks: The Arabian Challenge (Due date: 2015 Dec 12, Minimum 2pages required for all questions in Case Study # 2 as per APA format with not more than 10% Plagiarism) Please refer to MTV Networks: The Arabian Challenge Case Study on page PC2-9 and answer the following questions: 1) Experts felt that one of the biggest challenges faced by MTV while launching MTV Arabia was the prevalent culture in the Arab world. Discuss the Arab culture. How is it expected to pose a challenge to MTV? 2) Critically analyze MTV’s strategy in the Middle East. Comment on its entry strategy and also its strategy of providing mixed content to the market. Do you think MTV will be able to succeed in this market? Case Study Analysis #3: Alibaba in 2011: Competing in China and Beyond (Due date: 2015 Dec 14, Minimum 2pages required for all questions in Case Study # 3 as per APA format with not more than 10% Plagiarism) Please refer to Alibaba in 2011: Competing in China and Beyond Case Study on page PC3-1 and answer the following questions: 1) Critically analyze the factors that led to Alibaba sustaining its leadership position in the Chinese e-commerce market. 2) Discuss the rationale behind Ma establishing Taobao.com. What are the factors that led to Taobao’s success as compared to eBay in the Chinese online auctions market? With Baidu’s entry into the e-commerce market, discuss the challenges that Alibaba faces with regard to sustaining its position in the growing e-commerce market in China. 3) Critically examine Alibaba’s business model. Do you think it is sustainable? After having captured the Chinese e-commerce market, what steps should Alibaba take to expand globally? Case Study Analysis #4: Kelly’s Assignment in Japan. (Due date: 2015 Dec 14, Minimum 2pages required for all questions in Case Study # 4 as per APA format with not more than 10% Plagiarism) Please refer to Kelly’s Assignment in Japan Case Study on page 295 and answer the following questions: 1) Explain the clashes in culture, customs, and expectations that occurred in this situation. 2) What stage of culture shock is Kelly’s family experiencing? 3) Turn back the clock to when Kelly was offered the position in Tokyo. What, if anything, should have been done differently, and by whom? 4) You are Kelly. What should you do now? 106 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT Internet Resources Visit the Deresky Companion Website at www.pearsonhighered.com/deresky for this chapter's Internet resources. CASE STUDY Australia and New Zealand: Doing Business with Indonesia There are thousands of Australians, both individually and as members of organizations, who share trade and education with Indonesia as do New Zealanders. Yet, though geographically part of Asia, citizens of Australia and New Zealand are members of cultures very different from any other in Asia. As increasingly they seek to trade in Asia, so also do they need to learn to manage such differences; and doing business in Indonesia is a good example. Travelling time by air from Perth, Western Australia, to Indonesia is slightly less than four hours, yet the cultural distance is ·immeasurable. In January 2007, the Jakarta Post reported GDP growth had risen to over 5%. Consumer consumption drives the economy but exports are thriving, and therein lay opportunities for Australia and New Zealand. Indonesia is a country of more than 17,000 islands and the world's largest Muslim nation. In her lecture, Dr. Joan HardjonoofMonash University discussed the historical and geographic contexts of modern Indonesia. She spoke of the many clusters of islands worldwide that have come together as nation states-for example, the Philippines and some island groups in the Pacificbut described the Indonesian archipelago as in a class of its own. It is unique in terms of extent and diversity. For example, Java and Bali have fertile volcanic soils, while elsewhere the land is rich in mineral resources such as oil, natural gas, and coal. Climatic conditions vary from island to island. Some regions experience annual heavy rains and floods, while others suffer regularly from droughts that often lead to famines. With a population of more than 230 million people, Indonesia is the fourth most populous country in the world, but there is a great imbalance in population distribution within the archipelago. Settlement has always been greatest on the island of Java, and today about 60% of the Indonesian population lives there. National ties are strong, as revealed by the great response from within Indonesia to the recent natural disasters in Aceh and Nias. Unfortunately, there are still very obvious socio-economic disparities in all regions of the country. At the top of the social structure are wealthy elites, below them an increasingly demanding middle class, and at the bottom an impoverished majority. As Indonesia has become more integrated with ASEAN, North Asian trading partners have become more important: but well-to-do Indonesians now travel the world. Globalization has been the buzzword of international business for many years. International markets have split up into unified trade zones; individual marketplaces, particularly in the developing countries, are exposed to transnational pressures. Some Asian countries are pulling back from perceived threats of international contagion, but Indonesia continues to open up its markets to world enterprise. However, Australians and New Zealanders cannot expect to do business with Indonesians just because they are neighbors. They have to learn the moves. Business opportunities in Indonesia include agribusiness; the automotive industry; business and financial services; construction and infrastructure; information and communication technology; e-commerce; education and training; environmental products and services; food and beverages; fresh produce; health and medical provisions; mining and mineral services; oil and petroleum drilling, transport and storage; and science and technology. Taking advantage of these opportunities requires skillful negotiation. One of the biggest challenges of working in a foreign country is learning how to operate in a different cultural setting. International managers tell endless stories of cross-cultural breakdowns, missed appointments, problems over differences in management style, lost orders or down time on production CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE Australia and New Zealand Although manufacturing is an important contributor to Australia's • GOP, its shore has b.n steadily declining. One of the country's biggest challenges is to supple· ment its small domestic market with new trade Gnks. Japan, China, and the United Slates have replaced the United Kingdom as the principal trading partners. • ... I N D O •• "' c:!> c:::::::::>t'"/7 v .; Coral Sea , bVANUATU .... "Vila New Caledonia (France) Tasman Indian Ocean I \ Sea MANIA Despile its \lOst of desert and SOYOnna, Australia is highly urbanized, with 80% of its papulation hYing in cities along the well-watered coast. lines, labor problems between foreign management and local staff, and many other examples of miscommunication. Many could have been avoided or at least mitigated had the expatriate managers and their local counterparts been better prepared for differences in work patterns. Some cross-cultural behavior, such as patience and courtesy, is no more than good manners. It applies to all interpersonal communication; but in Indonesia, as in the rest of Asia, there is more need to develop a long-term relationship to produce a profit than there is in Australia or New Zealand. Relationships rely on shared expectations-for example, about how first contacts should be made, how appointments should be set and kept, how deals should be closed, how time should be managed (including the Indonesian concept of "jam karet," or "rubber time," that infuriates punctuality-conscious Westerners). Sensible but inexperienced international managers seek information that more seasoned veterans can provide. They might be colleagues, business associates, friends, or paid consultants, but in any case most people are eager to give advice. On the other hand, even managers with a highly developed global outlook may have too generalist a viewpoint on international business. They may overlook the need for a local perspective in each host country. Indonesia is one of those countries in which a foreign manager's home office priorities of task over relationship, of corporate rather than human priorities, may not be the most effective ways to achieve productivity and effectiveness. Indonesian managers usually place more value on harmony, understanding, and mutual respect. It may be sometimes that this emphasis outweighs the importance of job performance and productivity. On the one hand, there are a number of concerns for Indonesian managers working with their Western counterparts. For example, they believe Westerners should make an effort to adjust to the culture, taboos, and language of their Indonesian colleagues. Foreign managers should avoid bad language that might set a bad example for the workers. They should give instructions slowly and clearly in Standard English and should ask for a paraphrase to ensure understanding. 108 PART 2 • THE CULTURAL CONTEXT OF GLOBAL MANAGEMENT They should be wiiiing to consider individual cases and cultural needs (e.g., prayer times or other religious obligations, time off for cemetery visits before Ramadan, weddings, funerals, etc.). On the other hand, Indonesian managers should be willing to make many adjustments to working in an international company. Important areas where Western management techniques are most successful include strategic planning and timetable deadlines, efficiency and punctuality, handling conflict, and taking responsibility. Sensitivity to the needs of employees is a management area that is seldom stressed in most Western business cultures where efficiency, productivity, and effectiveness take priority. For example, when somebody loses their self-control through anger, distress, or confusion, Javanese will usually advise the need to "eling" (in translation, not to allow oneself to be overwhelmed by feelings and mixed-up thoughts but to regain self-control). Self-control is of high value to Javanese, maybe of the highest. This value is not unique to Indonesia. It is shared by the indigenous peoples of South Asia, the Himalayan Range and Central Asia, East Asia, Southeast Asia, and Africa; Oceania, the Caribbean, and South America; and Northern America and the Arctic: hence a common cultural emphasis on the art of making and wearing masks to represent hidden emotions. Regardless of the cultures they come from, masks convey the essential emotions. 1 Thus situations can arise in business contexts where hiding true feelings and keeping up appearances may take precedence over solving a problem. Maintaining the harmony of the office by giving the outward appearance that there is nothing wrong is a fairly common situation in traditional Indonesian offices. Bad news may not be communicated to the boss and situations that seem insurmountable to an employee may simply be ignored. 2 Since this behavior is not generally accepted to be part of Western culture-though certainly it exists there-Western managers need to spend more time observing and listening to their Indonesian employees than they would back home. Another reason why such attentiveness is important is that Indonesian business relationships are paternal or maternal. Workers expect their supervisors to look after their interests rather as parents do fol their children; and their supervisors understand and accept this responsibility. Furthermore, the tension involved in being the bearer of bad news to one's boss is felt very keenly by Indonesian employees, and this needs to be taken into account by supervisors and managers. The English language injunction is "Don't shoot the messenger," but some Indonesian workers seem to expect a firing squad when they have to report failure. Therefore, Western managers should make clear that they want and expect subordinates to come to them with questions or problems and that the response will be non-judgmental and self-controlled. Faces should be without masks; they should not portray negative emotions of anger, confrontation, or aggression. Managers in Indonesia are expected to always be polite and to keep smiling, no matter how angry they may be inside. Nevertheless, cross-cultural sensitivity works-or should work-both ways. Foreign managers should understand Indonesian culture and business customs, and Indonesian managers should be given clearly to understand what foreign managers will expect from them. Case Questions 1. Using this case and the cultural dimensions explored in this chapter, discuss some of the ways in which citizens of Australia and New Zealand are members of cultures very different from any other in Asia. 2. In what respects is the Indonesian archipelago unique in Asia? 3. What characteristics of Indonesian workplaces are referred to in this profile? 