What's Behind the Overseas Forays of U.S. Online Giants?Published: July 28, 2004 in Knowledge@Wharton
What's driving these international expansion plans? Even more importantly, what are the chances that they will succeed? Do the business models of U.S. Internet firms lend themselves to being exported and transplanted overseas? Experts at Wharton and elsewhere say that these world conquests are no sure thing. The ability to localize a global business can be a major challenge, they add, but if done right, over time such ventures can help offset slowdowns in the U.S. market.
Wharton management professor Raphael (Raffi) Amit points out that sometimes companies enter an international market only to retreat later. What works in the United States may not apply internationally. Although Internet-based companies, with their lack of physical assets, might in theory be expected to have an easier time overseas, success is hardly guaranteed. "When designing a business model you have to think of scale," says Amit. "The biggest issue overseas is whether a company's architecture will work in another institutional setting."
Take eBay's acquisition of Baazee, for instance. In June, the U.S. auctions behemoth announced that it would take over Baazee, which describes itself as India's biggest online marketplace, for a reported $50 million. Amit believes that the biggest hurdle eBay will face in making the deal work is dealing with the fact that most Indian consumers don't use credit cards. Meanwhile, though the numbers are growing, at present Internet penetration is fairly low. Eventually India is likely to be the second biggest market in the world behind China, but now the country has 17 million Internet users, according to research firm IDC. That figure is expected to increase to 30 million in 2006, but still remains paltry for a company with a population topping 1 billion.
Amit isn't necessarily skeptical of eBay's forays abroad, but notes the company will have to overcome cultural norms. "In many places around the world people want to meet face to face," he says.The ability to localize a global business is one of the biggest challenges, say experts. "When you have a business model that works at home, the challenge is to find out what's critical for success and then look for ways to localize," says Adrian Tschoegl, an adjunct professor of management at Wharton. "You have to be cautious with the changes — you just can't start fiddling around."
That's why companies like eBay, which also in 2003 acquired EachNet, an e-commerce company in China, increasingly buy a local player to enter a market. Baazee, the largest private online marketplace in India with more than one million users, knows the local customs and payment systems and should therefore be able to show eBay how to operate. According to Avnish Bajaj, Chairman and Co-CEO of Baazee, his company's "local expertise combined with eBay's global perspective" will fuel e-commerce in India.
Eric K. Clemons, a Wharton professor of operations and information management, says that eBay's strategy is to "get speed fast and do anything it has to" in order to build scale. According to Clemons, eBay's international strategy is to buy critical mass in global markets so it has a foothold to gather buyers and sellers.
Trials and Errors
So how will eBay's Baazee acquisition play out? Odds are that the move to India will work, but analysts such as Christa Sober at brokerage firm Thomas Weisel don't see any meaningful boost to eBay's international business until 2005, at the earliest. CEO Meg Whitman noted in a statement that it's the "early days for e-commerce in India," but she sees a "great opportunity over the long term."
Tschoegl says eBay's buy-its-way-in strategy makes sense because it's a safer way to learn the local business. It's also the most popular way for Internet giants to test overseas waters. Earlier this year, Yahoo bought Kelkoo, Europe's largest shopping-comparison site, and Expedia bought French travel site Anyway.com.
A recipe for failure would be a blind entry and seeking to rebuild U.S. operations overseas. It's unlikely that eBay could enter India by pushing its PayPal payment system, charging listing fees and urging credit card use. In contrast, Baazee doesn't charge a listing fee, but it does take a percentage of a final sale. Baazee users can pay in more ways — check, credit card, bank transfer, its PayPal-like PaisaPay system and even in person with cash.
And eBay has withdrawn from an international market before. In 2002, eBay retreated from Japan, according to regulatory filings. Even if successful, eBay expects the costs of operating new sites to exceed revenues for at least 12 months in most countries."
International expansion is largely a matter of trial and error," says Tschoegl. Like any other business method, practice makes perfect. You can't expect relatively young e-business companies to be able to replicate themselves abroad like McDonald's, which has been building outposts all over the world for years, he notes.
Google acknowledges the disadvantage young companies face in expanding abroad in its prospectus for its initial public offering. "Expansion into international markets is important to our long-term success, and our inexperience in the operation of our business outside the U.S. increases the risk that our international expansion efforts will not be successful,"says the document. The company opened its first office outside the U.S. in 2001.