China's Alibaba restructures online retailer Taobao

Taobao, China's largest online retailer, has split into three separate companies to better address its target markets, parent company Alibaba Group said Thursday.

The move could also foreclose a public listing of Taobao, an option that Yahoo, a stakeholder in Alibaba, had hoped would lead to an increase in the value of its investment, according to an analyst.

The restructuring creates Taobao Marketplace, a consumer-to-consumer platform designed for consumers and small businesses; Taobao Mall, a business-to-consumer marketplace; and eTao, which will target the shopping search market. All three companies will continue under the Alibaba Group.

Taobao currently dominates China's online retail market with a 71.6 percent share, according to Beijing-based research firm Analysys International. The site is very popular and reported reaching 370 million users at the end of 2010.

But Taobao, which first took off as a consumer-to-consumer site in 2003, has also been working to expand its e-commerce business. The site launched Taobao Mall in 2008, as a business-to-consumer platform that now features more than 30,000 international and domestic brands available to shoppers.

In an e-mail to Alibaba employees, company CEO Jack Ma said the company is making the move as e-commerce has faced "disruptive changes," pointing to social trends and the entrance of new companies in the market. "Significant change has taken place in customer demand," he said. "We need to offer consumers more sophisticated and customized services."

In spite of Alibaba's dominance in the overall e-commerce market, Taobao only has a 31.4 percent share of China's business-to-consumer market, according to Analysys International. Numerous competitors like Chinese electronics retailer 360buy and Amazon's Chinese site are all vying for the business.

Alibaba's eTao service also faces an uphill battle in its bid to get search engine users. China's Baidu is currently the country's largest search engine with a 75.8 percent share, and many users frequent the site to seek online goods, according to analysts. Alibaba aims to attract those users to its own eTao search platform, analysts said.

Even as the restructuring will allow the new companies to better focus on their core businesses, the move is also part of Alibaba's strategy to attract other players to take advantage of its platforms, according to Ma's letter.

Alibaba has tried to market its eTao as a search engine that shows results for all e-commerce companies, including rivals, said Mark Natkin, managing director of Beijing-based Marbridge Consulting. But Alibaba's competitors have been reluctant to support it, as eTao was operated by Taobao.

"At the moment, the perception within the industry is that Taobao is a competitor rather than a facilitator, so I think companies have been a little unsure if the eTao platform has their best interests at heart," he said. But now that eTao is a company on its own, other e-commerce players may be more be willing to support the search platform, Natkin added.

Still, some analysts question the timing of Alibaba's announcement and if more might be at play. The Chinese company has been involved in a recent dispute with Yahoo, which has a 43 percent stake in Alibaba.

The dispute arose when it was revealed last month that Alibaba Group decided to transfer its successful online payment service known as Alipay to a separate company controlled by Ma. By doing so, the move has threatened to devalue Yahoo's investment in Alibaba Group.

Alibaba defended the move and said it was done in order to obtain a license from the Chinese government to operate Alipay. But Yahoo fired back, arguing that the transfer in ownership occurred without the company's knowledge, a claim that Alibaba denies.

The dispute over Alipay underscores the ongoing discontent between the two companies over business issues. Last year, Alibaba held negotiations with Yahoo to buy back its stake, but those talks went nowhere.

Yahoo, however, may feel pressured to return to the negotiating table. It has been willing to "stomach" its difficult relationship with Alibaba because of the Chinese company's growing worth, Natkin said. Many believed Alibaba would list Taobao within the next 12 to 18 months, which would only further generate value for Yahoo's investment, he added.

Thursday's announcement, however, makes that more unlikely. Instead, Ma's letter said that the company "won't rule out" the possibility of taking Alibaba Group public. As a result, investors and Yahoo will probably have to wait longer for the company to list, Natkin said.

"It could put Yahoo in a situation (where) it has to make a decision: staying in a relationship where the romance has long ago faded, or go ahead and sell back its stake now to bring a conclusion to that relationship," Natkin added.