4. How does the population appear to be socially stratified? 5. What are some business opportunities in Indonesia for foreign direct investment? 1. Rupa-Pratirupa, Man & Mask, February 20--April 12,1998, Matighar, Indira Gandhi National Centre for the Arts, http://ignca .nic.in/ 2. George B. Whitfield, 2006, Executive Orientation Services of Jakarta (EOS). CHAPTER 3 • UNDERSTANDING THE ROLE OF CULTURE Sources: Joan Hardjono, 05/08/2005, Herb Feith Lecture, "Can Indonesia Hold?" Centre of Southeast Asian Studies and Faculty of Arts, Monash University, in association with ABC Radio Australia and the Melbourne Institute of Asian Languages & Societies, University of Melbourne: http://www.abc.net.au/ra/news/ infocus/s 1429967 .htm Javanese mystical movements, January 2007, http://www.xs4all.nl!-wichrnfjavmysl.html Phil King, December 2006, "Facing disaster: The 27 May earthquake shook a kingdom, not just a city," Inside Indonesia, http://www.insideindonesia.org/ Rupa-Pratirupa, Man & Mask, February 20-April 12, 1998, Matighar, Indira Gandhi National Centre for the Arts, http://ignca.nic.inlex_0032.htm. Stephen Schwartz, January 2007, "Maintain momentum to overcome challenges," Jakarta Post, Patrick Underwood, 23/11/2006, "Asia Update," Meat & Livestock Australia Limited (MLA) http://www.mla .com. au/; Inside Indonesia, http://www.insideindonesia.org/edit80/p ll-12mahony.html Western Australia Department of Industry and Resources: Export and Trade, http://www.doir.wa.gov.au/ exportandtrade/F3130D5 AECA54ACF8ABBB BA8317 66203. asp George B. Whitfield, 2006, Executive Orientation Services of Jakarta (EOS). World Bank, http://O-siteresources. worldbank. org.library. vu.edu.au/INTINDONESIA!Resources/htm :Adapted from Helen Deresky and Elizabeth Christopher, "Australia and New Zealand as Part of Asia: Doing Business with Indonesia," International Management: Managing across Borders and Cultures, Pearson Education Australia, 2008. Used with permission. ••--:rllli_m_ _ _ _ _ _ _ _ Case 4 MTV Networks: The Arabian Challenge "[. .. ] MTV has a penchant for airing controversial material and making a mockery of convention. And of course, it's an American brand. ... The challenge, therefore, is transforming a notoriously risque channel into a Middle Eastern-friendly platform for music and creativity without stripping MTV of its edge. It isn't without some irony that a channel known for angering religious, political, and conservative communities is operating in and catering to a region renowned for reacting (and sometimes overreacting) negatively to controversial content." 1 -DANA EL BALTAJI, Special Projects Manager, Trends magazine in Dubai, in 2008. "In many ways (MTV Arabia) is the epitome of our localization strategy. It's a different audience (in the Middle East) but this is what we reflect culture and we respect culture. The programming mix on this one is going to be a little more local than normal. "2 -WILLIAM H. ROEDY, Vice Chairman for MTV Networks and President MTVI Network International, in 2007. ALITMUS TEST FOR MTV'S LOCALIZATION STRATEGY MTV Networks (MTVN) launched MTV Arabia on November 17, 2007, in partnership with Arabian Television Network3 (ATN) as part of its global expansion strategy. According to analysts, MTV's presence in the Middle East would provide the region with an international music brand. Until then the Middle East did not have an international music brand though it had clusters of local music channels. On its part, the region promised to offer tremendous growth opportunities to MTVN. Analysts felt that MTV Arabia was MTVN's most ambitious and challenging venture. The Middle East offered huge growth potential to MTVN given its huge youth populace. However, according to analysts, MTV's success in the Middle East was contingent upon a balancing between delivery of international quality music and the culturally sensitive environment prevalent in the region. Some analysts felt that the channel was well equipped to achieve this considering MTVN's extensive experience in the global market and its ability to provide localized content without diluting what MTV stood for. C 2008, ICMR Center for Management Research. All rights reserved. No part of 1his publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means, electronic or mechanical, without permission. To order copies, call +91-40-2343-0462/63 or write to ICMR Centerfor Management Research, Plot# 49, Nagarjuna Hills, Hyderabad 500 082, India or email info@icmrindia.org. Website: www.icmrindia.org Author Information: This case was written by Debapratim Purkayastha, ICMR. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. 1 Dana El Baltaji, "I Want My MTV," www.arabmediasociety.com, May 11, 2008. Roberts, "MTV Set for Middle East Launch," www.arabianbusiness .com, October 17, 2007. 3Arabian Television Network (ATN) is a Dubai, United Arab Emirates-based broadcast media company, part of the Arab Media Group's Arabian Broadcasting Netwmx(ABN). ABN is apart of the Arab Media Group (AMG). As of2007, AMG was the largest media group in the UAE, with approximately 1,500 employees. It was an unit ofTECOM Investments that was controlled by Dubai's ruler. 1 Lynne To ensure that its programs won over the hearts of the Arabs and adhered to the local taste and culture without diluting MTV's global brand, MTV Arabia designed a much localized Arabic version of its international music and reality shows. In this connection, Patrick Samaha (Samaha), General Manager of MTV Arabia, said, "We've created programs that are an Arabic version of MTV programs. It is the first time that programs like this will really reflect the youth culture here, but we've been mindful all tbe way about respecting the local culture." 4 According to the company, the launch of MTV Arabia was also expected to act as a culturally unifying force by propelling Arabic music to the global forefront, and vice versa. While launching MTV Arabia, William H. Roedy, Vice Chairman for MTV Networks and President of MTV International, said, "Tonight's [November 16, 2007] MTV Arabia launch show celebrates one of the most important landmarks in MTV's 25-year history. MTV Arabia will reach the largest potential audience of any MTV channel outside the United States. MTV is proud to celebrate the voice of the Arab youth and through our global network we can showcase what this rich and diverse culture is all about to new audiences around the world." 5 BACKGROUND NOTE MTV (short for Music Television), which pioneered the concept of a cable music channel, was launched on August 1, 1981, and marked the commencement of the cable TV revolution. It was promoted by Warner Amex Satellite Entertainment Company, a joint venture between Warner Communications and American Express. In 1984, the company was renamed MTV Networks (MTVN) with its operations confined to the US. At the time of its launch, the MTV channel primarily catered to those in the 12 to 24 age group, airing heavy-metal and rap music. However, over the years, it also launched many sister channels such as VH-1 (short for Video Hits One) which 4 Jolanta Chudy, "MTV's Arab Net Thinking Locally;• www.hollywoodreporter .com, November6, 2007. 5 "Akon and Ludacris Dazzle the Desert in their Middle East Debuts to Celebrate the Launch of MTV Arabia," www.dubaicityguide.com, November 16, 2007. PC2-9 PC2-10 PART 2 • COMPREHENSIVE CASES was formed in 1985 to play light popular music; Rhythm and Blues (R&B), jazz, country music, and classics targeted at the 18 to 35 age group; and Nickelodeon, 6 which was launched in 1977 keeping children as its target segment. While these sister channels of MTVN continued playing different varieties of music, the core channel MTV began to diversify in 1990. Besides playing music, it also started airing non-music reality shows. The Real World and MTV Fear were some of the popular reality shows aired. Animated cartoon series were also introduced, the most popular of them being Beavis and Butthead. In 1986, MTVN was acquired by Viacom Inc. (Refer to Exhibit I for a note on Viacom.) Thereafter, in 1987, MTVN launched its first overseas channel in Europe, and this marked the beginning of MTV's global expansion. The international arm ofMTVN was known as MTVI. In addition to MTV, MTVI managed a bouquet of channels such as VH-1 and Nickelodeon. EXHIBIT I By the mid-1990s MTVI realized that to become a successful brand globally, it had to adapt to local conditions. Hence it adopted a strategy of "Think Globally, Act Locally." Thereafter, MTVI became the first international TV network to offer channels such as MTV Australia, MTV Asia, MTV India, MTV China, MTV Germany, etc. in local languages with localized content. 7 To penetrate any new market, MTVI initially tied up with a local music channel and in the course of time, it acquired the local company in that region. For instance, in the early 2000s, MTVI entered the Australian market by setting up a joint venture between Austereo (a national commercial radio network in the country) and MTVN. Later on, it acquired Austereo to become MTV Australia. Initially, some analysts were doubtful as to how far MTVN's global expansion would be successful, given the latent and overt anti-American sentiments in various parts of Note on Viacom Inc. Viacom was established as a public company in 1971. In 1985, it acquired a 65 percent ' stake in MTV Networks, which included MTV, VH-1, and Nickelodeon, and purchased the : remaining interest in 1986. In 1991, Viacom completed its purchase ofMTV Europe by acquiring a 50 percent stake from British Telecommunications and other parties. In 1994, the Viacom Entertainment Group was formed through a merger with Paramount Communi- • cations Inc. In 2000, CBS Corporation, a major media network in the U.S., merged with Via- ' com, as a result of which TNN (re-named as Spike TV in 2003) and CMT (Country Music Television) joined the MTV Networks. The BET (Black Entertainment Television) channel was acquired by Viacom in In the early 2000s, Viacom launched many channels worldwide under MTV Networks and BET. In 2005, Viacom Corporation split into Viacom Inc. and CBS Corporation. In 2006, Viacom Inc. was one of the world's leading media companies operating in the Cable and Satellite Television Networks (C&S) and film production divisions. VIACOM INC. BRANDS* Cable Networks & Digital Media \ • MTV Networks (Comedy Central, CMT, LOGO, MTV, MTV 2, MTV U, MTV Networks , Digital Suite, MTV International, MTV Networks Online, Nickelodeon, Nick @ Nite, The N, Noggin, Spike, TV Land, VH-1) • BET Networks presents the best in Black media and entertainment featuring traditional and digital platforms. Brands including BET, BET J, BET Gospel, BET Hip Hop, BET.com, BET Mobile, BET Event Productions, and BET International deliver relevant and insightful content to consumers of Black culture in more than 84 million households. Entertainment (Film & Music Publishing) • Paramount Pictures • Paramount Home Entertainment • Dream Works SKG *The list is not exhaustive Source: www.viacom.com 6 Nickelodeon primarily caters to children in age group 7-11, but along with this it also airs weekend programs in TEENick catering to children in age group 12-17 and also weekday morning programs aimed at children in age group 2-6 and a late-night segment known as Nick at Nite aimed at general audiences. 