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Alibaba IPO is wake-up call for Silicon Valley

Jessica Guynn
USA TODAY
Jack Ma, founder of Alibaba, speaks to  newlywed employees during a group wedding held for 102 couples in Hangzhou in east China's Zhejiang province in May.

SAN FRANCISCO — When its stock began trading on the New York Stock Exchange on Friday, Alibaba became one of the world's most valuable Internet companies alongside Google and Facebook.

Two other Chinese Internet giants — Tencent and Baidu — are not far behind. Based on its pricing late Thursday at $68 a share, Alibaba's market value will be at least $167 billion.

In fact, about a third of the top 20 Internet companies with the highest market caps are based in China.

These companies may be thousands of miles and many time zones away from Silicon Valley, but, says Geoff Yang, a partner with Redpoint Ventures, they are already "at our doorstep."

And that is a wake-up call for U.S. technology companies, particularly Google, Apple, Facebook and Amazon.com, which used to rule the consumer Internet.

"Alibaba isn't just a random Internet company in China," Yang says. "This is a giant company with a giant market cap and global ambitions."

WAKE-UP, SILICON VALLEY

Alibaba's IPO (TICKER: BABA) is perhaps the most dramatic sign yet of the growing ambitions of Chinese Internet giants Baidu, Alibaba and Tencent — known as the BAT group.

"U.S. companies have been complacent for a long time," says China expert Oded Shenkar, professor at Ohio State University's Fisher College of Business. "I am sure some people were paying attention, but a lot were not."

They will now.

"The Alibaba IPO is going to be successful and large enough that it is going to make it very clear that we do live in a global landscape, and we have to keep an eye on it," says Tomer Kagan, CEO of Quixey, a mobile app search engine in Mountain View, Calif.

Last year Alibaba led a $50 million funding round in Quixey.

"This is a bit of a warning sign to get out of our own bubble and keep tabs on what's going on globally," Kagan says.

600 MILLION INTERNET USERS

For years, U.S. and Chinese Internet companies operated in separate spheres.

U.S. companies from eBay to Google have long been drawn to China, where the number of Internet users tops 600 million, about twice the U.S. population. But companies have had so much trouble in China that most have thrown in the towel.

With explosive growth at home, Chinese companies have gained so quickly that they didn't need to set their sights abroad.

But Baidu, Alibaba and Tencent now each boasts such a massive share of the Chinese market that they are crossing borders, targeting developing markets and entering the U.S. in search of new sources of growth.

In the last two years, Alibaba and Tencent have made major investments in 13 U.S. tech start-ups, mostly in mobile and e-commerce, in addition to smaller investments in "countless" companies, Yang says.

Alibaba has invested in two of Redpoint Ventures' portfolio companies, game developer Kabam and Peel, which turns smartphones and tablets into TV remotes.

The Chinese tech giants are also establishing — and growing — beachheads in the U.S. and in other markets, such as Latin America. And they have the money, talent and drive to take on Silicon Valley companies in marketplaces around the globe — and on their home turf, Yang says.

He predicts it's only a matter of time before Alibaba makes a major acquisition of a brand-name U.S. technology company.

"I expect to see Alibaba make some pretty bold longer-term moves," Yang says.

MOBILE

Pedestrians on Sept. 14 select a cellphone or no-cellphone lane as they walk in southwest China's Chongqing Municipality.

Propelling the stunning rise of China's Internet giants: mobile.

Research firm eMarketer expects 4.6 billion people worldwide to use a smartphone this year. By 2017, that number will increase to 5.1 billion, more than two-thirds of the world's population.

Some of China's biggest players are at the forefront of the mobile wave.

Earlier this year Facebook announced it would pay $19 billion for WhatsApp, a Mountain View-based company that runs the world's leading messaging app, with more than 600 million monthly active users.

But Tencent's WeChat already has 450 million monthly active users and has only begun to explore markets outside of China.

"When the Internet started, it started in the U.S. When Yahoo went public, the majority of users were in the U.S., and a majority of those were in Silicon Valley. So it was easy to focus on one place and one set of companies," Kagan says. "With mobile, it's happening everywhere at the same time. Chinese users on average use more apps and spend more money on their phones than users in the United States. That changes the playing field dramatically."

Chinese Internet companies are fueled by something else: confidence. They have cash to invest abroad from sky-high margins in China. They understand emerging markets. And they are used to working with government censors, Shenkar says.

"They believe they can succeed where other Chinese companies have failed, that is, to actually globalize and get into international markets successfully," he says.


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