Rivals Taobao, eBay clash on whether free is best

SAN FRANCISCO (Reuters) - What's the better deal? Is free always better than cheap?

The two leading Chinese internet auction sites escalated a bitter war of words on Wednesday by arguing the superiority of their respective strategies for conducting online auctions.

Taobao.com, the Alibaba auction site backed by Softbank Corp of Japan, and in which Yahoo Inc recently purchased a 40 percent stake, sparked the battle by saying its site would be free of charge for three more years.

"We call on eBay to do what's right for this phase of China's e-commerce development and make your services free for buyers and sellers in China," Jack Ma, chief executive of Alibaba.com, said in a statement.

It was a clear shot across the bow of rival eBay, which acquired China's largest online auction site, EachNet, in 2003. To maximise the impact, Taobao's announcement was issued one hour ahead before eBay printed its quarterly financial report.

"'Free' is not a business model," eBay fired back in its own statement. "It speaks volumes about the strength of eBay's business in China that Taobao today announced that it is unable to charge for its products for the next three years."

EBay, the decade-old online auction giant that now counts 168 million users worldwide, has the philosophy that completely free is unhealthy. Paying something ensures that a marketplace won't become a dumping ground for unwanted goods, it argues.

"It is not good for a buyer or a seller because it clutters the marketplace," eBay spokesman Hani Durzy said, noting that sellers may list 20 of the same, unpopular item when price is no object. "Some amount of pricing ensures a higher quality supply," he said.


Free for three years

Alibaba.com said its Taobao Chinese-language consumer auction site will remain free for buyers and sellers for three more years, until at least October 2008.

It also plans to invest US$120 million to expand Taobao's marketplace and declared that its ambition was to create one million jobs in China for entrepreneurs selling goods on the Taobao site.

"Cutting prices is not enough -- it's time to make your services free and affordable for all of China's entrepreneurs and consumers," Ma declared. "Free is the right business model for China's current conditions."

Taobao was started in 2003. The company said it counted 10 million registered users at the end of September and that it is growing at a rate of one million new users per month.

Gross market volume for the third quarter grew to US$289 million with 10.79 million items posted for sale, Taobao said.

"They can say whatever they want about their gross market volume," eBay's Durzy said in response to Taobao's statistics, which he said were unaudited according to the strict standards required by US listed companies like eBay.

"They (Taobao) can't say anything about revenue because they intend to remain free for three years," Durzy said.

EBay chairman and chief executive Meg Whitman said eBay China added two million users during the third quarter for a total of 15.1 million users.

In April, the last time the company disclosed its gross merchandise volume, eBay said its China business amounted to about US$100 million and 11.6 million registered users. These numbers were scrubbed for fraud and duplications, making them difficult to compare with rivals, eBay said.

"Some of our competitors have twisted our metrics in the local marketplace. We don't give those numbers out any more for competitive reasons," Durzy said.

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