7 Dirk Smillie, "Tuning in First Global TV Generation;• The Christian Science Monitor, June 4, 1997. CASE 4 • MTV NETWORKS: THE ARABIAN CHALLENGE the world. However, the channel did not face too many difficulties. Commenting on this, Roedy said, "We've had very little resistance once we explain that we're not in the business of exporting American culture." 8 According to some analysts, Roedy was instrumental in taking MTVI across many countries worldwide. To gain an entry into difficult markets such as China, Israel, and Cuba, Roedy even met the political leaders of those countries to explain the network's initiatives to them. Overall, despite the initial hiccups, the channel's global exstrategy proved successful. Thus, by following a policy of having a global presence with a local outlook, by rnid-2006, MTVI catered to an audience of more than 1 billion and expanded its presence in 179 countries across Europe, Asia, Latin America, and Australia. 9 It operated more than 130 channels in over 25 languages and it comprised MTV Networks Europe (MTVN Europe), MTV Networks Asia-Pacific (MTVN AsiaPacific), and MTV Networks Latin America (MTVN Latin America). In addition to this, it operated some broadband services and more than 130 websites. 10 According to analysts, a noteworthy reason behind MTV's global success was that the channel adopted a decentralized structure and gave commercial and creative autonomy to the local staff. This policy of minimal interference in local operations led to innovation and rapid expansion. Commenting on this, Roedy said, "Something we decided early on was to not export just one product for the world but to generate a very different experience for our brands depending on the local cultures." 11 MTV's impressive growth globally contributed significantly to the revenues of its holding company Viacom over the years and it also became Viacom's core network. As of the end of 2007, MTVI had more than 140 channels around the world catering to a potential 1.5 billion viewers globally. 12 In the U.S. alone, it reached 87.6 million homesY Its Emerging Markets group was the network's fastest growing business segment. 14 For the year ending 2008, Viacom's total revenues (including cable network and entertainment divisions) were US$14,625 million. Out of this, the revenue from Media Network channels (which includes MTVN) was US$8,756 million (Refer to Exhibit II for selected financials ofViacom). PREPARING FOR THE LAUNCH With the growing popularity of MTV, there was a mushrooming of many similar channels across the world. Though the Arab media was late in adopting this concept, some European and U.S. channels had started offering such programs in this 8 Kerry Capell, Catherine Belton, Tom Lowry, Manjeet Kripalani, Brian Bremner, and Dexter Roberts, "MTV's World," Business Week, February 18, 2002. 9 www. viacom.com/cable.jhtml. 10 MTVI operated more than 130 websites of its international channels while MTVN, totally, operated more than 150 websites, which included online representations of channels broadcast in the US. 11 Brad Nemer, "How MTV Channels Innovation," Business Week, November 6, 2006. 12 Tamara Walid, "Finally Got My MTV," www.arabianbusiness.com, November 22, 2007. 13 lbid. 14 "Arab Media Group and MTV Networks International to Launch Nickelodeon Arabia in 2008," www.media.ameinfo.com, October 20, 2007. EXHIBIT II PC2-11 Selected Financials of Viacom (US$, million) Revenues Operating Income Net Earnings 2008 2007 2006 14,625 2,523 1,251 13,423 2,936 1,838 11,361 2,767 1,592 8,756 2,729 8,101 3,048 7,241 2,904 From Media Networks Revenue Operating Income Source: Adapted from http://www.viacom.com/news/News_ Docs/78157 ACL.PDF region, analysts pointed out. In the mid-1990s, some Arab music channels also entered the fray. Some of these channels were influenced by MTV. By the rnid-2000s, there were a number of Arab music channels (refer to Exhibit III for a note on major music channels in Saudi Arabia). These channels relied heavily on Arab artists but also aired international numbers by entering into agreements with production houses and other TV networks. MTV was available in the region through a special deal with Showtime Arabia. 15 As part of the deal, Showtime aired Nickelodeon and MTV in English with Arabic subtitles. 16 The channel catered to the middle and upper classes, who had been exposed to the West and had an interest in Western entertainment. Analysts felt that M'J.N was popular with a section of the audience in the region who were waiting eagerly for its launch there. The first announcement that MTVI was preparing to launch MTV Arabia came in August 2006. During MTV's 25 17 anniversary of its first US channel, the company said that it was on the lookout for local partners in the Middle East and would provide the audience in the region content that would be very different from that offered by popular Arab music channels. Dean Possenniskie, Vice President and General Manager for Emerging Markets, MTVI, said, "[MTV is] very interested in the [Arab satellite channel] market and realizes how important it is . . . . Hopefully [we] will be in the market in the next 24 months ... it all depends on finding the right local partners." 18 By the end of the year, it was announced that MTVI would launch the channel in the region in partnership with Arabian Television Network (ATN), which was a part of the Arabian Broadcasting Network (ABN). 19 MTVI's venturing into the Middle East was a result of the combined efforts of innovative and enthusiastic personalities such as Roedy, Bhavneet Singh, 20 Senior Vice President and 15 Showtime Arabia is one of the leading subscription-based television networks in the Middle East. It is partly owned by Viacom. 16 Zeid Nasser, "Showtime braces for impact of free-to-air MTV Arabia & Arabic Nickelodeon," http://mediame.com, October 16, 2007. 17 "Arab Satellite TV Channels Rapidly Expanding,".www.xrdarabia.org, November 14,2007. 18 Paisa! Abbas, "MTV Eyes Middle East Market," www.asharq-e.com, August 8, 2006. 19 "Arabian Television Network Partners with MTV to Launch MTV Arabia," http://mediame.com, December 27, 2006. 20 On April23, 2007, Bhavneet Singh was promoted to Senior Vice President and Managing Director of MTVNI's Emerging Markets group. PC2-12 PART 2 • COMPREHENSIVE CASES EXHIBIT Ill Music and Entertainment Channels in Saudi Arabia* As of early 2008, there are 370 Arabic satellite TV networks broadcasting in the Middle East. This is an increase of 270 percent since 2004. 17 Among these, 56 belong to private companies, 54 are music channels, and 38 are state owned. Most of these are headquartered in United Arab Emirates (22 percent), Saudi Arabia (15 percent), and Egypt (11 percent). In Saudi Arabia alone, there are more than 200 free-to-air satcasters and 50 music channels in the region. Some of the important music and entertainment channels are: Mazzika, which offers a variety of music and light entertainment programs. Melody Hits, which is a music channel airing Arabic and international music videos. MBC, headquartered in Dubai, which is a pan-Arab news and entertainment television channel. MBC 2 is a non-stop premium movie channel. MBC 3 is a children's channel and it broadcasts famous animated kids' shows, including exclusive translated titles and live action and animated feature films. It also airs family shows and family movies for younger audiences as well as the adult audience. MBC 4 broadcasts specifically American programs. , Nojoom, which is a music channel airing Arabic and international music videos. Rotana TV network, which broadcasts Arabic music and films. It has six channels under its wings-Mousica, Rotana Clip, Rotana Tarab, Rotana Khalijiyya, Rotana Cinema, and Rotana Zaman. The channels are dedicated to Arabic pop music; Arabic classical music, interactive games; Gulf music, cinema, featuring the biggest and latest blockbuster releases; and old classical movies. Saudi Arabian TV, which features live coverage of Ramadan, Hajj, and Eid prayers. It also shows popular movies and news programs. Shada channel-a part of the AI Majd Group-which is a channel totally devoted to ' Islamic songs (Anasheed). Wanasah TV chaniTel, which broadcasts music videos and some variety programs. All its programs are in Arabic. Panorama FM, which is a music radio channel in Arabic. Radio Rotana FM, which broadcasts customized programs and the latest Arabic hits fifteen days ahead of any of its competitors due to an exclusive deal with Rotana Music. ' Radio Fann FM, which broadcasts a mix of the latest Arabic, English, and International music hits, along with hourly news broadcasts and various customized programs. AI-Ikhbariya channel, which broadcasts news and current affairs. *The list is not exhaustive. Source: Compiled from various sources. Managing Director of MTV Networks International MTVNI Emerging Markets group, and Abdullatif AI Sayegh, CEO and Chairman of ABN. Analysts felt that it would have been very difficult for a Western company like MTVI to venture into the highly regulated and complex business arena of the Middle East on its own. In this regard, Singh said, "A market such as the Middle East, however, also brings a level of complexity in the way business is done and regulatory challenges which mean it takes a western media company a long time to get its head around 21 it." Hence, it entered the Middle East by tying up with a local partner, the Arab Media Group (AMG), an established player in the Arab media industry with eight radio stations and three daily newspapers. The channel MTV Arabia was formed as a result of a licensing arrangement between MTV and AMG. MTV would earn an estimated US$1 0 million annually in licensing fees from AMG for 10 years. 22 On the other hand, an alliance with MTV was a winning deal for AMG too as it could access the former's world class resources to enhance its visibility in the Arab media as well as across the globe. "We found it very good to start our TV business with MTV Arabia because it's a great name to start with. Great team, great people; they provided us with a lot of resources. We believe that MTV is the beginning of a new era in television in this part of the world,'m said Sayegh. However, the tie-up with a local partner was not enough to guarantee the success of MTV's launch in the Middle East 22 21 Andrew Edgecliffe-Johnson, "MTV Tunes in to a Local Audience," www.us .ft. com, October 26, 2007. Sarah Raper Larenaudie, "MTV's Arab Prizefight," www.time.com, November 2, 2007. 23 Tamara Walid, "Finally Got my MTV," www.arabianbusiness.com, November 22, 2007 . CASE 4 • MTV NETWORKS: THE ARABIAN CHALLENGE the conflict between the explicit hip-hop music culture lnnrtrayed by MTV and the conservative social culture prevain the Middle East. Hence, before launching the channel, conducted an extensive survey of the region to underwhat people wanted. The survey team targeted people in the 18-24 age group and travelled around the region to schools universities canvassing opinions. They also spoke to the and figures of authority to assure them that they were to entertain people within the limits of Arab traditions and had no intention of showing disrespect to the local culture. On · Samaha commented, "We also spoke to the governments, and parents and said, 'Don't worry, it will be nice,' so they know what's going on," 24 said Samaha. Accordingly, MTV Arabia's programming team decided to air MTVN's globally successful music shows but with a local that would suit the Arab mindset and this laid the foundation for a planned launch of MTV in Arabia. The launch team comprised a mix of Saudis, Palestinians, Emiratis, Iraqis, and Lebanese. 