ebay

eBay Inc. (NASDAQ:EBAY) is supposed to announce a deal with Tom Online Inc. (NASDAQ:TOMO) today. It's been long time coming. Anyone who has been following eBay closely the past year, has also been aware of the occasional rumor surfacing regarding a potential deal involving eBay China with the usual suspect being Tom Online.

Quite frankly, I'm surprised by the Wall Street Journal title: EBay Steps Back From Asia, Will Shutter China Site, or by the New York Times title: EBay Is Expected to Close Its Auction Site in China. I guess I've been expecting exactly such a deal so I don't see it as a retreat from the Chinese market, but as a change in strategy. And when a strategy isn't working, as was the case for eBay Eachnet in China, a change is welcome.

According to sources, no job cuts are planned, furthering the idea that this move is a strategic shift aimed at strengthening operations in China, not an exit strategy. This isn't another Japan where eBay bowed out to Yahoo! Japan.

True, eBay will close its primary Chinese site and pay about $40 million for a 49% stake in a new venture with Tom Online, a Beijing-based Internet company, ceding control of its China operations. Tom Online will then operate the site and maintain a 51% stake in the new site. But investors have to consider that eBay wasn't doing well in China, a market touted by Meg Whitman, eBay's CEO, as a major part of eBay's future.

PayPal, eBay's online payment unit, will also announce a deal to form a joint venture with a locally based electronic payment specialist. PayPal will pay $105 million for a 33% stake in the venture with UMPay.

Many U.S. Internet companies have struggled in China. For example, Baidu Inc. (NASDAQ:BIDU) is the Internet search leader with Google Inc. (NASDAQ:GOOG) and Yahoo! Inc. (NASDAQ:YHOO) finding it hard to compete. Yahoo! made a similar deal to the one eBay just did with Alibaba Inc., owning only 40% there. Time Warner Inc. (NYSE:TWX) also sold a controlling stake in its China TV station, CETV, to Tom Group. Microsoft Corp. (NASDAQ:MSFT) signed a deal with Baidu just last week also trying to strengthen its Chinese operations.

Not only is it difficult culturally for U.S. companies to operate in China, but in the case of eBay, its Chinese rivals, Alibaba's Taobao and Tencent, have been offering the same services for free. While Tom Online local management team should help, eBay still faces the fee problem. So I don't see the problem in China as fixed just yet. Keep in mind also that despite the local ownership, both Yahoo! China and CETV have been struggling.

The importance of China could not be overstated, especially if companies want to keep the growth rate investors have become accustomed to. China had 123 million Internet users at the end of June, second only to the U.S. So while I approve of this strategy shift and happy eBay didn't exit China altogether, it remains to be seen how the eBay-Tom site competes against free services while maintaining profitability.

Analyst notes:

• Prudential Equity Group analyst Mark J. Rowen said this was good news mixed with bad. While eBay could reduce operating losses in China, it would also effectively admit defeat.
• Stifel Nicolaus analyst Scott W. Devitt wasn't surprised and said that "Cutting losses and taking a minority stake in a locally owned business is a decent alternative for EBay."