25 "MTV first launched in 1981 when cable television was in its infancy. Since then we've grown into the world's largest TV network by becoming part of the fabric of youth culture, and by respecting audience diversity and different cultures. We're delighted to be launching MTV Arabia and looking forward to working with our partners to provide the best youth programming," 26 said Singh. MTV commissioned ad agencies TBWA\Raad and Fortune Promoseven to handle the launch of the channel in the Middle East. 27 "We're targeting normal Arabs. We're not targeting educated, private school people. Those are Arab society's niche. They are not more than 10 percent of the population. We are trying to appeal to the masses," 28 said Samer AI Marzouqi, channel manager, MTV Arabia. PC2-13 In line with its mixed-content strategy, MTV Arabia was to showcase 60 percent international music and 40 percent Arabic music, along with the local version of the channel's popular international non-music shows. About 45 percent of MTV Arabia's content was to be produced locally, with the rest translated. In this regard, Roedy commented, "The key is that the packaging, attitude, and obviously the language, should reflect the country. There is already great music there." 30 The channel's programming was to have a mix of music videos, music-based programming, general lifestyle and animated programs, reality shows, comedy and dramatic series, news specials, interviews, and documentaries. Besides international MTV shows, MTV Arabia was also to design new shows in Arabic to cater to panArab youth audiences. The company also said that the channel could act as a cultural unifying force in a region known for its political tensions. "The launch of MTV's 60th channel is a chance to correct misconceptions of the region .... This part of the world has been associated with stresses and tensions ... the one thing music can do is act as a unifying cultural force across regions," 31 Roedy said. RATIONALE BEHIND THE VENTURE MTV Arabia was considered by experts as the biggest launch in MTVI's history in terms of potential audience at launch. 29 An exclusive, star-studded preview event marked the launch ofMTV in the Middle East. The launch featured performances by eminent stars such as Akon, Ludacris, and Karl Wolf along with local hip hop group Desert Heat. The channel was formally launched on November 17, 2007, as a 24-hour, freeto-air television channel, having a target audience in Saudi Arabia, Egypt, United Arab Emirates, Lebanon, Bahrain, Jordan, Kuwait, Oman, Qatar, Yemen, Palestine, and Syria. MTVa.com, an Arabic and English language website, complemented the channel and provided users with a wide range of online community and interactive elements. Favorable demographics had been one of the key rationales behind MTV's commercial launch in the Middle East. About 65 percent of the Arab population consisted of youth under the age of 25, and the launch of MTV Arabia would provide MTV an opportunity to cater to a 190 million audience. 32 Further, though the Arab market was crowded with more than 50 channels, none of them provided a global platform to export the musical talent of the local youth. In this regard, Sayegh said, "Through our network, we now have more platforms to talk to our youth and in ways that have never been done before in the Middle East." Since young people "represent 65% of the population in the Middle East, it's time they were heard .... Understanding the next generation is a key priority." 33 MTV being an international brand, it had global reach and this became its key selling proposition for gaining critical mass in the Arab music world. Singh commented, "The fact that there has been no real youth platform, no real brand out there for the kids, makes us [feel] there is an opportunity for us." 34 Moreover, the Middle East had the potential to offer MTV not only lucrative ad revenues but also numerous media such as mobiles and the Internet to reach its end consumers. Singh said, "There are 37 million mobile subscribers in the wider Middle East, which is phenomenal and the average revenue per user is comparable to Western Europe. We believe that's where the future is-the ability to watch content wherever and however 24 Matt 30 MTV ENTERS THE MIDDLE EAST Pomroy, "The Revolution Will Be Televised," www.arabianbusiness .com, November 15,2007. 25 Sarah Raper Larenaudie, "MTV's Arab Prizefight," www.tirne.com, November 2, 2007. 26 "Arabian Television Network Partners with MTV to Launch MTV Arabia," www.mediame.com, December 27, 2006. 17 lain Akerman, "MTV Hires Two Agencies for Launch of MTV Arabiya." www.brandrepublic.com, May 23, 2007. 28 Dana El Baltaji, "I Want My MTV," www.arabmediasociety.com, May 2008. 29 irene Lew, "MTVNI Ups Singh," www.worldscreen.com, April30, 2008. Lynne Roberts, "MTV Set for Middle East Launch," www.arabianbusiness .com, October 17, 2007. 31 Simeon Kerr and Peter Aspden, "MTV Arabia Beams 'Sling' to Gulf," www.ft.com, November 17,2007. 32 "MTV Arabia to launch November 17," www.mediame.com, October 28, 2007. 33 Ali Jaafar, "MTV Arabia Announces Lineup;• www. variety.com, October 28, 2007. 34 Von Andrew Edgecliffe Johnson, "MTV Tunes in to a Local Audience," www.ftd.de, October 26, 2007. PC2-14 PART 2 • COMPREHENSIVE CASES you want. We want to provide Middle East youth with the opportunity to watch MTV on mobile, on broadband, and on television. We're in discussions with mobile operators in the UAE, Kuwait, and Egypt, to look at how to distribute MTV content. There's been a huge amount of interest in that." 35 Products such as MTV Overdrive, in which the user could download the video at broadband speed, and MTV Flux, in which the online users could create their own TV channel, were expected to help in luring the various Internet service providers in the region to MTV and to become major sources of its revenue. The existence of various communication media with mass reach was expected to act as a catalyst in augmenting the channel's penetration rate in the Arabic region. In times to come, if the channel validated its success in the Middle East, it would become a major revenue contributor to the MTV group. KEY CHALLENGES AND SUCCESS STRATEGY MTV was known for airing sexually explicit and provocative programmes. In other words, it carried with it an image of open Western culture. This explicit Western culture projected by MTV went contrary to the socially conservative culture of the Middle East and could be a key bottleneck to the channel's acceptance in the Arab region, according to analysts. "As a brand, one would think that MTV is the ultimate example of what the religious, conservative cultures of the Middle East would most revile about Western pop culture," 36 according to leading brand portal Brandchannel.com. Adapting content to suit local tastes too could prove challenging because of many different countries comprising the region. What was acceptable in Dubai may not be acceptable in other parts of Saudi Arabia; what was acceptable in Egypt may not be acceptable in Jeddab (in Saudi Arabia). Analysts felt that the company also had to maintain what it stood for and too much localization could dilute its brand. And to complicate matters, there were strong anti-American sentiments prevalent among a large section of the population. Issues such as the U.S. invasion of Iraq and its support for archenemy Israel had left many Arabs angry. However, the channel seemed well prepared to overcome such impediments to its growth plans in the Arab market. Though MTV Arabia would air its popular international programs, the network said that music videos and reality shows like "Hip Hop Na" and "Pimp My Ride" would be appropriately edited to ensure their alignment with the cultural ethos prevailing in the Middle East. Commenting on this, Sayegh said, "When we come to people's homes, we want to earn their respect." 37 He explained that there would be "culturally sensitive editors going through content of the programming." 38 In short, the channel expected to respect the local culture without diluting its brand. The channel aimed to prove that despite being a global brand, it would be a channel for the Arabs and made by Arabs-by people just like them. 35 "MTV Arabia to Be Launched Soon," www.oceancreep.com, October 8, 2007. "Will the MTV Brand Change the Middle East?" www.brandchannel.com, December 3, 2007. 37 "MTV Aims to Win over Middle East," www.cnn.com, November 19, 2007. 38 "MTV Aims to Win over Middle East," www.cnn.com, November 19,2007. 36 Analysts said that MTVN's entry into the Middle East, which already had more than 50 local music channels operating, would be marked by stiff competition. In other words, unlike its past forays into India and Europe, MTV would not be entering a virgin music industry when it came to the Middle East. If on the one hand, the existence of a youth population was a business opportunity for MTVN, the same favorable demographic factor had also led to the explosion of dozens of local music channels which had a better understanding of the local audience's taste and could pose a formidable threat to MTVN's growth in the Middle East. Also channels such as Rotana and Melody, which had already created a niche for themselves in the region, could pose a big competitive threat to MTVN. These channels had been functioning taking into account the tastes of the youth and had been able to attract a huge chunk of their target segment by offering creative concepts like games that allowed viewers to be part of the action from home along with interesting programs, music videos, and various artist albums and concerts. Moreover, some popular Arab music stars had already signed exclusive deals with some local channels. The challenge for MTV would be to not only find the right content but also ways to connect and captivate the Arabian youth, who were habituated to log on to any number of sites and enjoy music channels and videos according to their whims and fancies. However, MTV Arabia was confident of scoring over its competitors and posting an impressive growth in the years to come. To overcome competition, the channel planned to project itself as unique and different from the existing lot. It proposed to establish itself as a platform wherefrom the Arab youth could voice their local concerns as well as advertise their music talent. For instance, MTV Arabia's flagship show "Hip Hop Na" would audition the best local hip-hop acts in seven different Middle Eastern cities. Thereafter, the winner from each city would get a chance to record a track for a compilation CD produced by FredWreck. 39 In a nutshell, MTV Arabia would not only provide entertainment but would also leverage on its global reach to advertise the musical talent of Arab youths. In this connection, Samaha said, "We are not only a music channel, we are an entertainment channel where young Arabs will get a voice." 40 He added, "MTV Arabia is a fresh take on MTV the brand, made by Arabs for Arab youth, and is dedicated to their self-expression. We've done extensive research to listen to our audiences, and MTV Arabia will be the first free-to-air channel to celebrate young people and their lives and talents from across this dynamic, vibrant region. We'll also offer audiences a window to the world of global youth culture, bringing top international entertainment to the region and showcasing the Arab region in the context of what's happening around the world. Through MTV's global network, we'll also be able to export Arabic music and culture to the international stage." 41 39 FredWreck is a Palestinian-born hip-hop producer who has worked under some of the eminent record labels such as Dogghouse Records, Virgin Records, etc. He has also worked with many distinguished rap stars such as SO Cent and Snoop Dogg. 40 "MTV Looks to Conquer Middle East Market," www.aol.in, November 18, 2007. 41 "MTV Arabia to Launch November 17," www.middleeastevents.com, October 27, 2007. CASE 4 • MTV NETWORKS: THE ARABIAN CHALLENGE EXHIBIT IV PC2-15 Local Productions Aired on MTV Arabia The flagship local show: Hip Hop Na, a twelve-episode series which followed auditions to uncover the best local hip hop acts in four different Middle Eastern cities. Music Related Shows: Waslati, viewers with webcams become VJs and introduced three of their favorite videos. Baqbeeq, a music trivia show with a twist, where interesting and hilarious bits of trivia pop up through the most popular videos in the world. Introducing Block goes behind the scenes in the music industry, with exclusive interviews and performances by the biggest international and Arab stars. Other Programs: AI Helm, based on MTV's MADE format, follows the journey of aspiring teenagers looking to fulfill their dreams with the help of an MTV Arabia-supplied "coach." AI Hara tours the Middle East's street scene, and features previously unknown artists dis1 i playing innovative talent in skills like beat-boxing, break-dancing, or magic acts. The show is based on MTV's international program format, Barrio 19. In Akher Takka, based on MTV's hit format, Boiling Point, actors antagonize stressed-out "victims" who can win a cash prize if they manage to keep their cool in extremely annoying situations. Source: Compiled from various sources. Also, the programming line-up would feature more local content (refer to Exhibit IV for a note on local production program to be aired on MTV Arabia) in comparison to other localized MTV ventures. There would be a localized version of popular shows such as "MADE" (al Helm) and "Boiling Point" (Akher Takka), which would constitute 40 percent of the content to be aired on MTV Arabia. The company also said it did not expect anti-American sentiments to affect its chances in the region. MTV said that it expected to win over the target segment with content relevant to them. Moreover, it said that its research before the launch had shown that the majority of respondents thought that MTV was a European or Indian brand. 42 THE ROAD AHEAD MTVN catered to a huge market segment of nearly 2 billion people worldwide and was expected to provide a global platform for Arabic music and culture. It had influenced young people all over the world and given them a voice and it would try to do the same in the Middle East. An Arabic category was already added in MTV Europe Music Awards 2007, giving Arabic music the much-needed global platform. The MTV-AMG combine would not only provide entertainment to the region but would also take up social issues and try to contribute to Arab society, according to the network. In this regard, Sayegh commented, "We are going to encourage education and look for solutions to problems such as unemployment. These are all causes on our agenda." 43 42 Adam Sherwin, "MTV Arabia to Feature Regional Talent and Tone Down Network's Risque Content," www.business.timesonline.co.uk, November 16, 2fYJ7. 43 Simeon Kerr and Peter Aspden, "MTV Arabia Beams 'Bling' to Gulf," www.ft.com, November 17,2007. MTVN, along with AMG, planned to expand its operations in the Middle East. It had already announced the launch of Nickelodeon Arabia in 2008. It would be the first free-toair channel for children in Arabic. Roedy commented, "Adding the voices of Arab children to our worldwide Nickelodeon family is a significant milestone in our history, and advances our ambitious strategy to build a portfolio of integrated kids businesses across the region. The Middle East is a dynamic, thriving market with vast growth opportunities, and we look forward to launching even more MTVNI brands and businesses through our successful partnership with AMG." 44 Singh added, "The launch of Nickelodeon Arabia is a part of our wider, ongoing multi-platform strategy encompassing consumer products, digital media, hotels and theme parks, which we hope will establish Nickelodeon as the premier destination for kids in the region." 45 Thus far, MTVN's model of entering a market in partnership with a local partner and following a localization strategy had worked well for the company. Analysts felt that only time would tell whether the company would succeed in the Middle East. But Singh had a rather philosophical take on what success meant. To him, the venture would be a success when people in the smallest cities of the Middle East came up to him and professed their love for MTV. "After all, it's not about how many eyeballs you reach, it's about how many people relate to you," he said. 46 44 "Arab Media Group and MTV Networks International to Launch Nickelodeon Arabia in 2008," www.ameinfo.com, October 20, 2007. 45 Stuart Kemp, "MTV, Arab Media to Launch Nickelodeon Arabia," www .hollywoodreporter.com, October 17, 2007. 46 Tamara Walid, "Finally Got My MTV," www.arabianbusiness.com, November 22,2007. PC2-16 PART 2 • COMPREHENSIVE CASES Case Questions 1. Experts felt that one of the biggest challenges faced by MTV while launching MTV Arabia was the prevalent culture in the Arab world. Discuss the Arab culture. What challenges does the culture pose to MTV? 2. Critically analyze MTV's strategy in the Middle East. Comment on its entry strategy and also its strategy of providing mixed content to the market. Do you think MTV will be able to succeed in this market? 3. Follow up on this case as of the time of your reading it. How successful has MTV been in this market to date? What, if anything, do you think MTV should have done differently? What should the company do now? References and Suggested Readings 1. Dirk Smillie, "Tuning in First Global TV Generation," The Christian Science Monitor, June 4, 1997. 2. Kerry Capell, Catherine Belton, Tom Lowry, Manjeet Kripalani, Brian Bremner, and Dexter Roberts, "MTV's World," BusinessWeek, February 18, 2002. 3. "MTV to Launch Music TV Channels in Three Baltic States," www.eubusiness.com, March 6, 2006. 4. Faisal Abbas, "Q&A with Showtime Arabia's CEO Peter Einstein," www.asharq-e.com, June 29, 2006. 5. Faisal Abbas, "MTV Eyes Middle East Market," www .asharq-e.com, August 8, 2006. .. 6. Brad Nemer, "How MTV Channels Innovation," Business Week, November 6, 2006. 7. "Arabian Television Network Partners with MTV to Launch MTV Arabia," www.mediame.com, December 27, 2006. 8. Michael Learmonth, "MTV Maps Mideast Move," www .variety.com, December 27, 2006. 9. lain Akerman, "MTV Hires Two Agencies for Launch of MTV Arabia," www.brandrepublic.com, May 23,2007. 10. Salman Dossari, "A Talk with MTV Vice Chairman Bill Roedy," www.asharq-e.com, July 23,2007. 11. Ali Jaafar, "MTV Arabia Ready to Rock Middle East," www.variety.com, September 25, 2007. 12. "MTV Arabia to Be Launched Soon," www.oceancreep .com, October 8, 2007. 13. Kerry Capell, "The Arab World Wants Its MTV," www .businessweek.com, October 11, 2007. 14. Lynne Roberts, "MTV Set for Middle East launch," www .arabianbusiness.com, October 17, 2007. 15. Stuart Kemp, "MTV, Arab Media to Launch Nickelodeon Arabia," www.hollywoodreporter.com, October 17,2007. 16. Andrew Edgecliffe Johnson, "MTV Targets Muslim Countries as it Tunes in to Local Audiences," www .theaustralian.news.com, October 18, 2007. 17. "Arab Media Group and MTV Networks International to Launch Nickelodeon Arabia in 2008," www.ameinfo.com, October 20, 2007. 18. Andrew Edgecliffe-Johnson, "MTV Tunes in to a Local Audience," www.ftd.de, October 26, 2007, 19. "MTV Arabia to Launch November 17," www .middle-eastevents.com, October 27, 2007. 20. Ali Jaafar, "MTV Arabia Announces Lineup," www .variety.com, October 28, 2007. 21. "MTV Arabia to Launch November 17," www.mediame .com, October 28, 2007. 22. Irene Lew, "MTV Arabia to Launch in November," www .worldscreen.com, October 29, 2007. 23. Sarah Raper Larenaudie, "MTV's Arab Prizefight," www .time.com, November 2, 2007. 24. Jolanta Chudy, "MTV's Arab Net Thinking Locally," www.hollywoodreporter.com, November 6, 2007. 25. Matt Pomroy, "The Revolution Will Be Televised," www .arabianbusiness.com, November 15,2007. 26. "Akon and Ludacris Dazzle the Desert in their Middle East Debuts to Celebrate the Launch of MTV Arabia," www.dubaicityguide.com, November 16, 2007. 27. Adam Sherwin, "MTV Arabia to Feature Regional Talent and Tone Down Network's Risque Content," www .timesonline.co.uk, November 16, 2007. 28. Simeon Kerr and Peter Aspden, "MTV Arabia Beams 'Bling' to Gulf," www.ft.com, November 17, 2007. 29. "MTV Launches New Arabic Service," www.news.bbc .co.uk, November 18, 2007. 30. "MTV Looks to Conquer Middle East Market," www.aol .in, November 18, 2007. 31. ""MTV Arabia": Will It Work?" www.scopical.com, November 19, 2007. 32. "MTV Aims to Win over Middle East," www.cnn.com, November 19, 2007 . 33. "Muslim Hip-hop Turban Wrote, That's Good," www .reuters.donga.com, November 19, 2007. 34. Barbara Surk, "MTV for Young Arab Is Less Naughty," www.cincinnati.com, November 21,2007. 35. Barbara Surk, "MTV Launches Arab Music Video Channel," www.theeagle.com, November 22,2007. 36. Tamara Walid, "Finally Got My MTV," www .arabianbusiness.com, November 22, 2007 . 37. "Will the MTV Brand Change the Middle East?" www .brandchannel.com, December 2, 2007 . 38. Irene Lew, "MTVNI Ups Singh," www. worldscreen.com, April 30, 2008 . 39. Dana El Baltaji, "I Want My MTV," www.arabmediasociety .com, May 11, 2008. 40. www.topfive.com 41. www.en. wikipedia.org 42. www.mtva.com 43. www.viacom.com PART III: COMPREHENSIVE CASES !CMR Center tot Managernenl Research """w icr"lrindio org Case 5 Alibaba in 2011: Competing in China & Beyond "Alibaba has a first-mover advantage that makes it very hard for competitors to chip away at their lead in the market. , j -DICK WEI, Analyst, J.P. Morgan Securities Inc., 1 in 2007. "For us, the goal has been to build a company that lasts 102 years and a company that changes China. We're only six years old, so while other people may call us a success, we still do not consider ourselves successful yet. We have a long way to go and the intense competition is what keeps us sharp. The success we've had so far has not made us lose our edge."ii -JACKMA, Founder and CEO of Alibaba.com, in 2006. "If there's a company outside ofAmerica that can introduce a new business model to the world, it's Alibaba."iii . -MASAYOSHI SoN, Founder and CEO, Softbank Corporation, 2 Japan, in 2005. 3 On November 11, 2011, Bloomberg reported that China's leading e-commerce company, Alibaba Group (Alibaba), in association with Softbank Corporation (Softbank), The Blackstone Group4 (Blackstone), and Bain Capital5 (Bain), was considering making a bid for Yahoo! Inc. 6 (Yahoo!). While Jack Ma (Ma), founder and CEO of Alibaba, expressed an interest in buying back Yahoo!'s 40 percent stake in Alibaba, Softbank wanted to buy Yahoo!'s 35 percent stake in Yahoo! Japan. Blackstone and Bain were reported to be participating in the bid to buy Yahoo!'s remaining operations in the US.iv ©2012, IBS Center for Management Research. All rights reserved. To order copies, call +91-08417-236667/68 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email: info@icmrindia.org. Website: www.icmrindia.org This case was written by Hadiya Faheem, under the direction of Debapratim Purkayastha, IBS Hyderabad. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. 1 J.P. Morgan Securities Inc., New York City, New York, USA is the nonbanking subsidiary of JPMorgan Chase. It focuses on activities related to investment banking. 2 Softbank Corporation, headquartered in Tokyo, Japan, is a leading Japanese telecommunications and media company. It has investments in e-commerce, financial services, Internet infrastructure, IT-related distribution services, publishing and marketing, and technology services. 3 Bloomberg is a U.S.-based financial news reporting company. 4Tbe Blackstone Group is an asset management and financial services company. s Bain Capital is a Boston-based private-equity firm. 6 Yahoo! Inc., headquartered in Sunnyvale, California, USA, is an online portal with a network of websites-news, search engine, entertainment, e-commerce, etc. Its primary source of revenues is· through online advertising, but it also offers commercial services such as online marketing, etc. 7 B2B or Business-to-Business e-commerce is trading between two businesses using the Internet. 8 C2C or Consumer-to-Consumer e-commerce is trading between two consumers through the Internet. Alibaba had several Internet businesses focused on various e-commerce business models such as Bu.sinessto-Business7 (B2B), Consumer-to-Consumer8 (C2C), and Business-to-Consumer9 (B2C). It also had a presence in the intensely competitive web search market. In 2010, the company had also launched a transaction-based wholesale platform, AliExpress, for Chinese merchants to sell goods to foreign buyers. Being one of the first companies to enter the Chinese lnternl(t industry, Alibaba played a major role in bringing about an Internet revolution in the country (refer to Exhibit I for a brief note on the Internet market in China). Alibaba was launched with the vision of serving the small and medium enterprises (SMEs) in China and across the world. As of 2011, it had 69 million registered users spread across more than 240 countries.v According to the Hangzhou-based, e-commerceinformation provider China e-Business Research Center, Alibaba had been the clear market leader in the Chinese e-commerce market with a market share of 63.5 percent for the FY 2010.vi However, the company lagged behind in the Chinese online search engine market despite having acquired Yahoo! China's operations in 2005. The Chinese search engine market was dominated by players such as Baidu.com, Inc. 10 (Baidu) and Google Inc. 11 (Google) with market shares of 77.7 percent and 18.3 percent, respectively, in Q3 of 2011, according to iResearch Consulting Group 12 (iResearch).vii In August 2010, Alibaba had acquired Sogou, a search engine of Chinese portal Sohu.com, in a bid to increase its dominance in the Chinese web search market. It also had ambitious plans of investing US$ 157 million in its shopping search engine eTao 9 B2C or Business-to-Consumer e-commerce relates to business transactions between a company and a customer using the Internet. 10 Baidu.com, headquartered in Beijing, China, is a leading Chinese search engine. 11 Google Inc., headquartered in Mountain View, California, USA, is one of the leading Internet companies in the world. 12 iResearch Consulting Group is a market research company based in China. It offers companies market research services related to e-commerce, the Internet, online games, etc. PC3-1 PC3-2 PART 3 • COMPREHENSIVE CASES EXHIBIT I Internet Market in China According to a China Internet Network Information Center 13 (CNNIC) report in June 2010, China had 363.8 million broadband users.vm As of mid-2011, China was the world's largest Internet market in the world. According to DCCI, the number of Internet users in China had reached 508 million by the end of 20 11.ix The Internet users in China comprised only a meager portion of the country's population of 1.3 billion, which meant that there was a huge potential for future growth. China was important for Internet companies not only because of its large market size but also for its vast talent pool. Apart from the main business activities of Internet companies such as online search, online auctions, online communications, and online advertising, special features like blogging and SMS (Short Messaging Service) were also gaining popularity in China. Blogging was a popular feature, especially among Chinese youth. They were attracted to blogs 14 and the Bulletin Board System 15 (BBS) because of the freedom they offered to them to express their opinions and get to know those of others. These blogs were posted on a variety of topics, like what clothes to buy, what music to listen to, and what movies to watch, product reviews, comparison of products and advertisements, etc. Analysts opined that people expressed their likes and dislikes more strongly in blogs than they would otherwise. Blogs also generated a huge amount of information about customer choices and customer feedback throughout the country, which could be of great use for companies and . the government. SMS was another popular practice in China, generating heavy revenue ' for Internet portals. According to Gartner Inc. 16 (Gartner), messaging via cell phones and hand-held devices was a common practice in China and local Internet companies like Sina Corporation, Sohu.com Inc., and NetEase.com, Inc. received a good amount of revenue from the SMSs delivered through their portals.x Despite the huge opportunities it offered, the Chinese Internet market was not without its ' challenges. The political environment in China had a bearing on the existence and performance of Internet companies in China. The Chinese Internet market was strictly regulated by the government. The government 'imposed a censorship on pornographic content and content related to controversial topics like Tiananmen Square 17, Taiwan independence18 , the Dalai Lama 19 , etc. According to media reports, the Chinese government employed around 30,000 people to ensure , that such restricted content did not spread in the Chinese Internet space. In addition to complying with the government rules, it was important for Internet companies in China to know how to successfully launch a Chinese language website or design a search engine that would suit the complex Chinese language. The Chinese language makes extensive use of pictograms 20 and ideograms 21 • The characters are written without spaces between them, which made it hard to distinguish one word or phrase from the next. Due to all these political, cultural, and linguistic factors, many international Internet companies had to seek local help to understand the Chinese consumers and deal with the local nuances. Industry experts felt that many domestic Internet companies had managed to gain popularity and market share because of their familiarity with the local environment and customers. Because of their intimate knowledge of the local language, culture, and dealings with the government, the local players had an edge over their foreign counterparts in the Chinese Internet market. t Source: Compiled from various sources. 13 The China Internet Network Information Center (CNNIC) is the state network information center of China, founded as a non-profit organization in June 1997. The Computer Network Information Center of the Chinese Academy of Sciences runs CNNIC. CNNIC looks after everything related to the Internet in China like domain names registration, IP addresses, relevant researches, surveys and information services, and international liaison and policy research. 14 A blog is a user-generated website where entries are made in journal style and displayed in chronological order. 15 A Bulletin Board System allows users to dial into the system over a phone and using a terminal program, perform functions such as downloading software and data, uploading data, reading news, and exchanging messages with other users. 16 Gartner Inc. is a U.S.-based business consulting firm established in 1979. It delivers technology-related insights to around I 0,000 clients around the world. 17 BetweenApril 15, 1989, and June 4, 1989, there were protests in China against the Communist Party of China government. The protests, which were centered at Tiananmen Square in Beijing, were Jed by students, intellectuals, and labor activists. On June 4, 1989, the Chinese government dispersed the mobs at Tiananmen Square using military force, which led to the deaths of hundreds of protesters. The incident came to be known as the "Tiananmen Square massacre." 18 For years, the Taiwan independence movement was opposed by China, which described it as a separatist movement that would divide the nation and people. The pro-independence groups described it as a nationalist movement. 19 The literal meaning of "Dalai Lama" is "spiritual leader." The Dalai Lama is considered the supreme head of Tibetan Buddhism. The 14th Dalai Lama demanded greater autonomy for Tibet, which is under Chinese control. 20 A pictogram is a character that represents an object, a concept, or an activity through a picture. 21 An ideogram is a character that represents an idea. CASE 5 • ALIBABA IN 2011: COMPETING IN CHINA & BEYOND in order to gain a strong foothold in the online shopping market in China. xi The company was also making efforts to increase its global footprint. In June 2010, Alibaba acquired Vendio Services Inc.Z2 (Vendio ). The site was linked to Alibaba's network of suppliers and buyers. To fuel its global growth, in August 2010, Alibaba acquired Auctiva23 to reach U.S. businesses and connect with buyers and suppliers outside China. In December 2011, Alibaba announced that it was testing a social-networking product. This was part of its efforts to expand outside its e-commerce platforms to seek different streams of revenues. Industry experts felt Alibaba was devising strategies to fuel its growth and, with the acquisition ofYahoo!'s stake, it would gain a stronger foothold in China since Internet penetration and e-commerce were rapidly growing in China. BACKGROUND NOTE Jack Ma (Ma), founder of Alibaba, was born in Hangzhou, a city in China's Zhejiang province, in 1964. At the age of twelve, Ma developed a fascination for the English language. He began learning English by listening to the Voice of America24 and acting as a free guide to foreigners who visited Hangzhou. Another event that changed Ma was when he traveled to Australia to visit a friend in 1985. He had grown up believing that the world outside China was a terrible place to live in. He was taught that China was the richest country in the world and that the Chinese were the most contented people in the world. According to Ma, "Everything I'd learned in China was that China was the richest country in the world. When I arrived in Australia, I realized it's totally different. I started to think you have to use your own mind to judge, to think."xii In 1988, Ma earned a degree in English from the Hangzhou Teacher's Institute and began teaching English and international trade at the Hangzhou Electronic and Engineering Institute. In 1992, he founded an English translation agency in Hangzhou and soon built up a good reputation for his language skills. In 1995, Ma was sent to Malibu, near Los Angeles, by a Chinese businessman. Ma was to mediate in a dispute between the businessman and his American counterpart who had not put in the money he had promised into the man's firm. Ma approached the American ready to mediate but to his shock, he was locked up for a couple of days in the American's house. Ma was released only after he promised the American that he would start an Internet company in China in association with him. Though this joint venture never actually happened, Ma was able to leave. The same year, Ma went to Seattle with a trade delegation as an interpreter. This was to become a turning point in his life. During the visit, a friend introduced him to the Internet. Ma typed in "beer" in the search engine. It yielded results like German beer, Japanese beer, and American beer. Nothing called Chinese beer came up. He then typed in "China" and "beer" but this gave results. This made Ma decide to start a company to bring information regarding Chinese companies to the Internet. After returning to Hangzhou, Ma resigned from his teaching job, borrowed US$ 2,000 from his relatives, and launched China Pages, China's first commercial website, in 1995. About launching this website, Ma said, "At 9:30 we launched the home page, and by 12:30 I had six e-mails. I said, 'Whoa! Interesting!' If I could help Chinese companies list on the Internet and help foreigners find their websites, that might be a good thing."xiii The website contained a list of companies operating in China. The Hong Kong media called Ma the "father of the Chinese Internet" and credited him with bringing about an Internet revolution in China. In 1998, Ma moved to Beijing to work for the Chinese Ministry of Foreign Trade and Economic Cooperation (MOFTEC) as the Head of the Information Department of the China International Electronic Commerce Center25 (CIECC). He designed a website for MOFTEC. This became the first government website in China. ALIBABA IN ITS INITIAL YEARS In 1998, Ma left MOFTEC and returned to Hangzhou to fulfill his dream of establishing his own e-commerce company. He said, "I realized that you can never expect a government company to grow. So I left to set up my own."xiv Ma gathered 18 people in his apartment to explain his vision to them. He warned his colleagues who wanted to join him that his venture was a risky one and that they would be paid only Renminbi 26 (RMB) 500 every month. He gave them three days to think it over. He was touched when, finally, all 18 of them decided to follow him to Hangzhou. Ma and his colleagues put in some money. This money, which came up to US$ 60,000, was used to startAlibaba from Ma's apartment in Hangzhou in March 1999. Asked why Alibaba had been chosen as the name, Ma said, "The name [Alibaba], taken from the Arabian Nights, was chosen because it's universally well known and is easy to spell."xv In August 1999, the Chinese Bureau of Industrial and Commercial Administration registered Alibaba as a computer company since the company's business could not be classified under any other category. Because of the strict IPO regulations in Beijing, Alibaba was registered in Hong Kong. At the same time, Ma started looking out for potential investors for the venture. But since the business model was new, the investors initially did not believe in the venture. However, by September 1999, a few venture capitalists approached Ma, attracted by the novel concept of the business. Ma told them frankly that launching Alibaba was a risky proposition and that he expected it to make hardly any profits during the initial years. Some of the prospective investors were still eager to lend. Ma said, "I told them at the very first meeting, 'Don't push us. We know what we are doing.'"xvi Initially, Ma rejected offers from 38 venture capitalists. Later, he accepted an offer from a group of investors including ·The Goldman Sachs 25 Vendio Services Inc. is a U.S.-based e-commerce site. As of June 2010, it bosted services for 80,000 small businesses in the U.S. 23 Auctiva offered listing and marketing tools to vendors one-commerce sites. 24 Started in 1942, Voice of America is an international radio and television broadcasting service of the U.S. government. PC3-3 China International Electronic Commerce Center (CIECC) was founded in 1996 to build and operate a secure network for government communications and commerce. It provided services related to e-commerce and e-government that are used by government agencies in China. 26 Renminbi is the currency of the mainland of the People's Republic of China. Its principal unit is called the Yuan. As of December 4, 2011, US$ I was approximately equal to RMB 6.32. PC3-4 PART 3 • COMPREHENSIVE CASES Group Inc. 27 (Goldman Sachs), Fidelity Investments, 28 Investor AB, 29 Templeton Dragon Fund Inc., 30 and Transpac Industrial Holdings Limited31 and was able to raise US$ 5 million from them in October 1999.xvii In January 2000, Ma successfully persuaded Softbank to invest US$ 20 million in his venture.xviii Softbank was, at that time, the largest global investor in Internet businesses, owning stakes in hundreds of Internet companies such as Yahoo!, Chinadotcom Corporation32 (CDC), etc. In return, Peter Sutherland, Chairman of Goldman Sachs, and Masayoshi Son (Son), CEO of Softbank, were made members of Alibaba's board of advisors. In 2000, Ma moved the company's headquarters from Hangzhou to a new building in Shanghai. Alibaba concentrated on small and medium-sized Chinese firms that aspired to go global but found it very expensive to do so. Ma aimed at connecting these Chinese manufacturers with small and medium-sized buyers from across the world. Ma said, "We want to help SMEs from all over the world grow their business and benefit from cross-border trade. Alibaba.com is like the World Trade Organization for SMEs."xix Alibaba's mission was "to help small and medium enterprises (SMEs) grow." Commenting on its focus on SMEs, Ma said, "SMEs are the future of Asia, and the future of China. Many people believe in big companies, saying we should get more money from big companies, we should do transactions with them, etcetera. But I disagree. Asia is Asia. China is China. Unfortunately, in Asia, the market is too fragmented that we have no standard. There is no standard for e-commerce, SMEs, or B2B. Our job is to establish the standard. We cannot create beautiful PowerPoints, but we know how to listen to our customers."xx. During the late 1990s and early 2000s, the Internet had not yet become too popular in China and banks were not networked. Credit card usage was limited and providing logistics service in the country was difficult, to say the least. In this scenario, Alibaba thought it wisest to limit its business model to connecting buyers and suppliers. Suppliers were allowed to list their products on the website while buyers could post their requests on the bulletin boards. Deals were struck through e-mails or offline messages. The services were offered for free and no other value-added services were offered. Ma believed that Alibaba was still in its infancy stage and had to build a loyal customer base before it started charging for its services. Initially, Alibaba had two websites-www.alibaba.com, an English website for international B2B trade, and www.china .alibaba.com for B2B trade in China. However, the company soon 27 The Goldman Sachs Group Inc., headquartered in New York City, New York, USA, is a leading investment banking, securities, and investment management firm. 28 Fidelity Investments, headquartered in Boston, Massachusetts, USA is an investment products and services company. 29 Investor AB, headquartered in Stockholm, Sweden, is an investment company whose key products include core equity, private equity, operating and financial investments. 30 Templeton Dragon Fund Inc., headquartered in Fort Lauderdale, Florida, USA, is a non-diversified, closed-ended investment company. 31 Transpac Industrial Holdings Limited, headquartered in Singapore, is an investment holding company providing venture capital to private companies. 32 Chinadotcom Corporation, headquartered in Hong Kong, China, is a leading provider of business solutions, enterprise software solutions, and mobile and Internet applications. noticed that despite Japan being China's biggest trading associate, the online business carried out from that country was less compared to enterprises from the U.S., South Korea, India, and Europe. Alibaba therefore launched www.alibaba.co.jp, a Japanese site for Japanese traders, in 2002. According to Ma, "Chinese and Japanese entrepreneurs have a digital ditch on the Internet. We want to help them stride this ditch with Alibaba Japan Website."•xi Also, the Japanese preferred to use the site in Japanese. David Wei (Wei), CEO, Alibaba, said, "They prefer to use the Japanese language as their commercial language, and with China and Japan as each other's second-largest trading partner, there was a big demand."xxii Ma found that SMEs were hesitant about using the as they assumed that it would require some expertise in computer use. Ma ensured that Alibaba's websites were simple and easy to browse through. He considered himself a non-technical person, and this, he believed, helped him keep the websites more userfriendly. According to Ma, "I use my computer for two things, e-mail and surfing the Web. Most of our customers are not hightech people, so we have always tried to make the technology invisible. When a member goes on Alibaba.com to find a supplier, we want the website to be very simple and user-friendly. We have a great engineering team, but their job is to make sure everything passes the 'Jack test.' Ifl can understand our website, then I am sure our customers can too."xxiii In May 2000, Ma brought in John Wu (Wu), the creator of the Yahoo! search engine, and a]} pointed him as the Chief Technology Officer of Alibaba. Another major concern for Ma was that many SMEs distrusted the idea of online payments. Ma managed to convince them about the safety of the practice by stressing the fact that Alibaba's system for online transactions was managed in partnership with a leading bank in China. By the end of the first year in business, Alibaba had become the largest online global trading website in Asia, with about 200,000 members from 194 countries (70 percent of the members were Chinese), and approximately 1,000 new members joining every day.xxiv On the whole, the websites were receiving about 1,500 new subscribers every day.xxv Nearly half the requests were from companies based in the U.S., Europe, and India, while the remaining were from Greater China. In March 2000, Alibaba started catering to the European market and also planned to expand its operations in North and South America, Japan, etc. Buyers from any country could locate and strike deals with sellers in any country or countries across the world . Alibaba aimed to have a global presence and expand in the U.S. and hence the company's R&D was mainly done at Silicon Valley. It did not spend any money on marketing its websiteits membership was the result of the exceptional services that it offered to its customers. During the early 2000s, the huge manufacturing potential Asia, especially of China, and the rising popularity of Alibaba attracted a number of other companies to start e-commerce ventures in China. In the early 2000s, Hutchison Whampoa Limited33 launched a web portal called "www.tom.com." A group of businessmen from Hong Kong partnered with America's B2B 33 Hutchison Whampoa Limited, headquartered in Hong Kong, China, is a diversified conglomerate with business interests in ports and related services; telecommunications; property and hotels; retail and energy; etc. CASE 5 • ALIBABA IN 2011: COMPETING IN CHINA & BEYOND Commerce One. 34 Hong Kong-based Global Sources Limited35 (Global Sources) and San Francisco-based MeetChina.com (MeetChina) also announced their plans to enter the Chinese e-commerce market. MeetChina planned an aggressive expansion in Asia. While some of these firms concentrated on particular industries, others such as Commerce One and Ariba36 concentrated on big businesses in Europe and the U.S. Ma refused to worry about the rising competition. Instead, he set to work to make plans to provide various products targeting the SMEs in various countries. He made several efforts to differentiate Alibaba from others by providing innovative features like wireless access to its services in partnership with Motorola Inc. 37 (Motorola). To attract more users, Alibaba also started offering additional services for registered members (registration was free) such as e-mail, etc. In March 2000, when the dotcom bubble38 burst, a number of dotcom and e-commerce companies filed for bankruptcy. A vast majority of dotcom companies could not withstand the sharp fall in revenues from Internet advertising. Web-based retailers failed to gauge the infrastructure they required to carry on with their retailing activities on the Internet and so many companies were forced to shut down their businesses. Commerce One was also affected and it filed for bankruptcy in October 2004.39 A few companies such as Ariba merged with FreeMarkets Inc., 40 a leading B2B in June 2004.4' Alibaba, however, was able to withstand the dotcom crash since its business was not dependent on advertising revenues. To deal with the dotcom crash, Alibaba reformulated its strategies. By September 2000, Ma was left with hardly any revenues and so had no choice but to curb his expansion plans. He told his employees that Alibaba would be in trouble if it did not adopt the right strategies. He announced three B2C strategies. These were: • "Back to China," under which Alibaba would concentrate mainly on improving its business in China rather than focusing on global markets. 34 Commerce One, headquartered in Westbury, New York, USA, was an e-commerce solutions provider and a leading marketplace for B2B transactions. ll Global Sources Limited, headquartered in Hong Kong, China, is a leading B2B media company. 36 Ariba, headquartered in Sunnyvale, California, USA, is a provider of Intranet and e-commerce solutions. The Ariba B2B Commerce Platform allows online transactions between buyers and suppliers. 37 Motorola Inc., headquartered in Schaumburg, Illinois, USA, is an electronics and telecom goods company. 38 The increase in popularity of the Internet fueled the growth of dotcom companies-firms that provided products and services related to or by using the Internet. They grew rapidly in number between 1995 and 2000 as many individuals started their own companies. Most of these companies offered similar products and services. The uncontrolled proliferation of such companies ended with the bubble busting in March 2000, leading to the closure of many of these companies. 39 Commerce One was later acquired by Perfect Commerce in February 2006. Perfect Commerce is one of the largest providers of On-Demand Supplier Relationship Management (SRM) solutions. Inc., headquartered in Pittsburgh, Pennsylvania, USA, is a leading e-commerce company. 41 The merged entity was called Ariba Inc. and since then has been a leading provider of Spend Management solutions to help companies analyze, understand, and manage their corporate spending. PC3-5 • "Back to Central," under which the headquarters was moved back from Shanghai to Hangzhou. • "Back to the Coast," under which Alibaba would concentrate on improving its presence in the coastal areas, the richest region of China. In July 2000, Alibaba started selling its advertising space. However, the revenues generated were very limited. Alibaba also began selling reports and statistics on various sellers. For the year 2000, Alibaba's revenues were just US$ I million and the company had not made any profits.xxvi According to Ma, "The year 2000 was a difficult year. Our team was youngonly a year old. We saw things were still going up, but knew it would surely go down. We didn't know how deep the fall would be, how bad it would be. Besides which, we had virtually no revenue."xxvii In early 2001, Alibaba started offering a customized online marketplace for its members called "Alibabies" for a premium. However, this generated only a small amount of revenueUS$ 0.3 million a year. xxviii Several analysts were quick to write off Alibaba. They expressed doubts about its survival in the long run in light of the dotcom crash. The increasing competition from other B2B companies targeting the Chinese B2B markets was also building up tremendous pressure on Alibaba to merge or to fall. In the same year, Ma brought in Savio Kwan (Kwan), general manager of GE's China equipment division, as Chief Operating Officer..of Alibaba with the aim of turning around the company. Kwan said, "We need to ground [Alibaba] in reality and make it into a business."xxix In late 2001, Alibaba began charging its members for its services. The fee was US$ 3,000 per year for a membership in "China Supplier"- an online community for qualified Chinese exporters who were verified by third-party credit agencies. In mid-2002, the membership fee was increased to US$ 8,000. By March 2002, Alibaba's members had touched the one million mark (refer to Exhibit II for different types of membership). In 2002, Ma set a target of US$ 1 profit for Alibaba. Commenting on this, Ma said, "We said, 'Let's make one dollar in profits for the whole year. We spend five million US dollars, we should make at least one back. If we spend 10 million, we should still earn one dollar.' So, we spent the whole year trying to make one dollar. When we set the target, everyone said I was stupid. But the whole company had a clear target throughout the year. The young people in the company had never had experience making money. Even if we say we are going to make 10 million dollars, how are we going to make it? But the one dollar target is something we could make if we just saved electricity, for example."xxx In March 2002, Alibaba set a TrustPass membership fee of US$ 299 for companies wanting to join Alibaba, after which they were verified and authenticated. However, this fee did not deter companies from joining; about 200 Chinese companies were registering themselves every day. BUSINESS PORTFOLIO Despite its struggles, by the year 2000, the Alibaba Group had emerged as the largest e-commerce company in China and was PC3-6 PART 3 • COMPREHENSIVE CASES EXHIBIT 11 Types of Membership at Alibaba.com ---· ---·-- ---·-··- ----------·· ·-- - -·----1 • Free Membership: Free members were offered basic services, free of cost. Sellers registered under this category could post products they wanted to sell, search for buyers, and contact them. Buyers were allowed to post buying leads and send inquiries to the suppliers. However, Chinese companies had to join as "Gold Supplier" members in order to become a seller. r • TrustPass Membership: It consisted of supplier members from outside Hong Kong, Macau, and Mainland China. TrustPass Membership was a paid service where the member had to pay US$ 299. The member would be authenticated and verified by a thirdparty credit reporting agency.xxxi The supplier would then be able to display a TrustPass icon symbolizing credibility to online buyers. However, this facility was available to Chinese companies only if they were "Gold Suppliers." TrustPass members were allowed to have their own websites that contained information about the company, its products, etc. • Gold Supplier: This membership was primarily for export-oriented suppliers. It consisted of premium suppliers from Hong Kong, Macau, and Mainland China. The process of authentication and verification was more rigorous for such membership. The suppliers were classified into 27 industries which enabled buyers to locate the companies conveniently. The member would display the TrustPass icon and a Gold Supplier icon to symbolize the highest level of seller qualification. Some of the advantages that such members enjoyed were listing of products on Alibaba's home page and unrestricted access to buyers' trade leads. Source: www.alibaba.com one of the leading players in the international e-commerce market. Alibaba was the flagship company of the Alibaba Group with marketing and sales offices Beijing, Seoul, Silicon Valley, London, Japan, and Latin America. Alibaba's business portfolio included the following: AliPay: Launched in 2004, AliPay was an online payment solution that enabled the users to carry out online money transactions easily, quickly, and safely. As of September 2011, AliPay had over 600 million registered accounts with around 11 million daily transactions.xxxvii Alibaba China: Launched in 1999, Alibaba China (www .china.alibaba.com) was a website in the Chinese language serving domestic B2B trade in China. As of November 2011, user base of 50 million paying an annual it had a subscription fee for posting their products on the website.xxxii The authenticity of the members was verified by a third-party credit-reporting agency. Yahoo! China: Yahoo! China (www.yahoo.com.cn) was China's third most popular search engine after Baidu and Google. It was started in October 2005 after Yahoo! merged its China operations with Alibaba in August 2005. Alibaba had the exclusive rights to use the Yahoo! brand and technologies in China. Alibaba International: Launched in 1999, Alibaba International (www.alibaba.com) was an English website which connected a number of Chinese SMEs with a number of businesses worldwide. It had 18 million registered users from around 200 countries as of April 2011. xxxiii Taobao: Taobao (www.taobao.com) was launched in May 2003. It was China's most popular C2C trading site. As of June 2011, Taobao had more than 800 million product listings with 370 million registered users and more than 60 million page views per day_xxxiv According to Ma, Taobao had garnered a market share of 80 percent for the FY 2010.Xxxv In 2011, Alibaba Group reorganized Taobao into three separate companies-Taobao Marketplace, Taobao Mall, and eTao-in a bid to capture Chinese e-commerce consumer opportunities. Taobao Mall was Alibaba's B2C platform. For the Q2 of 2011, the site recorded a 48.5 percent market share in China's B2B online retail market, according to iResearch.xxxvi In November 2010, Taobao Mall launched Tmall.com as an independent web domain. Alisoft: In January 2007, Alibaba launched Alisoft, a software services company that catered to the needs of several SMEs in China. Alisoft allowed customers to use various services such as customer relationship management (CRM), marketing information management, sales force management, inventory management, and financial tools. Other services provided were e-mail, information management, inquiries, bookkeeping, and invoicing. Alisoft also provided an instant communication tool called "Aliwangwang," which was offered to users as TradeManager42 on Taobao. As of January 2007, Alisoft had operations in Shanghai and Hangzhou. In July 2009, Alisoft was merged with Alibaba Group R&D Institute. Alimama: In November 20, 2007, Alibaba launched Alimarna, an online advertising exchange company. The company allowed advertisers and publishers on the web to trade advertising inventory online. It was intended to serve the more than one million SMEs in China that accounted for 80 percent of web traffic in China.xxxviii In 2008, Alimama was integrated with Taobao. 42 TradeManager is an instant communication tool that is offered to buyers and sellers for interaction. CASE 5 • ALIBABA IN 2011: COMPETING IN CHINA & BEYOND THE COMPETITION TABLE I Alibaba was launched at a time when the Chinese Internet industry was in its infancy. Considering the growth potential of the budding e-commerce market, other players like Global Sources and MeetChina were launched in 1999. These players were expected to intensify competition in the emerging B2B market. Global Sources had an advantage over Alibaba because of its search technology and detailed information about the products listed on its site. Moreover, in 1999 the company had an employee strength of 1,600 people with several salespeople across the world to build its supplier community. There was also the threat of many new players entering this space. In order to gain a strong foothold in the B2B market, Ma announced that Alibaba would not charge any transaction fees. Commenting on Ma's strategy, Craig Pepples, CEO, Global Sources, said, "Some players are focusing on building as much 'community' as possible in a short period of time, usually by giving things away. The problem with this approach is ... the free sites have very little depth. What customers need is detailed [information] and the tools to slice, dice, and compare."xxxix Unfazed by the competition, Ma said that he was unaware of his competitors' existence. Ma said, "The world is changing so fast, you don't know what each other is thinking about, you don't even know what you are thinking yourselves. How do you know who are your competitors?"xl Despite several attempts made by Alibaba's competitors to carve out a place for themselves in the rapidly growing B2B market, they failed to make a mark, largely because of Alibaba's dominance in that market. Alibaba, on the other hand, continued to enjoy phenomenal growth. According to Q3 2011 China B2B Market data released by iRe search in 2011, the size of the B2B market in China had reached RMB 3.48 billion in the third quarter of 2011. Alibaba was the market leader in the Chinese B2B market with a market share of 53.8 percent (refer to Table I for market shares of B2B players in China). Players C2C and B2C Market Alibaba's increasing popularity and the burgeoning Chinese e-commerce market attracted several foreign competitors to China (refer to Exhibit Ill for a discussion of the e-commerce market in China). In 2002, U.S.-based eBay Inc. 43 (eBay) entered China by acquiring a 33 percent equity stake in the Shanghai-based e-commerce website EachNet.com44 (EachNet), at an investment of US$ 30 million. eBay launched its Chinese site based on its business model in the U.S. By 2002, it had emerged as one of the leading online auction sites in China with 3.5 million registered users.xli By 2003, eBay had cornered a 79 percent market share in the Chinese online auction markeClii 43 eBay Inc., headquartered in San Jose, California, USA, is the world's largest online auction company. In addition to providing online auction markets, eBay also has an online payment service called Pay Pal and a communications business under Skype, which offers Voice-over-Internet Protocol (VoiP) services. 44 Founded in August 1999 by Chinese entrepreneurs Bo Shao and Haiyin Tan, EachNet was a major electronic commerce company based in China. It was later acquired by eBay in July 2003. Market Shares of 828 Players in China (Q3 2011) Alibaba Global Sources Made-in-China.com HC360 Dhgate Mysteel Global Mar...
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